Tax-deferred exchanges are great opportunities for real estate investors. In a typical property transaction, the seller is hit with the capital gains tax. Fortunately, section 1031 of IRS code stipulates that no gain or loss will be recognized in a qualifying exchange. A tax-deferred exchange is not as simple as swapping properties though. There are specific deadlines the exchanger must meet in order to reap the tax benefits. Once the first property is relinquished, the replacement must be identified within 45 days and closed on within 180 days. If this schedule in not met, the exchanger stands to lose all the deferred benefits of the 1031 code. In the right context, a traditional 1031 can be ideal. In other situations, investors may benefit from more specialized types of exchanges. The investor who finds a new property before selling the like-asset will need something more advanced than a conventional exchange. This sort of investor should consider a 1031 reverse exchange.

There are many advantages to a reverse exchange, but the most obvious is that a property owner can find a replacement like-asset without time constraints. Controlling a replacement property in advance of selling the initial asset alleviates much of the pressure involved in a traditional exchange. A reverse exchange is an appropriate option for the investor who is ready to purchase a new building but has not yet sold the initial property of the exchange. In essence, a reverse 1031 avoids the risk of having to pay substantial capital gains taxes on a sale should an exchange property not be purchased in time.

However, a reverse exchange is not entirely without defined deadlines. The schedule for a reverse exchange is identical to that of a traditional exchange, except the relinquished asset and replacement asset trade roles. In a reverse 1031, the relinquished property must be identified within 45 days of purchasing the replacement. In addition, the relinquished property must actually be relinquished within 180 days.

The 1031 code can be hugely advantageous for investors. The tax saving are, in effect, like a 0% interest loan from the federal government that extends indefinitely. Many options and variations exist for exchangers looking for a tax-deferred benefit. But for the investor who has found a replacement property prior to selling anything from his or her portfolio, the reverse 1031 exchange is the clear choice.

Practical financial advice is what we all should desire. The WWRD series is designed to provide real life circumstances along with real life, practical solutions, to these circumstances. Here is the first set of circumstances in the WWRD series.

Suppose there is a middle income family with two children. Husband and wife both work and make contributions to their respective 401K plans. Their goal is to begin saving for the college education of their two lovely daughters. One of the daughters is quite smart; the other is very athletic and is good at every sport she attempts. Father recently got a raise in compensation at work and is thinking of what to do with the extra money. The family does have some savings outside of the retirement plan but would like to have more in case of an emergency. What would be your advice to this family in order for their financial goals to be met?

The first order of business is to identify all of the issues at hand. This family is saving for retirement for the parents, it is taking care of children, it is building a portfolio outside of the retirement plan (more attention should be given to this area), and the family is deciding how best to provide for the education of its children. Does this study case sound familiar to anyone? Before I get started on the solution to this situation, I would like to first mention life insurance. Is there enough protection against one ore both of the parents passing away? There should be enough insurance to provide for income replacement if both parents pass. This could mean having each parent purchase significant life insurance to protect family assets. A rule of thumb might be to assume a 6% return on investments and then calculate how much insurance will be needed to generate the same income provided by each working parent. For example, if one parent makes $120,000 per year, $2,000,000 in coverage will be needed to provide for income replacement. This insurance, in my view, can be obtained through a term policy that would expire at some point after the kids are projected to graduate college, say at age 24. Remember, life insurance is a hedge against living and there is coverage that is needed. We do not want to get more coverage than we actually need. Enough said on this portion of the discussion.

Let’s get back to our case study involving this family’s desire to provide for a college education. I will bet that many of you are already saying that the solution is simple, just get a 529 plan. I am going to stop you here and ask that you think of this investment strategy. Putting money into a 529 plan will be similar to you putting money into a retirement plan. The investment strategy will be the same. The contributions made will have a given purpose and will be invested with a strategy that will protect this interest. Doesn’t this sound like the 401K? It sure does to me. Let’s remember that this family wants to build on its emergency funds. In addition, it’s important to consider that the kids may not want to go to school, could get a scholarship of some sort, or could make some other arrangement to fund college. Mom and Dad should consider building the emergency funds needed and building a portfolio outside of the retirement plan. Tax exempt bonds and large cap stocks can be used in addition to savings to build the emergency fund and increase the portfolio. The argument many will make is that the 529 plan grow tax free. This is true. I will submit to you that a portfolio can grow outside of the 529 on a tax free basis if one knows how to master capital gains and losses netting (see my article on capital gains and losses as well as portfolio management). If this is done effectively, the portfolio can be built to accommodate all needs. It can build for education, it can provide for retirement, and it can be used for most anything. A variety of investments will be available outside of the 529 plan. These investments will take advantage of income tax attributes available to one’s portfolio (capital losses, suspended passive losses) and if managed properly, can gain similar tax free growth like the 529 plan.

It's tax time and everyone is feeling the pain. There is a widely unknown source of write-offs for any every day person. Having a home business allows anyone to take the write-offs that the Corporate Giants get. Yes, you can get great business deductions with a home business! The best thing about a home business is that you probably will not have nearly as much overhead as a traditional brick and mortar business. You do not have to pay for office or business space; just pay your rent along with your other bills. And you can get all of the tax write-offs those corporate giants get with your home business. Plus, you are working as an independent, which means you get to manage your own hours, work where you want, take time off when you need it, do the work you love to do, and more.

Tax Advantages for the Home Business Office

Home businesses have many tax advantages and benefits. Here is an example of some various home business deductions you can take advantage of:

Home Office Deductions -

If you use a room in your home or apartment for your business office, you can take the home office deduction. You simply need to use one space in your home for work for your business solely, and nothing else. This will have you qualified to take the deduction. To make sure that you will qualify for the home office deduction utilize one room in your home as your work office, and use it for nothing else.

Home Office Renovation Deductions -

If you make any upgrades to your home office you can deduct those expenses in your taxes. For example, if you paint your home office, fix something, have an addition created, or any other renovations you can write-off those expenses in your taxes.

Property Cost Deductions -

You can also write-off a portion of your rent or mortgage payments for the year due to your use of your home office. You will need to figure out how much square footage your home office is in relation to your entire home. Then you can calculate how much you can deduct depending on how much you pay in rent or in your mortgage.

Tax Deductions for a Home Business -

There are so many deductions to take advantage of. You should make yourself fully aware of all of the tax write-offs you can take advantage of. Here is an outline of those many possible home business tax write-offs:

Home Office Security -

If you keep your home office under security, such as by using a security alarm system, using camera monitoring, or other similar ways to keep your home office safe, you can probably write-off those expenses in your taxes.

Utility Expenses -

The cost of your electric payments can be deducted for as much electricity you use in your home office. You will have to calculate how much you spend on this in order to deduct those expenses. If you pay for a business telephone line, you can write-off that expense.

Transportation Expenses -

You can deduct your expenses for traveling to destinations to conduct business, such as going to the bank, visiting a client, dropping off paperwork – anything you do when you run errands for your business – you can deduct those expenses. If you move into a new home during the year you can deduct the expenses of moving the business part of your home.

Miscellaneous Home Business Deductions -

When you entertain clients or meet them for dinner, you can deduct the travel costs, as well as the cost of the meal or entertainment. Usually you can deduct up to 50% of these expenses.

When you buy something such as software, office supplies, and etc. you can deduct those expenses because they are a direct expense of your home business. Do you want a new computer? You can deduct a new computer, printer, scanner, or any other office equipment you use. Do you contact clients via internet or have a business web site? Deduct your Internet Provider, hosting costs, and your Domain name costs.

Have you taken any classes, seminars, or other training that is directly related to your home business? You can deduct those expenses.

How to Manage Home Business Taxes -

The one main key to getting all of the home business tax write-offs is managing your home business taxes well. You will need them well maintained and well organized. You need to keep records of all of your expenses in order to be able to take advantage of those home business deductions.

Receipts: Keep receipts from every expense you have throughout the year. You will need these so you can show that you did pay for these business costs.

Travel Logs: In order to take advantage of the travel deductions you will need to keep a log (best kept in your vehicle) of where you travel, why you are traveling there, the time and date, the starting mileage, and finishing mileage.

Maintaining Your Home Business Taxes Throughout the Year -

As mentioned above, it is advised that you keep your receipts and logs well maintained throughout the year by keeping them well organized. You can do this by starting some files for each month or quarter and track your expenses for each amount of time. Keep them all calculated for the period of time you choose so that when tax time comes around you won't have to do as many calculations all at once.

Having your own home business has numerous benefits from all ends, and the best one may just be the tax write-offs you can take advantage of!

I Am My Daddy’s Tax Deduction

I know my daddy loves me but he seems much happier with me during income tax time. A whole year of taking care of me yields some sort of tax windfall as long as my daddy’s adjusted gross income is not too high and he is not in the alternative minimum tax. The one thing I have learned by being the daughter of a public accountant practicing tax is that you get your tax benefits as soon as you are able. Money received today is much better than money received tomorrow.

I do love my daughter and I am very proud to hear her say these words. It is absolutely true that is always better to get money today as opposed to waiting for tomorrow. If we are in receipt of funds today, we can make investments, put more money in our 401K’s, pay extra on our mortgages, and take care of our current life styles without running up debt and finance charges. What is really being said here is take advantage of your income tax benefits today. Do not wait until year end; do not run up credit card debt to make ends meet just to get a big tax refund. Have use of your money this very day and begin planning for your future. Here’s how you can take advantage of your income tax benefits today:

Husband and wife with two kids 4 exemptions
Mortgage interest ($24,000-10,300 standard deduction) 4 exemptions
Real estate taxes ($4,000) 1 exemption
State income taxes ($7,000) 2 exemptions
Contributions ($10,000) 3 exemptions

In this scenario, husband works and wife has no income. The standard deduction for married individuals filing a joint return is $10,300 which is already factored into the income tax withholding tables used by your employers. This amount was subtracted from the mortgage interest expense but could have been deducted from the total to arrive at the same result. The personal exemption amount used in this calculation was $3,300 with exemptions rounded to the nearest ones place. Assuming that this family is in the 25% bracket for federal purposes, the extra 10 exemptions will save $8,250 annually. This would breakdown to $688 more each month. Imagine the difference this would have in your monthly budget. If this money were invested each month or used to pay down some of the outstanding mortgage balance, the economic benefit will go well beyond this tax savings. The power of compounding interest will turn this monthly benefit into a much bigger economic gain.

Please my friends, my daughter and I urge you to calculate your income tax benefits for 2007 and beyond. Please take advantage of your benefits today to secure a more advanced economic well being tomorrow. Remember, if both spouses work, the subtraction will have to be $20,600 as both spouses will have this standard deduction built in to their respective withholding tables. If you are in the alternative minimum tax, please do not take into consideration your real estate taxes, personal property taxes, and income taxes.