Jill on Money: Advisors, taxes on real estate
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When is it worth it to pay a professional for financial advice? That's the question that Theresa from CT and Dave from CA are weighing, though each is in a very different situation. Theresa is considering hiring a CFP because she is not confident in her ability to manage the money, while Dave already uses an advisor, but is dissatisfied with the performance of his $1.3 million portfolio.
In general, there are three choices to consider for anyone in either situation: 1) the cheapest option) is to manage your own money with no-load index funds at Vanguard, T. Rowe Price, Fidelity or Schwab; 2) the more expensive option is to hire a fee-based advisor who is registered as an investment advisor and there fore must put your interests; and the option that splits the difference between the two, engage an advisor by the hour to help get you on the right track. You should check out NAPFA.org for fee-based advisors located near you. If you are interviewing advisors, here are the 10 Questions to ask.
We fielded a few questions about the taxation of gains on real estate. Lyle and Gary had questions about the commercial properties. In the course of this conversation, I brought up a 1031 exchange, which is a nifty IRS rule that allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange. Gain deferred in a like-kind exchange under Section 1031 is tax-deferred, but it is not tax-free. When you ultimately sell the next property, the tax is due.
Timothy asked about taxes on an inherited property, which is actually easy. Beneficiaries receive a step-up in cost basis in the assets they inherit, which can include stocks, bonds and real estate. That means if your granny purchased a home for $20,000 and when she died, it was worth $500,000, your cost basis is the value at the date of death.
Dale is interested in investing in real estate inside of her pension plan. While it is permissible to do so, there are only a few custodians who will facilitate it. There are also a lot of rules surrounding self-directed retirement accounts, including prohibited transactions: property held by the IRA can't be for your own use or that of a family member, and you can't buy the property from yourself or family member.
Speaking of retirement, Ed from CT is in great shape, having socked away $4.5 million. That said, he can't go nutty and start splurging on a big-time second home any time soon! Craig from Fla wanted advice on his $132,000 retirement account, which is "a fortune" to him. It's like I always say, whatever the amount of your nest egg, it is a fortune to you, so be careful with it!
The fabulous 404 fans were out this week. Joe from Wisconsin is 26, and has already gotten in the good habit of saving for his retirement. Of course we could all be doing more, which is what I suggested for Joe! Claudio from NYC is 27 and needed help on where to put his emergency reserve fund; what to do with additional monthly investment; and how to balance a school loan and a mortgage. Speaking of school, I practically begged Jeremy from Georgia not to drain his 401k to cover education expenses.
Here are web sites and resources mentioned in this week's show:-- How to Choose a Financial Advisor: 10 Questions
-- NAPFA: National Association of Personal Financial Advisors (fee-only advisors)
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