Explaining Capital Gains and Tax Deferment

By Damien Christian

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. Bear in mind that in order to qualify, the replacement like-kind asset must be purchased within 180 days of 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 1031 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 0,000 sells for ,000,000 less than ten years later. A 0,000 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

When tax problems occur, it can be difficult to hide from the IRS. We are going to talk about capital gains tax relief and other things that may be important for you to know more info about. Being familiar with these tax problems allow you to recognize them as soon as they occur. Whether you are an individual or a business entity, make sure that you are aware of these common problems regarding taxes.For example with a Capital Gains Tax Relief if you have lived in your home and it has been your only home all the time that you owned it, you will not have to pay Capital Gains Tax on any money you make when you sell it. If you have used any part of it exclusively for business purposes or bought it to sell early for profits then you will be not be able to avoid the capital gains tax relief. An other tax issue you may encounter has something to do with the payroll system in your place of employment or company. They can vary with different underlying issues that may have caused them. Still, remember that the IRS ensures that they can collect your past payment dues or anything that you owe. Therefore, make sure that yours is updated and that you have the correct tax information. The tax lien demonstrates that you have existing back taxes in the IRS. This is one of the tax problems that can involve your personal property like real estate. When that happens, you cannot sell or transfer its ownership if you are unable to pay all your back taxes so the lien can be removed. However, it can be difficult to do so because once you get a lien on your property, it is difficult to apply for a loan that can help you pay off your taxes. Next in the list of tax problems is the IRS levy, a drastic attempt by the IRS to get you to pay your tax debt. This is particularly difficult to handle because levies hinder you from getting the money that you usually get from various sources. Basically, having an IRS levy gives the IRS the authority to take your money from your savings or checking account if you have one. Still, the levy is only effective for a certain day and it is the bank’s job to withdraw the money required by the IRS and send it to them. The levy is also bothersome because it can take money from your wages, which puts your entire paycheck at risk for going to the IRS. IRS seizures, unfiled tax returns, IRS tax audits, and wage garnishments are the other tax problems that you can encounter. Together with other tax-related issues, they can place great burden on your finances and your life in general. Therefore, it is important for you to keep all your tax-related documents just in case you are audited by the IRS. That way, you can give them all the information they need and prevent them from taking any action against you. Still, if you find yourself in a tight and risky situation with the IRS, you can ask for help. There are things that you can do to spare yourself from being contacted by the IRS, facing legal action, or having to deal with those tax problems. For starters, consult with an enrolled agent, a person who is authorized by the US Department of Treasury to provide help to individuals and businesses in dealing with their tax-related issues. So for more info on capital gains tax relief and other issues, Let Mike Habib deal with your tax problems. As an Enrolled Agent, you can count on him to help you solve your tax-related problems. His 16 years of experience in financial advisory and taxation allows him to work well with you and find a possible solution for your problems. All you have to do is call us here at 1-877-78-TAXES for a free consultation. You can also learn more about Mike Habib’s services by exploring this website at http://www.myirstaxrelief.com today.

Entrepreneur’s relief is available to most, including individuals, trustees (in some circumstances), but not to limited companies.

You can claim Entrepreneur’s Relief when you sell all of your business, or even shares in your own company after 5th April 2008. The capital gain, when entrepreneur’s relief is applied, is taxed at an effective rate of 10%, instead of 18% or even 28%.

There are, however, some stiff limitations to entrepreneur’s relief:

You must be selling all, or a material part, of your business, including:
Selling shares in a qualifying company. The shareholder MUST own at least 5% of the ordinary voting shares, as well as having been an officer or employee of said company
Selling the whole of your business
Selling partnership interest

If you sell the assets, without selling the actual business, or ceasing to trade, then this will not qualify for the relief. For example, if an accountant sold part of their practice, entrepreneur’s relief would not apply.

You need to have owned the assets/shares for at least a year prior to the sale.
The business must be defined as a trading business, which means that, for example, a property letting business would not qualify. A furnished holiday letting company, however, would.
Entrepreneur’s relief only applies to capital gains made after 6th April 2008. Taxpayers are restricted under certain conditions to claiming this relief on lifetime gains up to £10 million worth of gains (£5 million prior to 6th April 2011, £2 million prior to 23rd June 2010, and £1 million prior to 6th April 2010.) For capital gains realised before 6th April 2010, and exceeding £1 million, no additional relief is given.

It may also be possible to claim relief where gains are deferred as a result of either the Enterprise Investment Scheme, or Venture Capital Trust investments.

When a material disposal relates to the sale of shares, or a partnership share, the person who is disposing is also able to claim relief against any gains made in the disposal of an asset that is used in the business. This later disposal can happen as long as 3 years after the original disposal. However, the relief is restricted if rent is charged on the property.

Chargeable assets includes all forms of property unless it is specifically exempt. The main assets it tends to apply to are land and buildings, shares and business assetsincluding goodwill. CGT can be very complex and the rules are far more detailed that can be explained in this brief blog post, so read the Helpsheet after this post.

How a Capital Gain occurs

A capital gain occurs when the value of an asset at the date it is disposed of is higher than when it was first acquired.

An asset can be disposed of either by sale or by gift. If you give away an asset in an uncommercial transaction, the market value will replace any actual consideration paid.

For assets acquired before 31 March 1982 the cost usually taken to be the value on that day, although actual cost can be used in some circumstances.

The following also reduce the amount of the chargeable gain…

Incidental costs of acquisition
Expenditure to enhance the value of the asset
Incidental costs of disposal, and
Tax reliefs and allowances (see below)

Rate of Tax

From 23 June 2-1- a new CGT rate of 28% was introduced where the total taxable gains and income are above the income tax basic rate band.

Prior to that and below that limit, the rate is 18%. For trustees and personal representatives of deceased persons the rate increased from 18% to 28% on all gains from 23 June 2010.

Tax Reliefs

There are several different tax reliefs which can reduce the chargeable gain, including…

Rollover/holdover relief on replacement of business   assets – allowing you to defer the CGT on a gain of a business asset where this is matched with a replacement of a new business asset in the period commencing one year before and ending three years after the disposal.
Business incorporation relief – available when you transfer your business into a Limited Company in exchange for shares.

This blog post is an extract from our Tax Helpsheet ‘An Introduction To Capital Gains Tax.’ There are a few more tax reliefs explained in more detail in the Helpsheet,including Entrepreneur’s Relief, so if you are interested in learning more about how to reduce your Capital Gains Tax liability, click here.

The last seven years has seen tremendous appreciation in home prices. This brings up the issue of home capital gains tax issues for people when they sell.

Home Appreciation and Capital Gains

Owning home is considered part of the American Dream. Unless you are extremely unlucky, homeownership leads to tremendous wealth building. You simply sit in your home, make the monthly payment and reap the benefits of appreciation and increased equity. A bit of the luster, however, can be lost when it comes time to sell.

Capital gains taxes are the problem. The federal government encourages homeownership, but also wants a chunk of a change when you sell. The capital gains tax is a percentage of the profit you have realized from the home, to wit, the difference between the price you purchased it at and the price it is sold. You can deduct mortgage costs, improvements and so on, but there is still the tax.

Fortunately, there are some large safe harbor exemptions to the home capital gains tax. If you are single, you can exclude the first 0,000 in profit from being taxed. If you are married and filing jointly, you can merge your individual exemptions and protect the first 0,000 from being taxed. In most parts of the country, these exemptions will completely protect you from home capital gains tax. Even if they don’t, the tax savings should be substantial.

To claim the exemptions, you must meet a few requirements. Obviously, you have to actually own the home. You must also have lived in the home two out of the previous five years. It must have been two years since you tried to claim the exemption on any other home. Put another way, you cannot claim the exemptions for investment property or second homes. Still, these healthy exemptions are a windfall for most homeowners.

Americans are notorious for being horrific savers when it comes to financial planning. Homeownership provides a relatively straightforward savings method and the government promotes it as such by providing these large home capital gains tax exemptions. If you can pull it off, buying a home is one of the smartest moves you will ever make.

When a non-resident sells property in Spain, they buyer is obliged to retain 3% of the price and pay it to the tax authorities to cover the vendor’s tax liabilities. If the vendor is due a refund after the tax has been paid, it can take years to get money back.

If the Spanish tax authorities consider a vendor non-resident in Spain for tax purposes, the buyer has to withhold 3% of the sale price to cover the vendor’s tax liabilities resulting from the sale. The taxman wants the money in case the vendor does a runner without paying his taxes, something that almost all non-resident vendors have done in the past.

Various terms in English and Spanish are used to identify this procedure. In Spanish it is known as the ‘retenci?n (sobre la venta de inmuebles) a cuenta del impuesto de la renta de los no-residentes’, whilst in English it is referred to as the capital gains tax retention on property sales. Some people also talk about a withholding tax (no strictly true) or money withheld, deducted, or kept back on a property sale in Spain.

The tax in question is the vendor’s capital gains tax, which has to be declared in his or her annual income tax returns (known in Spain as La Renta), and is taxed at 18%. Non-residents used to be taxed on capital gains at 25% but this was reduced to 18% as of 01/01/08.

This retention does not cover the vendor’s ‘plusvalia’ tax liability, which is paid to the town hall and is a separate matter.

After the sale, the buyer has one month from the date of sale to pay the 3% retention to the local tax office using the form (modelo) 211. A copy of the submitted form should then be given to the vendor or his lawyer, so a refund can be claimed.

If the vendor believes he is owed a refund (that the tax liability is less than the 3% retention), he has 3 months to present form 212 requesting a refund. This step is done at the local tax office (delegación de hacienda).

If a refund is due, how long does it take? It depends upon the tax office; some are quicker than others. In theory it shouldn’t take more than a few months, though some people report it taking up to 16 months. For feedback from other people see this Spanish tax retention forum discussion.

Be warned that if there are any minor errors in the documentation the tax authorities will jump on them as a reason to delay any refund. So make sure all the information in your 212 reclaim form is correct.

In an increasing number of cases, perhaps a majority of cases, the vendor’s tax liability is greater than the retention. What then? Depending upon the size of the liability, the Spanish taxman may try and come after you for it back home.

So, for example, if a British person living in London sells a holiday home in Spain for 200,000 Euros, the vendor will retain 6,000 Euros and pay it to the tax office. Say the vendor originally bought the home for 100,000 Euros, meaning a capital gain of 100,000 Euros, and a capital gains tax of something in the region of 18,000 Euros (there will be some relief for inflation). In this case the vendor will not be entitled to a refund, and may be pursued for 12,000 Euros back home by the Spanish taxman.

But if you don’t hear from them within 4 years you know you’re safe, as that is the legal deadline for the tax authorities to take action.

Note: This issue only applies to vendors who are considered non-resident by the Spanish tax authorities, i.e. fiscal non-residents. To be considered a fiscal resident you have to get a certificate from the tax office (hacienda) certifying that you are a fiscal resident. You will get this if you have been doing tax returns (declaración de la renta) for several years. Do not make the mistake of thinking you are fiscally resident just because you have an NIE number, or once had a residency card (tarjeta de la residencia). A notary will only accept a certificate from the tax office.

For more information and forum discussions see the Spanish capital gains tax retention at Spanish Property Insight

Best answer:

Answer by ranger_co_1_75
In the U.S., any real estate held more than 12 months is long term capital gains. Real Estate held less than 12 months is short term capital gains.

If you have held the property for more than 12 months, it can be treated as long term capital gains. If the property qualifies as investment property, you can roll the proceeds into the new qualified investment property and defer the taxes, as long as the new property cost more than the old property.

Add your own answer in the comments!

The Threat of Modern Capitalism to Society

As Ben Okri has stated, “Individualism has been raised almost to a religion, appearance made more important than substance. Success justifies greed, and greed justifies indifference to fellow human beings” (Okri, 2008). Our leaders strive to protect the interests of their citizens. They work to lower unemployment levels, improve education systems, methods to genuinely look after the people they govern. But for what end? The fierce competitiveness of our job markets push people to advance, where often to get ahead, individuals will abandon their sense of morals, of good. In the modern capitalist age we are told relentlessly to compete, that people break the rules to gain an advantage, sabotaging others if necessary. This occurs, while masquerading as fair competition.

In defence of capitalism, yes it promotes survival of the fittest, but it has now come to inadvertently push unethical practice, where behaviour bereft of values of good, of decency is seen to be necessary. It has come to be the norm in society now, through the omnipresent stream of commercialism and advertising.

Now, throughout human history there have and will always be, individuals who will cross any moral boundaries where necessary to meet their own ends, which leads us to one positive that we can take from the current society, from the effects of capitalism. True integrity, true moral character is accentuated by our system. There are people who still adhere to the principles of decency, virtue and of fair treatment of fellow human beings, which Ben Okri has not taken into account. Although his warning to the world is very real, the “heart of society”, as he puts it, is not as ruptured as profoundly as he claims.

However for the majority, the masses, there can be hope. Correct guidance and sincere leadership are now more important than ever before as the pitfalls of capitalism have become starkly transparent.

We Need Leaders of Values

As the devastating repercussions for the world from the disastrous decisions made in America are now becoming ever clearer, chiefly the financial crisis, a neglect of the dangers of climate change and human rights infringement on a colossal scale, it is also clear that we need strong leadership more than ever, to lead us through this dark time in the history of humanity. In Barack Obama not just America, but the world awaits with baited breath, in hope that he can undo many of the wrongs in our world. With leaders of principles, we aspire to be like them. A leader like Obama campiagned vigorously with the electorate, people across the country who share his vision for a better future, which led to record donations to his campiagn. His campaign was primarily funded by donations of less than 0 from over 3 million people, not large sums such as the £50,000 George Osborne sought to solicit from Oleg Deripaska, Russia’s richest man.

But how can we repair the damage within our civilisations when our leaders themselves undermine the values and principles that we should aspire to. If politicians and religious leaders lie or cheat in their own interests, what kind of example does that set to the peoples that they lead? Moreover many crimes committed by public figures have gone unpunished. This can be seen throughout history. Richard Nixon was pardoned by President Ford for the Watergate scandal. More recently the “cash for honours” scandal in Britain, where nobody in the upper echelons of the Labour leadership was called to account. Instead those who aspire to lead our civilisations need to engage the masses, campaign for donors in order to realise their vision for a nation, for the world. Society needs a relationship of trust between those who govern and the governed. It is inextricable, otherwise, we are faced with a broken society, where, as is now the case, the human race is slowly losing its very humanity.

Ben Okri (Thursday, October 30, 2008), writing for The London Times, Page 30

http://www.capitalinvest.equitylinesite.com/2009/11/14/reducing-tax-on-investments-minimising-capital-gains-tax/

Capital gains with capital losses are in the same tax year and accounting for thisthere is an annual exemption, currently £ 7,500. As a result, few people pay CGT.

If the result of transactions, which is one year before the annual exemption, a loss, it can be done to us in the following years.

The annual exemption can not be transferred, but gains are applied for a year before a loss brought forward which, if not used, can be transmitted.

The following investments are exempt from CGT:

gilt edged stock
Corporate bondLoans and equity
Friendly Society Savings Plans
ISAs and PEPs
Company share option schemes
Investment companies and venture capital trusts
Commercial forestry

As for taxes on income, investments, capital gains are exempt, have good investments in their own right. A gain is taxed at better than no profit at all.

Indexation and taper relief

For purchases prior to April 1998, the costs can be indexed, that set by the cumulativeInflation (RPI) between purchase and April 1998.

However, the index can not exceed the break, ie it can not be used in order to be taken to create a loss.

If you shares before the 6th April 1998, it is a good idea to compute the indexed cost of acquisition as it will not change. This can be done by the CW indexation allowances for April 1998 in Inland Revenue leaflet CGT1, which can be obtained from your local tax office.

From April 1998 the indexation was replaced by taperRelief, which is based on the length of the property. It only applies to shares held for at least three full years, although an additional year to the total for the stock on 17 March 1998 is added to the property.

The share of the profits at the expense reduced to 95% on the third full year and a further 5% for each subsequent year, at a minimum of 60% complete after ten years.

For example, if you bought shares would, in August 1996 and sold it in June 2001, the taxable profits are calculated,follows:

The initial cost would be until 5 April 1998 in accordance with the CW indexation allowance increased for the period to give the indexed purchase price.
The excess of the selling value of the indexed cost is the taxable gain before taper relief.
Although the stock here only for two full years, since April 1998 instead, as the shares on 17 March 1998 for another year added style, allowing a total of three years, then taper relief reduces the chargeable gain by 95%

http://www.capitalinvest.equitylinesite.com/2009/11/14/reducing-tax-on-investments-minimising-capital-gains-tax/

Best answer:

Answer by money-saving-rv-repair.com
This isn’t my area of expertise but… if the gains and losses occurred in the same year they can be offset and you don’t pay taxes on the capital gains.

If this happened on separate years things now change.

Say a $ 10,000 loss occurred first and there were no gains that year to offset the loss. You can carry over the loss into the following years to offset future years gains, however, there is a $ 3,000 per year limit. If you made capital gains the next year of $ 20,000 you will be taxed on $ 17,000. The remaining $ 7,000 of losses remains and can be applied to offset future gains.

Add your own answer in the comments!