The Flip Board

Virginia and Loudoun County are giving Raytheon plenty of goodies to consolidate some of its operations in the former AOL complex in Dulles.

The economic crisis has created a survival-of-the-fittest environment for U.S. real-estate investment trusts.

There may be few signs of life among home buyers. But defense strategies among home builders have now evolved to encompass mergers to guard against more trouble to come.

Pulte Homes plans to buy Centex in a $1.3 billion stock deal that would create the largest U.S. home builder.

(Listen Here 5:05 min)

Part Two – The Death Question

Section 102 of the internal revenue code says that an heir (beneficiary who inherits property) that receives property as a “gift, bequest, devise, or inheritance” takes that property tax-free.  It states “Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance”.

You can read Section 102 at: http://www2.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000102—-000-.html

Basis of an Heir

The question then becomes, what if your heir then sells the property that they received as an “inheritance” from you? What is the heir’s basis for calculating his or her gain?  Will the heir have any tax liability?

At present, Section 1014 of the internal revenue code allows your heirs to take your property with a “stepped up basis” [roughly Fair Market Value (FMV)] of the property at the time of your death) so they would not necessarily take over your low basis in the property.  However, the tax code in this area may change, so you need to talk about this with your CPA or your accountant.  Under current Section 1014(a) the general rule applied to property an heir receives from a decedent is that the heir's basis equals the fair market value of the property at the time the decedent dies.  Because of Section 1014, any appreciation of the affected property that occurred during the decedent's lifetime may never be taxed. The current operation of this code section provides an incentive for taxpayers to defer taxes throughout one’s lifetime until death.  One strategy that people refer to with 1031 exchanges is called “Defer, Defer, Defer,…Die”.  The idea is that one never recognizes any gains during one’s lifetime, but instead continually defers the recognition of gain (compounding and building wealth tax-free) until they die.

Section 1014(f) says that this section shall not apply to decedents who die after December 31, 2009.  This “sunset provision” came from the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).  According to EGTRRA, Section 1014 will be terminated. EGTRRA replaces Section 1014 with a modified “carryover basis” rule, under which the property will receive a basis equal to the lesser of the adjusted basis of the property in the hands of the decedent, or the fair market value of the property on the date of the decedent's death. So, your heirs would probably take over your low basis, and they would need to continue to defer the taxes by utilizing 1031 tax exchanges. The good news is that they could also continue the strategy of “Deferring, Deferring,  Deferring,…Dying”… generation after generation.

You can read Section 1014 at http://www2.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00001014—-000-.html

The real-estate industry is lobbying the Fed for modifications to a bailout program that the industry said may avert a wave of commercial-property defaults.

The nation's apartment market deteriorated in the first quarter as the vacancy rate for the top 79 U.S. markets jumped to an average 7.2%.

While overall credit availability to the corporate sector has increased, the drought is continuing in commercial real estate, forcing borrowers, lenders and sellers to get creative.

(Listen Here 4:25 min)

Many people ask me questions along the lines of  “Over the years, I have invested a large amount of money into an investment property. How does this affect my taxes  if I sell the property or if I die?.”

First, I would like to talk about the sale vs. 1031 exchange part of the question, and then I would like to go into the ramifications of dying while owning the property.

Part One  – Selling ~ The 1031 Question

Section 1031 is a very “taxpayer friendly” provision of the internal revenue code.  It gives you a way to “sell” your investment property without having to recognize the gains.  This defers your taxes.  I just posted a video that you can watch on 1031 exchanges of collector coins at: http://www.youtube.com/watch?v=dgJmxbdPxRw  (click on this link)

There are some rules and regulations that you must follow in order to get this tax deferral.  One of the key rules is that your property must have been “held for investment or for use in your trade or business”.  I have some good information on this at: http://www.youtube.com/watch?v=AIolirun-88   (click on this link)

The other major requirement is that you have to re-invest your proceeds into “like-kind property”.  If you have watched the two videos (see hyper links above) then you have probably picked up that certain property held for investment can be exchanged for certain other like-kind coins that will be held for investment.

In a delayed exchange using a qualified intermediary, your proceeds from the sale must be invested in a like kind property within 180 days of the sale. Also, your replacement property must be identified within 45 days. 

Remember, 1031 exchanges are governed under the United States Tax Code which specifies that if an asset (such as a collector coin, real estate, business equipment, aircraft, race horses or agricultural equipment) is sold, and the proceeds of the sale are then reinvested in an asset of a like-kind, then no capital gain or loss is recognized. This  allows the deferment of capital gains taxes that would otherwise have been due on the first sale. You can read this code section at: http://www2.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00001031—-000-.html

Remember, both your relinquished property and your replacement property must be held either for investment or for productive use in a trade or business.

Why is a 1031 Tax Exchange Good For You?
Time Value of Money

The key benefit is that your capital gains tax liability that would otherwise become due is deferred under Section 1031 of the code. The main value to investors is that as long as your money continues to be re-invested (over and over again) in other qualifying like-kind property, your portfolio can continue to grow in value (without taxation).

Australian gambling magnate James Packer is weighing a stake in City Center, the troubled $8.6 billion Las Vegas development owned by MGM Mirage and Dubai World.