These are a few things you could expect when buying an investment home.
* There are NO additional taxes when buying, the only fees you incur when you buy cash are title insurance (based off of purchase price), title/closing fee (varies on purchase price), and a small recording fee to record the warranty deed showing ownership with Clerk of Courts) Example a home purchase of $185,000 cash the recording fee would be $18.50. Also keep in mind if you intend to keep the property, you will want to consider hazard and flood insurance.
* When youâ€™re selling the home you just purchased, you have to pay the IRS Capital Gains Tax, which is currently 15%, but may go up to 20% in the future years. Also include the federal and state tax rates of your given state when selling a home. The IRS depreciates the Capital Gain by 3% per year as long as you hold on the investment per year, until it is fully depreciated. When you sell the capital asset, in this case a home, the IRS wants to tax you on the depreciated portion as an income tax, and that would be a marginal tax rate, example if you hold an investment for 15 years, the IRS depreciated it by 45%. It then wants you to pay the taxes on that 45% depreciate. If you combined state and federal taxes to that you end up paying 35% at the marginal rate, thatâ€™s about 15% of the cost of the property. Minus the amount you initially invested.
Due to the fact that exchanging, a property, represents an IRS-recognized approach to the deferral of capital gain taxes, it is very important for you to understand the components involved and the actual intent underlying such a tax deferred transaction. It is within the Section 1031 of the Internal Revenue Code that we can find the appropriate tax code necessary for a successful exchange. I would like to point out that it is within the Like-Kind Exchange Regulations, issued by the US Department of the Treasury, that I find the specific interpretation of the IRS and the generally accepted standards of practice, rules and compliance for completing a successful qualifying transaction.
The extent that either of these rules (above) are violated will determine the tax liability accrued to the person executing the Exchange. In any case which the replacement property purchase price is less, there will be a tax responsibility incurred. To the extent that not all equity is moved from the relinquished to the replacement property, there will be tax. This is not to say that the (1031) exchange will not qualify for these reasons. Keep in mind, partial exchanges do in fact, qualify for a partial tax-deferral treatment. This simply means that the amount, of the difference (if any), will be taxed as a boot or "non-like-kind" real estate property.
EXIT Ocean Realty