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As an aside, I am surprised so little discussion regarding exuberant real estate prices have focused on the effect of Section 1031 exchanges. Combined with the principal residence exclusion, these rules are discouraging marginal capital from leaving the real estate market.

The cherry on the top is the AMT, which punishes sellers of substantial assets benefiting from a long-term 15% tax rate by shifting them into a new, higher tax system.


Maybe one of the accountants on our board can answer this definitively, but I don't think the AMT applies to capital gains, at least long term capital gains, so a 15% federal cap gain rate for long term gains on real estate I still considered reasonable and sold 85% of all my real estate rentals during 2004 and 2005 from the Calif. nose-bleed prices. I decided I would rather sell too early than too late, suspecting a looming top-out of prices. Like many landlords,, I was tired of renters for awhile and so was not interested in any 1031 exchanges. I preferred to take sizeable gains, pay Uncle Sam a reasonable amount (plus 9% to state of Calif), and put the proceeds in a more liquid asset like stocks, particularly BRK.

Thus, paying a little tax can still be OK if it fits in a persons financial plan at a particular time. I believe in about 3 years or so, many of these people buying with no down payment, interest only etc. will show up on the foreclosure lists, and that will be the time to re-consider getting back into the real estate investment market for me. Bryce 102
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