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Are you a real estate investor/professional? Do you own rental properties? Are you looking to complete a Section 1031 exchange? If so, there are important tax implications to consider which can impact your tax bill.

When it comes to this specific area of taxation, however, Congress didn’t do any favors for those who are looking to sell real estate. This is because the tax laws relating to real property sales are extremely complex and often misunderstood even by seasoned tax professionals.

Let’s say that you are selling a real estate rental property along with appliances and other personal property using a seller-financed note (installment sale).

When selling property using a seller-financed note, you may want to use the installment sales method to recognize gains over the term of the note instead of all in a single year.

With regard to personal property (that is, property that is NOT real estate), you will generally have to recapture all of the gain attributable to depreciation in the year of the sale (whether you use the installment sales method or not). This is known as “Section 1245 Recapture,” which is taxed as ordinary income in the year of the sale.

As for the building and the land that you are selling, these assets are treated differently. They are known as “Section 1250 property.” For any of the gain on these assets attributable to depreciation, you will be subject to “Section 1250 Unrecaptured Gain” which is taxable up to 25% for federal tax purposes. Unlike Section 1245 Recapture, the Section 1250 Unrecaptured Gain may be spread out over several years and does not have to be recognized in its entirety in the year of the sale if you use the installment sales method.

Confusing enough? We make it simple. Whether you are looking to buy or sell, make the Tax Code work for you!

Call us today at (323) 531-3500 so that we can help you make the right decisions with regard to your real estate.

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