Taxes

Tired of paying Taxes? Try a Like-Kind Exchange

Death and taxes. Neither can be avoided. However, with some clean living, careful choices, and a little luck the former can be delayed. So can the capital gains tax on the sale of your real estate, which happily only requires some planning.

The tool to make this delay of tax is known as a Like-Kind Exchange, often referred to as a 1031 exchange, from the IRS code of that same number. As of January 2018, this only pertains to real property used productively in business or held for investment and not personal property such as equipment, vehicles, and other such things.

What is a like-kind exchange? Simply put, it is exchanging one property, held for productive use in a trade or business or held for investment, for another property for those same purposes. What it is not? It cannot be used for delaying taxes on real estate which is held primarily for sale, often referred to as dealer property, where it is your business to buy and sell real estate for profit. This will likely be taxed as ordinary income.

Pros and Cons – The benefits of using a like-kind exchange are pretty obvious if growing your real estate investment net worth is your primary goal. Reinvesting equity gain which would otherwise be paid to Uncle Sam in capital gains tax, may net a better return on investment. The downside to the exchange can be the lack of liquidity of real estate in general and less diversification of investments. As an example, if a great stock opportunity became available to you, the equity from the property sale could not be used tax deferred to purchase it.

Is it complicated you ask? We are talking about the IRS, so of course it is. Nothing worthwhile ever comes easy. There are several types of exchanges and rules such as time to complete the exchange, naming of properties to exchange into, and not directly receiving the proceeds from the sale of the relinquished property, plus many other potential concerns. The process involved in an exchange can take up many chapters in how-to books, so I will not cover all the details here. The good news is, if you are interested in an exchange, there are professionals out there, such as Qualified Intermediary (QI), CPAs, real estate brokers, and attorneys that can guide you through the process.

If you think that the like-kind exchange is a possible route that you may take, plan it from the day you put your property on the market. Engage the appropriate professionals that are required to help you. Be sure you inform the buyer of your property about your intentions to exchange in both the property disclosure and purchase and sale agreement. This is not necessarily required but certainly will make for a smoother closing.

If you need more information, here are some links to the IRS website and a QI and attorney we have used.

Rudman and Winchell Asset Preservation Inc. IRS Guidelines IRS Form 8824

 

Maine Subdivision Rules - Should You Develop Your land?

Maine Subdivision Rules - Should You Develop Your land?

In Maine, there is a difference between a division of land and a subdivision of land. In most municipalities dividing your property into two separate lots requires little or no permitting. However, dividing a property into 3 separate lots within a 5-year period does require approval in most cases, and is the definition of “subdivision” in our state.

Increased Property Value

Why would you want to do a subdivision? Most property investors look at the subdivision process as a way to increase the per acre value of their property. At first the thought of a smaller lot being worth more does not make sense, but consider that by reducing the size of the acreage you bring the gross selling price lower and within the purchasing power of more people. More people competing for a property usually translates to more demand and a higher price.

Higher prices may or may not translate into more profits. Before jumping headfirst into a subdivision some research and planning should be undertaken. Market conditions should be the first consideration. Data such as recent comparable lot sales, how many sales have occurred, lot sizes of successful sales, what is the current supply of lots, absorption rates, and financing availability to name a few. Next what will be the costs of surveying, wetland delineation, engineering, road construction, soil testing and other requirements of permitting? After thorough analysis and due diligence a property owner can decide if the risk is worth the reward to subdivide.

Requirements

Every organized town in Maine may have a slightly different subdivision ordinance. The unorganized territories in Maine have a uniform ordinance with little variation in requirements. Typically, a local planning board will review a proposed subdivision to see if it conforms with the ordinance. The process will consist of several meetings starting with a presentation of a preliminary sketch of the proposal. This is followed up with notifications to the public and nearby property owners of the proposed subdivision and the date of the public meeting to review it.

This next hearing consists of a more formal presentation of a preliminary survey plan of the layout of the proposed lots, roads, easements, slopes, soils etc. Public comment is permitted and heard by the board. After this meeting any changes required by the board need to be addressed and another hearing with a final plan will be scheduled. Assuming no other issues are outstanding, the board will sign the final plan that will be recorded in the county registry of deeds.

Exceptions

There are a number of exceptions to the rule to sell property without the process of subdivision. Gifts to relatives (see definition in statute) may be exempt if the donor has owned the property for at least 5 years and the consideration is less than ½ the current assessed value. Sales to abutting property owners may be exempt from subdivision rules. In unorganized territories, 3 lots can be created in a 5-year period as long as the 3rd lot is retained for forest management purposes. This is often referred to as the ‘2 in 5 Rule.’ There are other exceptions listed in the statute linked above.

Summary

This post is intended to encourage a thoughtful process in land investing and should not be viewed as an endorsement to subdivide your property. In many cases I would advise clients not to.  The above descriptions are a simplification of the process, not a complete outline of all potential requirements of every planning board. You are well advised to consult with experienced professionals like real estate attorneys, surveyors, soil scientist, and land brokers before undertaking the subdivision process.

How To Get a Maine Property Tax Abatement

The mention of property taxes often stirs controversy among our citizens. The fact is most of us in some way use the services that tax money pays for from educating our children to keeping infrastructure maintained. If you do not agree with how the money is spent get more involved in the process. This post is for those who think they are being unfairly taxed for the property they own in Maine not for a philosophical discussion about the pros and cons of our current tax system.

The Maine constitution requires that taxes on property be based on just value and fairness. Just value is usually considered fair market value. Fairness is determined by how all property owners are treated as a group. To challenge a perceived excessive property tax the land owner in Maine has options for relief.

A potential option for abatement is to challenge how the tax assessor determined the property's value. Get a copy of your tax card from the town and review the methodology of the assessor. Compare the valuation of your property to a recent appraisal and/or review recent sale data of similar properties. If you see a big discrepancy in current market value compared to the assessed value you may have grounds for abatement.

Another option for abatement is to prove that your property is being assessed unfairly. Similar to researching just value, the taxpayer must do research before requesting the abatement. What you need to look for are a number of similar properties with large difference in valuation. The tax assessor is allowed some variations as it is not practical to fully analyze every property in the town every year. To have success you need to show that your valuation is more than the average of similar properties. If just one or two properties are found with slightly higher or lower valuation you probably do not have a case for abatement.

If after your review of all this data you are convinced that your property is being taxed unjustly or unfairly you should meet with the tax assessor to discuss the difference. If you can convince them of the error in just valuation or fairness, they may adjust the valuation to reflect your findings. This should be done before the taxes are committed for the tax year as assessors will most likely refuse to adjust any valuations after that date. If they do refuse your request and you are convinced you are right a more formal request will be necessary.

Under Title 36 MRSA, Sections 583, 706, 841-849 and 1118 a Maine property owner who thinks their taxes are higher than they should be can file a formal application for abatement of property taxes with the local assessors within 185 days after the tax was committed to the tax collector. You can find more details on the process online at   http://owlshead.maine.gov/Maine_Revenue_Services_Property_Tax_Bulletin.pdf

Comments

  1. William R Brown on

    Thank you, McPhail Brothers, for the timely tutorial, i will refer to the information before taxes are due, hopefully. Cheers, from william Monday, March 28th, 2016

    Maine Tree Growth Tax Confusion

    If you have been planning to purchase a parcel of land in Maine you have probably heard of tree growth tax status. These are a few common misconceptions about the program that we often hear from potential land buyers and land owners.

    "I can't cut any trees if I have the property in tree growth". False

    The tree growth tax law was enacted by the Maine legislature to allow land owners to maintain their property as productive woodland to supply Maine's wood industry. Cutting trees is what this tax law was designed for.

    "It is too complicated." False

    As a new owner you will have a few obligations to get the tax benefit from tree growth but it is a relatively simple process. You need to hire a consulting forester who will help you create a management plan, file some forms and then follow your plan.

    "I don't want to give up control of my land." False

    While you do need to follow some rules, the rules allow for the owner to make their own decisions in managing the lands as long as they use sound silvicultural practices.

    "I can't build on the land if it is in tree growth." Somewhat True

    Once a property is enrolled in tree growth tax status you will need to apply for a change of use that will be acceptable to the town but a penalty will be imposed for the change of use. Also, portions of a property can be left out of tree growth at the time of enrollment to allow for penalty free building sites.

    For more information on Maine's Tree Growth Tax see:

    http://www.maine.gov/revenue/forms/property/pubs/bull19text.htm

    Buying Maine Land With A Self-Directed IRA

    If you are like many of our customers concerned with having all of their retirement investments tied to the stock market you may want to look into a self-directed IRA. With a self-directed IRA you will be ready to act when you find that Maine land for sale that you know is a good investment.

    What is a self-directed IRA?

    The Individual Retirement Account or IRA has been around for many years as an incentive for individuals to save money tax deferred for their retirement. A self-directed IRA is simply an IRA that gives you complete control over what you invest in.

    What can you invest in?

    Unlike most IRA's offered by banks or custodians the self-directed IRA can be used for nontraditional IRA investments like real estate, notes, precious metals and many others. Maine timberland, farmland, land with development potential, waterfront and more could be a great diversification to you investment portfolio.

    Pros

    The best benefit of the SDIRA is the ability to have control over what you invest in. No one cares more about your retirement than you do. You can invest in what you know instead of letting others have control of your future. You can partner with friends and others on new investment opportunities. Your investments will grow tax deferred.

    Cons

    All investments have risk and a self-directed IRA will require you to do your own due diligence to mitigate risk.

    Because this type of tax deferred account could have a lot of potential tax advantages for you the IRS has a lot of rules that need to be followed.

    Is it right for you?

    You will need to decide if the ability to control your own destiny is something you are comfortable doing. If you do not have time for researching your own investments you may want to stick with a traditional IRA. If you are one of a growing number of individuals concerned with the course of traditional banking and investing, the self-directed IRA is worth a look.

     

    Deferring Capital Gains When Selling Maine Land

    Death and taxes are unavoidable but they can be delayed. The former by eating right and exercise and the later by employing the right strategy when selling your land.  If you are considering selling your land in Maine and will realize a large capital gain you may want to consider a 1031 tax deferred exchange, aka. Starker exchange.   Always consult with your tax advisor but be aware, not all CPA's have a comprehensive knowledge of the exchange process and the tax code involved.

    One of the most common misconceptions is the term "like kind property".   If I sell my undeveloped land, I will need to replace it with another piece of undeveloped land, keeping with the "like kind".   NOT TRUE!!  The term "like kind" means "investment property" for "investment property".   If John Doe owns a 4 unit apartment building in Florida that has been used 100% as investment, Mr. Doe may exchange that property for a timber investment in Maine.

    As with any topic, you will find tons of information on the internet regarding 1031 exchanges. One company that has been around for years is Asset Preservation.  Their web site can be found at http://apiexchange.com and you will find a lot of useful information.  Once on their site, click on the button "1031 Repeal Issue".  This will allow you to send an email to your Representative asking them not to repeal section 1031 of the IRC.

    Even if you never have any intention of using a 1031 exchange, the buyer for your property may be involved in an exchange. This type of buyer is motivated and must meet a stringent time table to comply with IRC.

    Comments

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    Maine Tree Growth Tax Confusion

    Maine Tree Growth Tax Confusion

    If you have been planning to purchase a parcel of land in Maine you have probably heard of tree growth tax status. These are a few common misconceptions about the program that we often hear from potential land buyers and land owners.

    "I can't cut any trees if I have the property in tree growth".

    The tree growth tax law was enacted by the Maine legislature to allow land owners to maintain their property as productive woodland to supply Maine's wood industry. Cutting trees is what this tax law was designed for.

    "It is too complicated."

    As a new owner you will have a few obligations to get the tax benefit from tree growth but it is a relatively simple process. You need to hire a consulting forester who will help you create a management plan, file some forms and then follow your plan.

    "I don't want to give up control of my land."

    While you do need to follow some rules, the rules allow for the owner to make their own decisions in managing the lands as long as they use sound silvicultural practices.

    "I can't build on the land if it is in tree growth."

    Once a property is enrolled in tree growth tax status a change of use is possible. A penalty will be imposed for the change of use. Also, portions of a property can be left out of tree growth to allow a penalty free building site.

    For more information on Maine's Tree Growth Tax see:

    http://www.maine.gov/revenue/forms/property/pubs/bull19text.htm