capital gains tax

You can cut the capital gains tax out of a real estate sale with the use of Exchange 1031. Exchange 1031 provides that if you are going to use proceeds of the sale of a real estate property to purchase additional property, you can avoid paying the capital gains tax.

The idea is to bolster real estate sales by allowing taxpayers to waive this tax on your property sale if the main purpose of the sale is to purchase another property. This provision gives an incentive for both the buying and selling of property.

Capital gains taxes assessed in the sale of real estate are estimated at around 20%-30%. If a taxpayer is engaged in a "like kind" real estate purchase, the tax reduces his ability to purchase a similar property by effectively cutting the resale value of their property by 20%-30%. This, in turn, will reduce the amount of money that they are likely to spend on a "like kind" purchase of another property.

There, of course, are conditions to deferment of capital gains tax under Exchange 1031.

The value of the property you are purchasing with the proceeds from the sale of your property must be equal to or more than the net profits from the selling of your property.

The full equity realized from the sale of your property must be used to purchase the "replacement" property.

If the replacement property you purchase under an Exchange 1031 provision turns out to be of lesser value than the property you sold, you will be liable to pay an accrued tax. The amount of your tax liability will be determined by the amount the replacement property fell short of the full equity of the sold property.

In other words, the amount of tax liability incurred will depend on your situation and the amount of total capital that you realized after the sale of your property. Therefore, part of the tax is deferred in this instance, rather than deferring all of the capital gains tax.

The hope of this provision is that such a substantial tax savings will encourage real estate sellers to purchase "replacement" property rather than invest the income from such a sale of real estate into some other venture. It is a good provision for people looking to "buy up" in the housing market.

If you sell your property, your face the liability for capital gains tax. However, there is one way out. You can avoid payment of capital gains tax by taking advantage of exchange 1031 provisions. How to take this benefit? Chintamani Abhyankar provides useful advice.

Chintamani Abhyankar, is a well known expert in the field of finance and taxation for last 25 years. He has written many books explaining inside secrets of the magic world of personal finance. His famous eBook Stop donating your money to IRS which is now running in its second edition, provides intricate knowledge and valuable tips on personal finance and income tax.

capital gains tax

So many property investors forget about capital gains tax completely, only to be reminded sharply when it comes to selling their investment property. Capital gains can have a huge chunk of their profit, even resulting in you not making any money at all. Don't be caught unaware by this tax!

Understanding CGT

Understanding capital gains tax is not as difficult as you might imagine. In fact, the principles are actually quite simple. Capital gains tax is paid by individuals (or trustees / personal representatives). Companies do not pay capital gains tax; however, they do pay an equivalent sum, under corporation tax, known as chargeable gains.

Anyone who is liable for capital gains tax must declare it in their self assessment tax return. Or, if they fail to complete a self-assessment form, then the Inland Revenue must be notified by the 5th October after the relevant tax year has ended. Any amount payable to the Revenue will then normally be due by the end of January of the following year.

What is Capital Gains Tax?

Simply put, capital gains tax is paid on any gains that are made on the disposal of an asset. There are deductible expenses and allowances, as well as exemptions that tax payers can make the most of. Any capital gain is considered as part of income. Therefore, if you are being taxed at 40 percent, you will also pay capital gains, at this rate.

Calculating Gain / Loss

Firstly, take the value at disposal. If the asset is being given away then the current market value must be used. From this deduct the following:

• sales costs (this includes agents fees, advertising costs, solicitors' costs);
• purchase costs (again including solicitors' fees);
• the purchase price or the market value at the date of purchase; if the property was purchased before 31 March 1982, then you are able to use the market value at this date;
• any taper relief that is available to take into account inflation; and
• the costs of any capital improvements that have been made, since you owned the property; remember, the only expenditure that you can deduct is expenditure that you have not deducted previously.

A taxpayer does not have to pay capital gains on his or her main residence, provided that it is a permanent residence and any periods of absence do not total three years. If you own more than one property then you are able to elect which property you wish to be considered as your main residence.

Married couples are only allowed one permanent residence, unless they are separated under a court order or are permanently separated.

If you have a main residence that, occasionally, has been your main residence but has also had periods when it was rented out, or was not your main residence for some other reason, then normally the gain must be apportioned on a time basis. There is a specific relief which allows you to consider the last 36 months of ownership as being a period of main residence, when you are doing your calculation, regardless of the factual situation.

This may appear a little strange and is easiest understood by considering an example.

Consider that you have bought a property in which you live for a year, before purchasing a second property; you then decide to rent your original property. After a further three years, you decide to sell the original property. There would, in this case, be no capital gains tax to pay as you were resident for the first year and the last three years before disposal is automatically considered as a period with which it was your main residence. This is an important situation to bear in mind, as many investors opt for purchasing a new property to live in, whilst they rent out the other property. If you decide on this strategy, consider you position carefully after 3 years as, at this point, you may find that you start losing out to capital gains tax.

Another relief which may be of particular interest to property investors, is the relief that is available on property that has been a main residence, at some point, but has also been let out for a residential purpose. This relief is either £40,000 or the amount which is equal to the main residence fraction, whichever is the lower at the time of calculation.

Take a look at this example:

You purchase a flat for £200,000 which you then sell for £300,000. The gain is £100,000. If you owned the property for 5 years and lived in it for 1, you would have 1/5 which is liable for capital gains tax and 4/5 (the first year and the last 3) which is not. Therefore, the total exempted amount of the gain is £80,000 and the total taxable amount is £20,000.

The amount of the exemption that you can claim is the lower of £40,000 or £80,000 (exempted amount). Therefore, you can claim relief for £40,000. As your gain was £20,000, in this case, no tax would be payable.

And that is it, for a brief and very simplified look at the CGT reliefs, available on residential property. There are a number of special rules that apply to special circumstances such as agricultural residential property and a few other situations, but we won't go into them, here.

The annual allowance is currently £8,800 (this is reviewed annually) per person; therefore, you can make a gain of £8,800, before you are liable for any capital gains tax.

If you make a loss in any year this can be offset against gains from other sources of income in that year, or can be offset against capital gains made in future years.

Common transactional structure that save capital gains tax

The transfer of assets between husband and wife is tax free. Therefore, many couples will choose to transfer the asset to the individual who pays the lesser tax rate. By doing this, the person actually disposing of the asset can use their personal allowance and the remainder will be taxed at the lower income tax rate.

In essence, the concept of capital gains is relatively simple. Despite this, many property investors forget to consider the possible implications of this tax on their levels of profit. With a potential bill of 40 percent of any gain you have made, it is vital that you consider this tax and obtain the necessary advice, before you get stung!

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capital gains tax

What is CGT?

Capital gains tax ('CGT') is the tax that you pay when you sell an asset. So if you sell property, or an investment you'll need to consider CGT. In fact anything that you don't hold for the purposes of a trade (ie that you've not bought to sell) will be within the scope of CGT.

Any gain that you make is then taxed depending on the rate of income tax that you pay. So if you're a 40% taxpayer you'll pay CGT on the gain at 40%. If you are a basic rate taxpayer you'll pay CGT at 20% on the gain within your remaining basic rate tax band, and 40% on the excess.

OK - this is quite simple, but based on the above areas of WCL is huge! (since it covers all the items that you did not buy to sell). Well, this is correct it does have a very wide scope but the interesting bit is that there are lots of exemptions that take assets out of the scope of CGT. We'll have a quick look at these so you can see what you can sell without having to account for CGT.

The exemptions from Capital Gains Tax

Your own Home

As most of you will probably know, an investment in your own home is free of capital gains tax, (and income tax as well for that matter).

Chattels which are wasting assets

There is a blanket capital gains tax exemption for 'tangible moveable property' that is also classed as a wasting asset.

In general terms if an asset has a predictable life of less than fifty years it is exempt from capital gains tax. An item of machinery is regarded as having a predictable life of less than fifty years and therefore they will usually be a wasting asset.

Therefore many assets that have an element of machinery should in principle be exempt (for example antique clocks and watches)

Gambling winnings

Anything you make from Gambling is received totally tax free. So there's no capital gains tax, and there will not also be any income tax or national insurance due

Personal compensation or damages

Most forms of compensation will be exempt from capital gains tax

Motor cars

There is a capital gains tax exemption for 'normal motor cars'

Debts

There is an exemption under capital gains tax for a disposal of a debt by the original creditor

Chattels worth less than £6,000

Even if you have tangible moveable property that does not qualify as 'wasting' assets there should be a capital gains tax exemption available if the proceeds are under £6,000.

The annual capital gains tax exemption

It's also well worth noting that everybody has an annual capital gains tax exemption (currently £9,200) that is available to cover capital gains. So if your gain is less than this there's no capital gains tax to pay in any event (this means that a couple could purchase an asset jointly and later sell it eliminating profits of £18,400 due to the two annual exemptions).

This should give you a few pointers on which assets you can sell without incurring capital gains tax. We cover all of these and more in detail via our website http://www.wealthprotectionreport.co.uk

Lee J Hadnum is a rarity among tax advisers having both legal & chartered accountancy qualifications. After qualifying as a prize winner in the Institute of Chartered Accountants entrance exams, he went on to become a Chartered Tax Adviser.

He previously ran his own his own tax consulting firm, and has written a number of tax books as well as editing the popular tax planning website wealthprotectionreport.co.uk

For a limited time, Lee is offering a Free report on Offshore Teleworking from his Offshore Tax Site http://www.wealthprotectionreport.co.uk Wealth Protection Report offers a wide variety of information on tax matters including, Capital Gains Tax, Inheritance Tax and UK Emigration.

capital gains tax

Explaining Capital Gains and Tax Deferment

Death and taxes; while both are certain, the sting of capital gains tax can be significantly softened for real estate investors. Although the tax man likes to keep his fingers in the pockets of the American public, we do find precious instances where the IRS cuts us some slack. Most of us have or know something about tax-deferred retirement vehicles such as IRAs and 401Ks. Simply stated, the government won't tax these savings as long as we do not touch the investment. We can even move capital around without penalty if the money is transferred or rolled-over within a specified period of time. A real estate investor, like a retirement planner, can also enjoy a tax-deferred, "roll-over" benefit of sorts. This lesser known real estate perk is a 1031 exchange.

A 1031 tax-deferred exchange is a real estate transaction where the proceeds of a building or property sale are reinvested into a like-kind asset, i.e. another building or property. Similar to a 401K roll-over, the reinvested funds of a 1031 tax exchange are tax-deferred, and there is no recognized capital gain or loss. Remember that to qualify for consideration as natural resource must be purchased within 180 days after the sale. Since 1031 exchange properties must be business or investment properties and not personal residences, the benefit is reaped by the businessmen, the landlords, and the entrepreneurs. That's all the more incentive for the rest of the population to jump in the game.

But how do tax-deferred exchanges play out in the everyday? Let's say, for example, that an investor purchased an apartment complex in South Boston during the mid-nineties. The property she bought for $500,000 sells for $1,000,000 less than ten years later. A $500,000 appreciation is certainly nothing to scoff at. But what about capital gains tax? If the proceeds of the sale are reinvested into another building (within the 180 day closing period), the investor can potentially avoid a painful tax hit. During a qualified 1031 exchange, capital gains are not taxed.

If you want to complete a 1031 exchange, but don' want to into a property that will require time and effort to manage, you can also invest in a portion of a professionally managed, commercial grade property along with other investors. This is called a "tenant in common" arrangement. Tenant in common allows you to hold an undivided title of a property and satisfies the 1031 requirement for "like-kind" property exchange.

1031 tax advantages can certainly be favorable, and they have gotten better since 2002, when the IRS expanded the pool of exchange properties with a ruling pertaining to co-owned real estate (CORE) and tenant in common (TIC) structures. With the vast potential upside to a 1031, it is crucial that you the investor seek out experienced tax and exchange professionals to complete your business effectively and safeguard your money. In this way you can execute your exchange efficiently and enjoy the substantial tax benefits you are legally entitled to.

Information from this article was taken from http://www.allstates1031.com/

Christine Casalini is a freelance writer in Boston, MA. Her interests are investing, real estate and personal finance.

capital gains tax

The Obama Administration is now considering nearly doubling the tax rate on capital gains when it should be seriously considering reducing or eliminating those taxes. Many economists assert that a reduction in capital gains tax rates will spur private investment in the stock market and ultimately help our economy recover and grow. The Obama Administration loathes the idea of cutting those rates for fear it will be criticized for offering tax cuts to the wealthiest strata of our society.

First, in these difficult times, every measure to spur recovery should be seriously considered as everyone will benefit from a strong economic recovery. Second, even though a reduced capital gains tax favors the wealthy who collect more capital gains, the centroid of securities ownership in this country is squarely in the middle class, not the wealthy. Half of all households, more than 100 million Americans, own securities. These owners typically have more than half their household financial assets in stocks and earn a median household income of $65,000. In today's economy, these are not rich folks. The Obama Administration needs to acknowledge these facts. While it's true that many owners hold securities in their tax-deferred IRA and 401K accounts that won't benefit directly from a reduction of capital gains taxes, it's also true that more than three-quarters of securities owners own some outside their retirement accounts. Also, if a reduction in capital gains taxes helps push up securities prices, all owners will benefit from the increase in wealth.

Third, in fact, global stock market wealth in the last year lost nearly half the capital gains tax has been already performed and the results given by the investors lost. Going forward, there will be few capital gains to be subjected to tax. In fact, on average at current index levels only investments made more than a decade ago will register any meaningful capital appreciation.

Last and most significant, it's possible and ironic that the only way to stem the decline and reverse the stock market trend might be to eliminate capital gains taxes, thereby causing the impetus for new investment. Incremental new investments would push the market higher and lead to capital appreciation, i.e., eliminating the tax on gains may be necessary to produce capital gains going forward.

In view of these facts, a reduction or elimination of capital gains taxes could be a powerful stimulus for many middle class Americans, would cost taxpayers nothing in the short run, and minimally until both the economy and stock markets recover significantly. It would also be a no-risk proposition. If it doesn't work, it doesn't cost taxpayers anything.

More articles by this author are available at http://joedelcasino.blogspot.com Books are available at http://www.Xlibris.com

capital gains tax

With the booming property prices of recent years, more and more people are finding themselves facing a large tax bill when they come to sell their investment properties. However, did you realize that there is a perfectly legal way of deferring payment of such taxes by utilizing the advantageous 1031 tax code that was introduced by the IRS in the early 1990s?

A 1031 exchange is a way of deferring payment of capital gains tax on certain types of real estate. Normally when an investment or business property is sold, capital gains tax has to be paid. However, with 1031 exchanges, by replacing the old property with a like kind property, within set time limits, payment of capital gains tax can be avoided.

In the 1031 real estate exchange rules, the seller must have owned the property for at least one year and one day for her to enjoy. Another requirement is that both old (relinquished) and new (replacement) 1031 exchange properties must be of a likekind - either rental properties, vacant land, trade, business or investment properties.

1031 exchanges must be completed within strict time limits. There is a 45 day Identification Period from the transfer of the old property, in which a replacement property must be identified. The 1031 exchange rules stipulate that the exchange must be completed within the 180 day Exchange Period.

The 1031 exchange real estate issues are complex, so it is imperative to seek professional advice from a tax advisor or qualified intermediary who can assess your specific circumstances and explain other issues such as the reverse 1031 exchange or TiC rules. With careful financial planning, you can reinvest your capital gains in future real estate investments, thereby allowing you to leverage your money more efficiently and to reap greater financial benefits.

Caroline Smith is a regular contributor to 1031.ws - an online resource all about 1031 exchanges, including information on the 1031 exchange rule and the requirements of a 1031 tax exchange.

capital gains tax

If you want to avoid UK capital gains tax by moving overseas it's usually necessary to remain non-resident for five complete tax years. Any gains on assets disposed of after you leave the UK will then escape UK capital gains tax completely.

The other side of the coin though is that you'll want to avoid or at least minimise any tax charges overseas. There's no point saving UK tax at say 20% but then incurring tax overseas at 30%!

This is particularly the case when there are reliefs that will apply to reduce any gain for UK tax purposes. The main reliefs that I'm thinking of here could include:

· A disposal of your home. The UK provides for a full tax exemption on the disposal of your main residence (assuming it's been your main residence throughout your period of ownership). Other countries are not as generous and could only provide for a postponement (eg Spain, which includes a rollover relief to defer the gain when you purchase another principal residence).

· Business assets. Examples here are properties that have been let to a trader. These could qualify for taper relief of 75%. This means that a higher rate taxpayer would have a CGT charge of 10% - which is very low even by international standards

· Gambling winnings - tax free in the UK but not so elsewhere

· Most debts are tax free in the UK - not so elsewhere

· Assets held long term. Any assets held for at least ten years will in any case qualify for maximum non business asset taper relief. This will reduce the effective CGT charge for a higher rate taxpayer to 24% and not 40%

Therefore this makes it very important to ensure that any overseas jurisdiction you choose offer a CGT free or low CGT environment.

Low CGT jurisdictions

Italy 20%

Ireland 20%

Japan 20%

Croatia 25%

China 20%

Spain 18%

However when looking at these you need to bear in mind the opportunities above for low UK CGT rates.

CGT free jurisdictions

If you want to avoid CGT in full there are plenty of these to choose from. Some of the most famous countries with no CGT or can offer a CGT free environment for expats with correct planning include:

Gibraltar

Malta

Andorra

Monaco

Isle of Man

Channel Islands

Cyprus

If you're thinking about moving overseas to avoid CGT you should ensure that you take detailed advice. If you're interested in more articles on moving overseas and avoiding UK CGT visit http://www.wealthprotectionreport.co.uk for further details of offshore tax planning opportunities.

Lee J Hadnum is a rarity among tax advisers having both legal & chartered accountancy qualifications. After qualifying as a prize winner in the Institute of Chartered Accountants entrance exams, he went on to become a Chartered Tax Adviser.

He previously ran his own his own tax consulting firm, and has written a number of tax books as well as editing the popular tax planning website www.wealthprotectionreport.co.uk.

For a limited time, Lee is offering a Free report on Offshore Teleworking from his Offshore Tax Site wealthprotectionreport.co.uk Wealth Protection Report offers a wide variety of information on tax matters including, Capital Gains Tax, Inheritance Tax and UK Emigration.

capital gains tax