New real estate investor tax law changes

The following is an overview of the law (the amended version of H.R. 4853) that passed after agreements were reached between the President and Congress. The changes have a definite positive effect for real estate investors who want the opportunity to pay no tax when disposing of either income-producing or investment held real estate through the use of a "1031 exchange." The three major areas of concern to many real estate investors were the following: 1. Favorable capital gains tax rates 2. Tax-free exclusion amount for estate and gift taxes 3. Stepped-up basis for inherited property First, the capital gains tax rates will stay the same as they were. For real estate this means they remain at 15% maximum federally. Although this is good news, for those real estate investors that want to pay no tax when disposing of income-producing or investment held property, they have the opportunity to defer not only this favorable capital gains tax, the recapture of depreciation which is another 25% federally as well as New York State income tax. In many cases this can be as much as a third of your selling price depending on your gain (profit). For estate and gift taxes, the exclusion will be $5 million per person, with a tax rate of 35% for amounts over $5 million. An important element of the estate tax agreement for taxpayers is that a property is inherited at a stepped-up basis. This means that while the decedent may have had a low tax basis as a result of an acquisition that was made many years ago, the property will be inherited at a stepped-up basis meaning the property will be appraised at the fair market value at the time of death. The wake up item here is that someone can perform a "1031 exchange" over and over and each time defer their taxes and upon their death can leave their property to their heirs without any income tax. It becomes a tax-free tool rather than a tax-deferred tool. The heirs will not have to pay any income tax on the previous gain (profit) as they will receive the inherited property with a tax basis at its current market value. That means the heirs can turn around and sell the property immediately upon inheritance and there would be no income tax due. If the heirs decide to hold the property, then they would only pay capital gains tax, recapture of depreciation taken while they owned the property as well as New York State income tax. But they would also have the ability to perform a "1031 exchange" and pay no tax. Landlord Notice There will be expanded IRS Form 1099 reporting for income-producing property owners starting this year. The Small Business Jobs Act of 2010 requires all individuals who own income-producing property to issue an IRS Form 1099 for payments relating to their properties. Now, by definition, "a person receiving rental income from real estate shall be considered to be engaged in trade or business of renting property." A 1099-MISC form will be required if the property owner spends $600 or more per year per recipient. Examples of possible 1099-MISC recipients: contractors and repair service providers, landscapers and painters to name a few. Russell Gullo, CCIM, CEA is a certified exchange advisor, president of R. J. Gullo & Co., Inc., and chief executive officer of the R. J. Gullo Companies of Real Estate Investment Services, West Seneca, N.Y.