Using a 1031 exchange to defer taxes on capital gains
Dear Liz: My husband and I are selling a commercial property for $600,000 and we have capital gains questions. Our Realtor said that we have 90 days to buy another property but suggested we don’t make a purchase due to the state of the economy at this time. We are looking for any suggestions to lessen our capital gains. Do you have any suggestions that we could look into or articles to read?
Answer: Your Realtor is referring to what’s known as a “like-kind” or Section 1031 exchange. These exchanges allow people to defer capital gains taxes when they sell commercial, rental or investment real estate as long as the proceeds are used to purchase similar property.
Section 1031 exchanges happen all the time, in all sorts of economic conditions, so your Realtor’s attempt to dissuade you based on “the state of the economy” is a bit odd. Also, likekind exchanges don’t have to be completed in 90 days. Owners have 45 days to identify potential replacement properties and a total of 180 days to complete the transaction. There are a number of other rules you must follow, so you’ll want to use companies known as exchange facilitators that specialize in handling these transactions.
Your first step, though, should be finding a qualified tax professional.
While your desire to educate yourself is laudable, and you certainly can find books about taxes at your local bookstore, there’s no substitute for consulting an experienced tax pro who can give you personalized advice.
Are accounts safer at online banks?
Dear Liz: My wife keeps over $60,000 in her checking account at a brick-and-mortar bank. I think that is a bad idea. Too easy for possible fraud. I have tried to convince her the safest place to keep the bulk of her cash is in a savings account, preferably in an online bank, which I believe provides added protection against fraud as long as we maintain good computer health. What do you think?
Answer: Many people have the opposite conviction. In reality, both types offer encryption and other safety measures to deter fraud. Accounts are insured by the Federal Deposit Insurance Corp.
Your wife’s money wouldn’t necessarily be safer in a savings account, but she’d earn a little more interest. Many online banks currently offer rates of about 1% on savings accounts. If she moved all but $10,000 out of the checking account, she could earn about $500 a year in interest and perhaps more if the Federal Reserve continues to raise rates.
Starting Social Security too early
Dear Liz: Does the Social Security Administration still allow a person to start taking Social Security benefits at age 62 and then later return the full amount received and begin taking the higher delayed benefits? For people who don’t need the income, this seems like a smart strategy as they could obtain the investment income on the benefits received from age 62 to 70 as well as the higher benefits amount starting at age 70.
Answer: Social Security closed that loophole in 2010.
As you know, Social Security retirement benefits increase each year you put off applying between age 62 and age 70, when benefits max out. An early start typically means a permanently reduced benefit.
Before 2010, people who started early, but who were able to repay all the money they received, were allowed to restart benefits at an older age and claim the larger checks as if they’d never applied before. This do-over prompted some recipients to apply early, invest the money and enjoy a kind of interest-free loan from the government.
People who make the mistake of starting Social Security too early still have a couple of options. They can withdraw their application within 12 months, but they are required to repay any benefits received, including benefits received by family members.
Another option is to wait until their full retirement age, which is currently between 66 and 67, and simply suspend their benefit.
No money has to be paid back and the recipient receives the delayed retirement credits that increase their benefits by 8% for each year they delay. Benefits will be automatically restarted at age 70, although the recipient can start them earlier, if desired.