| Understand the tax consequences of
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| | weeks.
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| flipping houses, rehabbing houses, and
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| | 1031 Exchange
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| how to defer taxes with the 1031 Exchange
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| | However, the Internal Revenue Code
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| before you get into real estate
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| | provides real estate investors away to
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| investing. Problems arise when real
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| | defer capital gains taxes indefinitely.
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| estate investors don't follow federal and
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| | Section 1031 of the Internal Revenue Code
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| state tax laws. This is why you need
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| | provides a tax-free exchange. Also known
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| professional advice. Although I am not a
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| | as a "like-kind" exchange, this code
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| tax advisor, here are some common
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| | allows you to sell a business or
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| mistakes beginning real estate investors
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| | investment property and defer
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| make by not understanding tax
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| | capital-gains taxes by immediately
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| liabilities:
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| | reinvesting the gains into a similar
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| Flipping Houses
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| | piece of property. The key, replacing a
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| The reason flipping houses is a mistake
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| | business or investment with similar
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| for some beginners is that they don't
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| | property, means that no gain gets paid to
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| know the income tax consequences. One
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| | the investor. Any profit taken out of
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| problem with flipping houses, or selling
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| | escrow gets taxed. This means that
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| too many properties too quickly, the IRS
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| | beginning investors might take out a
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| could say that your real estate business
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| | portion of the profit after they
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| is your trade, subject to ordinary income
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| | carefully explore their tax liabilities.
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| and self-employment taxes.
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| | In other words, talk to an accountant and
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| Self-employment tax, a social security
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| | find out what your tax would be according
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| and Medicare tax primarily for
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| | to your current usual income. Many
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| individuals who work for themselves, is
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| | business owners take advantage of this
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| similar to the social security and
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| | because they have many business
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| Medicare taxes withheld from the paycheck
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| | deductions.
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| of most employees. The self-employment
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| | The big mistake beginning real estate
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| tax rate costs you 15.3% of your profits.
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| | investors make doing a 1031 tax-free
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| (However, this may provide retirement
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| | exchange, taking possession of the
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| benefits.)
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| | profits, voids the tax deferment. You
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| Rehabbing Houses
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| | must declare the sale of your property to
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| Another common mistake that beginning
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| | be a part of a 1031 exchange before you
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| investors make is selling a property
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| | sell the property. Then you have the
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| after holding it for almost a year. Some
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| | money placed in a trust account held by
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| rehabbers work part time on a fixer and
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| | an intermediary until you purchase the
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| take six months to get the house ready.
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| | new investment property. You have 45 days
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| Add on two months to sell with a 60 day
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| | to identify a replacement property and
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| closing, and they're up to ten months. To
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| | 180 days to close on the new investment.
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| take advantage of the low 15%
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| | You can't purchase a primary residence or
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| capital-gains tax rate, you must keep the
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| | a vacation home with funds from an
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| investment property for at least a year
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| | investment property and defer taxes in a
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| before selling. If you sell before a
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| | 1031 exchange.
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| year, your tax rate, the usual capital
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| | The best advice for beginning real estate
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| gains rate of 35%, could eat up a
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| | investors:
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| significant amount of your profits.
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| | Talk to an accountant.
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| If you're rehabbing houses, be patient.
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| | Would you be better off making extra
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| You could save thousands in taxes by
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| | money, even if you must pay taxes?
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| holding your property just a few more
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| | © 2005 Jeanette J. Fisher.
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