The Ficks | Main / Taxes

"Like Kind" - Starker Exchanges

Some notes about like kind intents are important.
If you convert a property which was used in a 1031 like kind exchange to a personal residence, it cannot be sold for at least five years after purchasing it:

"But, the rules changed effective October 22, 2004 with the American Jobs Creation Act of 2004 which imposed a new ownership requirement of 5-years for property received as replacement property in a 1031 Exchange."

If you convert a property which was used in a 1031 like kind exchange to a personal residence, you must have established the property as an investment property first. I have found varying info on this topic, here are some examples:

"Taxpayers who hold their relinquished property for two years satisfy the requisite intent for a 1031 Exchange (or two tax reporting periods, since in an audit the IRS may look backwards and forwards two tax returns). A holding period of over a year has generally been accepted, but may be subject to review by the IRS. A much shorter holding period has been accepted, where a change in circumstances indicates that the taxpayer had intended to hold the property for a longer period."

"What if the rental property is not suitable for a taxpayer to want to live in it for two years? The answer is a 1031 Exchange for a property that will be suitable for the taxpayer. Astute real estate investors have discovered that they can roll-out of an investment property thru a 1031 Exchange, replace with a qualifying residential real estate investment property, rent it out for a year or so (exchange professionals recommend 1-year), move into it, live in it for two years and then sell it tax-free. And, they have discovered that they can do this again with a second investment property, and a third, and so on."

Personal Residences

From: http://www.irs.gov/publications/p523/ar02.html#d0e1966 Married Persons

If you and your spouse file a joint return for the year of sale, you can exclude gain if either spouse meets the ownership and use tests. (But see Maximum Exclusion, earlier.)

Example 1: one spouse sells a home.

Emily sells her home in June 2005. She marries Jamie later in the year. She meets the ownership and use tests, but Jamie does not. Emily can exclude up to $250,000 of gain on a separate or joint return for 2005.

Example 2: each spouse sells a home.

The facts are the same as in Example 1 except that Jamie also sells a home in 2005. He meets the ownership and use tests on his home. Emily and Jamie can each exclude up to $250,000 of gain.

Maximum Exclusion ...

You can exclude up to $500,000 of the gain on the sale of your main home if all of the following are true.

You are married and file a joint return for the year.
Either you or your spouse meets the ownership test.
Both you and your spouse meet the use test.
During the 2-year period ending on the date of the sale, neither you nor your spouse excluded gain from the sale of another home.
If either spouse does not satisfy all these requirements, the maximum exclusion that can be claimed by the couple is the total of the maximum exclusions that each spouse would qualify for if not married and the amounts were figured separately. For this purpose, each spouse is treated as owning the property during the period that either spouse owned the property.

Roth IRAs

From: http://invest-faq.com/articles/ret-plan-roth-ira.html

You must use labor income to contribute:

"Contributions are limited to $4,000 annually (as of 2005) and may be restricted based on an individual's income and filing status. In 2005, an individual may contribute the lesser of US$4,000 or the amount of compensation income from US sources to his or her IRA account(s). Compensation income includes wage income and self-employment income; it excludes investment and pension income, just to name two examples..."

Also:

"Contributions can be withdrawn tax-free and penalty-free at any time."

Annuities

Annuities allow post tax money to be accrued tax free until after you retire. The money does not have to be withdrawn then either, you can die with it still in the account and then have it distributed to your inheritors.

HSAs

These health accounts can be use as a retirement plan instead of a 401K! You must have an eligible health insurance plan and your contribution is limited by the deductible ~$5K, but like a 401K, it is pre-tax money (actually it's deductible) so that if you do not end up spending it, it will stay in the account until you retire! A convenient plan for contractors especially since you will probably be benefitting from a much cheaper health plan while you are at it!

Life Insurance

You can also save post tax money in a life insurance policy for use in retirement. With special policies you can build up a cash value which grows at slightly lower rate than the market, but you will never have to pay tax on the earnings! Since a substancial portion of your premium on these plans goes to pay for your death benefit, your cash value will take many years to build up to a reasonable savings. It will probably take at least 10 years to brake even with a straight market investment minus taxes. One advantage of this type of investment over other retirement options is that you can withdraw up to the cash value minus $1 at anytime without a penalty, you do not have to wait until you are 59. This can make a good additional investment if you think that you are already saving well and might have a heavy tax burden when you retire (similar to a Roth IRA).

From The Ficks

Main: Taxes