How a “like-kind” 1031 exchange defers real estate gains

Dear Liz: My husband and I are selling commercial property for $600,000 and we have questions about capital gains. Our real estate agent said we have 90 days to purchase another property but suggested not making a purchase due to the state of the economy at the moment. We are looking for suggestions to reduce our capital gains. Do you have any suggestions we could look into or articles to read?

Answer: Your realtor is referring to what’s called 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 a similar property.

Section 1031 exchanges happen all the time, in all sorts of economic conditions, so your real estate agent’s attempt to dissuade you based on “the state of the economy” is a little odd. Also, similar exchanges do not 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 need to follow, so you will want to use companies known as exchange facilitators who specialize in handling these transactions.

Your first step, however, should be to find a qualified tax professional. You’ve just discovered what can happen when you turn to non-tax professionals for tax advice.

While your desire to educate yourself is commendable and you can certainly find tax books at your local bookstore, there is no substitute for consulting an experienced tax professional who can give you personalized advice.

Saving in online banks

Dear Liz: My wife keeps over $60,000 in her checking account at a physical bank. I think that’s a bad idea. Too easy for possible fraud. I tried to convince her that the safest place to keep most of her money is in a savings account, preferably in an online bank, which I think provides additional protection against fraud as long as we maintain good IT health. What do you think?

Answer: Many people have the opposite belief that online banks are somehow less secure than physical versions. In reality, both types offer encryption and other security measures to deter fraud. Accounts are insured by the Federal Deposit Insurance Corp. and covered by federal banking regulations designed to protect consumers from fraud.

Your wife’s money wouldn’t necessarily be safer in a savings account, but she would earn a bit more interest. Many online banks currently offer rates of around 1% on savings accounts. If she moved all but $10,000 from the checking account, she could earn about $500 a year in interest and possibly more if the Federal Reserve continues to raise rates.

Starting social security too soon

Dear Liz: Does the Social Security Administration still allow a person to begin taking Social Security benefits at age 62, then later return the full amount received and begin taking the higher deferred benefits? For people who don’t need the income, this seems like a smart strategy, as they could get the investment income on the benefits received from age 62 to 70 as well as the higher benefit amount starting at age 70.

Answer: Social Security closed this particular loophole in 2010.

As you know, Social Security retirement benefits increase each year you defer claiming between age 62 and 70, when benefits peak. An early start usually means a permanently reduced benefit.

Prior to 2010, people who started early, but were able to repay all the money they received, were allowed to resume benefits at a later age and claim larger checks as if they had no never applied before. This overhaul prompted some recipients to apply early, invest the money, and get a sort of interest-free loan from the government.

People who make the mistake of starting Social Security too early still have a few options. They can withdraw their claim for benefits within 12 months, but they are required to repay all benefits received, including benefits received by family members such as spousal or child benefits.

Another option is to wait until full retirement age, currently between 66 and 67, and suspend their benefit altogether.

No money has to be repaid and the beneficiary receives deferred retirement bonuses which increase his benefit by 8% for each year of delay. Benefits will automatically restart at age 70, although the beneficiary can start them earlier, if they wish.

Liz Weston, Certified Financial Planner, is a personal finance columnist for NerdWallet. Questions can be sent to him at 3940 Laurel Canyon, #238, Studio City, CA 91604, or by using the “Contact” form on asklizweston.com.