Investing in US Real Estate A Tax Perspective April 28, 2011

Capital Gains & Dividends Tax Rates  Capital gains and dividends will be taxed at maximum rate of 15%; this rate will continue through December 31,  Federal Tax on Capital Gains = 15%  Maximum State Tax Rate for Arizona = 4.54%  Rates on capital gains were scheduled to rise to 20% and dividends as high as 39.6%.

How to avoid Capital Gains – Primary Residence  Exclusion of up to $250,000 of Gain for Singles and $500,000 for Married Couples filing a Joint Tax Return  Must occupy home as primary residence for 2 consecutive years of the last 5 years  May qualify if former primary and later converted to investment property (if lived in 2 of the last 5 years)  Must recognize a pro-rata share of the gain if converting investment property to primary residence.

How to avoid Capital Gains – Investment Property  Internal Revenue Code Section 1031 – Like Kind Exchange  May defer the tax on the entire gain if exchange for another real estate investment of equal or greater value  May exchange raw land for apartment building or office building for condominium.  Any investment in real property qualifies as “like-kind”

FIRPTA Exception for US Residents who are beneficiaries of Canadian Retirement Plans  Article XVIII(7) of the United States – Canada Income Tax Convention  Provides exception to recognize tax on investments made with Canadian Retirement Plans until Plan distributions are made

FIRPTA How to Avoid Withholding Requirement  If sales price is $300,000 or less  Seller must file form 8288 with the IRS  US Treasury considers the 10% a deposit against the total tax bill. Return must be filed to report the tax & claim the deposit made

FIRPTA How to Avoid Withholding Requirement  If sales price is $300,000 or less and selling to a buyer that will occupy the home as his or her primary residence.  Seller must apply for a certificate to excuse withholding  Check your tax treaty…

Energy Efficient Improvements  2010 Tax Act renewed energy efficiency credits at lower levels.  For Credit of 10% of cost up to $500 for energy efficiency improvements to your home  Expires 12/31/2011 and must be in existing home & principal residence  Save receipts and Manufacturer’s statement for your records, submit Form 5695 with taxes

Modification of Estate Tax  Future heirs got lucky and escaped the possible 55% tax rate… 2010Estate TaxGift TaxGST Tax Tax RateRepealed35%Repealed ExemptionN/A$1M- 2011Estate TaxGift TaxGST Tax Tax Rate35% Exemption$5M

2010 Tax Relief Act  The extension of the Bush Era Tax Cuts… 2011 Individual Tax Rates Joint Return Income RangeTax Rate -to 17,00010% 17,001to 69,00015%plus $ 1,700 69,001to 139,35025%plus $ 9, ,351to 212,30028%plus $ 27, ,301to 379,15033%plus $ 47, ,151and over35%plus $ 102,574

AMT Patch The Alternative Minimum Tax - 26% Flat Tax AMT prevented from meddling into the middle income tax bracket AMT prevented from meddling into the middle income tax bracket With patch, taxpayers can offset AMT liability by full amount of nonrefundable personal tax credits in 2010 and 2011 With patch, taxpayers can offset AMT liability by full amount of nonrefundable personal tax credits in 2010 and 2011 Exemption Amounts: Exemption Amounts: 2010 Exemption Amounts2011 Exemption Amounts $47,450 – Single$48,450-Single $72,450- Married Filing Jointly $74,450-Married Filing Jointly

Arizona Tax Rates 2011 Individual Tax Rates Joint Return Income RangeTax Rate -to 20, % 20,001to 50, %plus $ ,001to 100, %plus $ 1, ,001to 300, %plus $ 3, ,001and over4.54%plus $ 11,542

Elizabeth Hale, CPA eeCPA PLC 4612 E Robert E Lee St Phoenix, Arizona T F W E