Tony's Tax Tips

The Tax Chess Board Part 7

This article originally appeared in the Pasadena Star News on May 13, 2006.
THE TAX CHESS BOARD – By owning real estate you can increase your net worth without paying any income tax. In order to pay the least amount of tax, you have to understand the tax consequences of the various methods of disposing of real estate.
C. Anthony Phillips, CPA

WHY PAY TAX? – It does not make sense to sell for cash, pay federal tax on the due date of your next tax return and risk being forced into paying alternative minimum tax because of the amount of state tax you may have to pay.  Why pay tax when you can defer payment of the tax by selling and accomplishing a 1031 exchange?

1031 EXCHANGE – Instead of selling your investment property and accepting cash or an installment note for the purchase price, you can engage the services of an accommodator, like Downstream Exchange Company.  They can accomplish a 1031 exchange by helping you navigate the maze of Federal and State tax laws, as well as the rules and regulations of the Internal Revenue Service and the State.  If you successfully follow their directions, you will be able to sell your investment property, acquire another investment property and defer all or some of the resulting Federal or State tax.

WHY WOULD YOU WANT TO DO A 1031 EXCHANGE? – The principle benefit is that you can defer the gain from the sale of your investment property into the newly acquired investment property.  You would have to pay tax on the deferred gain if you sold the newly acquired investment property for cash or on an installment sale.  However, if you continue to accomplish 1031 exchanges over your life time, you will escape paying the capital gains tax on your exchanged properties.

WHAT IS THE DIFFERENCE BETWEEN AN INSTALLMENT SALE AND A 1031 EXCHANGE? – An installment sale allows you to recognize gain over the period of time you receive principal payments on the installment note.  You will, however, eventually pay the tax due.  A 1031 exchange allows you to defer the tax on the sale of an investment property until you sell the newly acquired property.  If you never sell, you never pay the tax.

FOR MORE INFORMATION ABOUT A 1031 EXCHANGE – Call Downstream Exchange Company; at 626-796-1031 (great number isn’t it?)  You may speak to Karen Petersen, Vineet Dubey or my son, Derek Phillips (The 21 years of education are finally starting to pay off!)   You can also visit our web site at www.DownstreamExchange.com.

Tony Phillips, CPA has a certified public accounting firm, Phillips & Company in Pasadena and is President of Downstream Exchange Company which helps investors save taxes when they sell their investment property.

The above is not intended to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.