Avoiding tax on your Mountain Home
By Bob Yoder
Converting your vacation home to a principal residence status has tremendous tax advantages. You receive a $250,000 tax exemption for singles or $500,000 for married couples. This definitely has caught the eye of many or our clients. There are certain thresholds you must meet to qualify a home as a principal residence. Make sure you consult with your own accountant as a future audit and disallowance would prove to be very costly.
The whole notion of tax deferred “1031” exchanges continues to be confusing to many people. You can sell any investment property, land, rental, commercial, apartment etc. and exchange into a mountain home in our area. There are no definitions of exactly how long your replacement property must be used as a rental before you can convert it to personal use. The suggested timeframe is one to 2 tax years. Again, consult with your accountant. Now this is where it gets great. You exchange your depreciated income property into a mountain home, rent it for 2 years and then turn it into personal use. You can go one more step and live in it for 2 of 5 years as a principal residence and then you get the tax exclusion. There currently is a pending Federal bill that states you must own it a total of 5 years before sale. What does that mean? Federal Government is confirming it is ok to sell your rental property, buy a mountain home, rent it for 3 years, live in it for 2 years and then sell it as a personal residence. Now, if you do not think that is the greatest tax deal going please contact me with yours.
Another great plan is buying real estate in your retirement plan. If you have a Sep, Ira, or defined benefit plan with an entity that allows real estate investments, you are set. Yes, you absolutely can have real estate in a retirement plan. Many accountants say this is not so, but they are incorrect. However, you must have a trustee that allows these investments. Go to www.entrustadmin.com for more info or call us. This works great for buying land, lots or trust deeds. The gains accrue tax free, so buying and selling are great options.
The second home market is one of the hottest segments in real estate and lots of areas are seeing 1031 exchanges into what will either be a future vacation home or retirement. You should take advantage of this great opportunity.
If you want more information, call Bob Yoder 530-582-3313