Tax Consequences of Repositioning Real Estate

Tax Professionals' Resource
April 8, 2013 — 1,512 views  
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In the current economic state where the interest rates and the cost of living are high and the net investment gains are reasonable, the only possible solution for both investors and individuals is real estate repositioning and debt restructuring. Typically, these activities involve taking an existing real estate asset or a debt and changing the terms and conditions in such a way that it is more beneficial to the person who owns the debt or real estate. There are a number of ways in which this can be done. Here are some examples and possible tax consequences of repositioning real estate and restructuring debts.

Repositioning Real Estate

The bottom line of repositioning real estate is that you are making the property more attractive to the buyer. Firstly, you should decide a price tag for the property. You should not overprice or underprice the property. It is better to take the help of an expert for this.

The next job is of repositioning real estate. You should come up with a marketing strategy for the house and highlight the benefits of the house. Highlight some of the factors such as the geographical location, the market value of the house, amenities available, the location it is situated in etc. These are only a few of the number of ways in which you can reposition real estate.

Tax Consequences of Real Estate Repositioning

The equation can be very simple at times. If you value your real estate too high, be prepared to shell out more in taxes. But at the same time, you must also understand that being patient is beneficial in real estate repositioning. If you own a particular property for over a year, the fed taxes will reward you with lesser tax amounts. However, not all can afford the luxury of time when it comes to real estate repositioning.

Examples of Restructuring Debts

Similar to real estate repositioning, some people will take advantage of the varying interest rates or offers by new banks to change the term and conditions of their debts. This is called debt restructuring. Callable interest bond is one such way of restructuring debts. You recall the bond when the interest is low and readjust the interest of the debt. There is another method called the 0% APR trick where the debt holder takes advantage of the introductory credit offers by some companies. Although the reduction in interest is only for a year, the savings will be substantial.

Tax Consequences of Restructuring Debts

Most of the times, cancelled or restructured debts will result in taxable income for the person. In case the property is your first, you get a tax relief owing to the 2007 Mortgage Forgiveness Debt Relief Act. But if it is your second property, you will have to pay taxes. However, there are certain tax attributes like tax basis of the property, minimum tax credits, net operating losses, credit carryovers; passive activity loss, foreign tax credit carryover, etc. get reduced in the case of debt restructuring. It is better to take the advice of an expert and get an idea about tax restructures before you actually make any decision on debt restructuring.

Tax Professionals' Resource