Wave “Bye-bye” To Uncle Sam’s Taxes
There exists an extremely effective wealth-building technique that has actually been around since 1921, and is still used by the country’s most savvy real estate investors. Incredibly, the IRS made this tax deferral possible.
Put simply, you can delay (perhaps permanently, if you fulfill a particular condition which I’ll share in a minute) capital acquires taxes on the make money from the sale of a foreign property if you utilize the profits of the sale to buy another foreign property.
I’ve helped individuals perform these kinds of exchanges (Area 1031 or “like kind” exchanges) for the previous six years. I can help you, too, but first, a number of cautions:
1. You cannot exchange U.S. real estate into foreign real estate. This gives some confusion, probably dating back to a time before “like kind” property was clearly defined and codified by the Internal Revenue Service. Although there have actually been cases where a 1031 exchange of U.S. real estate for foreign home has actually been carried out when the replacement property remained in Puerto Rico or the U.S. Virgin Islands, the cold difficult truth is that today you can not 1031 exchange U.S. property for foreign real estate in many parts of the world.
2. Unless you carry out a 1031 exchange, Uncle Sam will be sitting silently at the closing table with you waiting on his 15% share of the profits, whether the realty being sold remains in Paris, San Miguel de Allende, or Buenos Aires.
Please note that you should 1031 exchange the whole earnings of the sale (less selling expenditures), not just the earnings or there will be “money boot,” and taxes due. Even more, if you have a home mortgage on the home being exchanged you are needed to have a home mortgage (for an equivalent or higher quantity) on the brand-new residential or commercial property to avoid “home loan boot”.
The Good News
If you 1031 exchange foreign residential or commercial property it doesn’t have to be in the exact same nation to meet the “like kind” requirement. For example, you could 1031 exchange the proceeds of a sale from a Paris condo into beachfront home on Roatan.
Plus, you can 1031 exchange a single foreign home for several foreign homes … or 1031 exchange multiple foreign residential or commercial properties for a single foreign home– so long as the exchange is well balanced, i.e. the value of all “given up residential or commercial property” is equal to or greater than the value of all “replacement property. ”
So, you could, after Ten Years of wise buying, sell your Paris condominium, Roatan beach house, and Cancun beachfront lot, all worth an overall of $1.5 million … and exchange the profits for a charming $1.5 million Tuscany villa total with vineyard (or visa versa)… and defer the capital gains tax you would otherwise owe Uncle Sam.
Remember when I said there was one condition that would allow you to defer the capital gains tax forever? Well, it readies news for your successors– that “condition” is when you die. At that point, your heirs will inherit your house on a “stepped up basis” meaning at “reasonable market value at the time of you death. ” Ergo, no capital acquires taxes will be paid by them (although they might owe estate tax).
Used appropriately, 1031 exchanging can remove equity shrinkage when you sell a property, for that reason offering you more cash to purchase your next residential or commercial property. This can be repeated once again and again, up until your heirs acquire the residential or commercial property and pay no taxes for your 1031 exchange activities.