According to John Mangham, Atlanta CPA, real estate investor and “The 1031 Guy,” who is a national speaker on real estate strategy and tax planning, there’s no time like now to focus on investing, taxes and your family’s “financial fitness.”

When the ball drops on Times Square on December 31st, you may want to have some of these ideas set in place for 2006:

1. Get your real estate debts in order. Interest rates are rising. If you have interest-only or adjustable rate loans, now is the time to consider converting them to long-term fixed-rate instruments. You should consider either a “rate and term” refinance which incurs minimal costs or a “cash out” refinance which can provide funds for other investments. In general, the only time it makes sense to keep interest-only or adjustable rate loans in place is if you intend to sell the property within the next two to four years.

2. Open a home-equity line of credit (HELOC). This is a valuable financial tool based on the value of the equity in your home. As interest rates rise and credit markets tighten, lines of credit may become harder to get. A home-equity line can be used to make improvements to your home, purchase personal items such as cars or boats, or invest in real estate. No matter what you use the money for interest can be deducted on up to $100,000 of your HELOC.

3. Hire your family and shift income to a lower tax bracket. In addition to teaching your children about business, there are several tax incentives. Income may be shifted to a lower tax bracket by paying your child if your child is providing deductible services to your business or your company. The IRS allows a deduction for over $7000 for you and your dependant child will pay no federal income taxes. Additionally, once your child has earned income he or she can open and contribute to an IRA. Imagine how large the IRA could grow if contributions were made starting at age 5 instead of age 25!

4. Plan for your estate. A fundamental estate planning technique is to ensure that there are assets allocated and owned by both husband and wife so they may each take the maximum gift and estate exclusion. For 2006 the estate tax exclusion is $2 million, an increase of $500,000. (Additionally, for 2006, the top estate tax rate dropped from 47% to 46%). This tax device keeps more family wealth in the hands of the next generation and less in the hands of the IRS!

5. Get into gifting. The lifetime gift tax exclusion (in the form of a credit) results in a taxpayer being able to gift up to $1 million and shelter it from estate taxes. This gift would reduce the $2,000,000 estate tax exclusion. The other powerful gifting technique is the annual per person gift which is not included in the $1 million lifetime gift tax exclusion. For 2006 you may gift up to $12,000 per person per year, an increase of $2000 over 2005. As always, spousal gifting is exempt from gift taxation.

6. Commit to expanding your investments by purchasing real estate. Not only are you purchasing an asset which can generate cash flow but it is likely to appreciate over the years. Additionally, rental real estate generates taxable deductions for all operating expenses and generates a depreciation deduction. The basic rental house with a value of $150,000 can generate over $4000 annually in income sheltering depreciation write-offs.

7. Fine tune your real estate portfolio. Grade your properties using a simple A, B, C grading system. The A properties are keepers for the long haul. The B properties are steady performers, neutral and “hold on to” type properties. The "C" grade properties are the ones that typically take 80% of your time and provide only 20% of the return. Decide now that 2006 will be the year that you sell the “don’t wanters.” If capital gains taxes threaten to take too much of your profit, a 1031 exchange can solve that problem. Not only can you get rid of the “C” properties, but you can exchange into “A” grade properties for the long-term.

8. Downsize your large house and pocket $500,000. If you are considering selling your residence, current tax rules allow you to exclude $250,000 of the profit on the sale, per person, from taxation. To qualify for this exclusion you must have owned and lived in your home for any two years within the five-year period preceding the date of sale. This exclusion creates an opportunity for homeowners with “too much house” to sell and pocket the profits. There is no requirement to buy a replacement residence of any size.

9. Consider conversion. Individuals who are reaching a stage in life may consider retirement in a resort location. If you own real estate, your rights as the owner include such basic things as the ability to occupy, rent, mortgage, or sell. Tax laws provide for excluding or deferring taxes depending on the type of property and how it is used. However, rental property owners may choose not to sell but rather to move into their rental properties. Think beach, mountain, lake, and golf communities where the conversion from a rental to residential property creates no tax liability! Additionally, a subsequent sale of that property, if it has become a primary residence, may qualify for excluding up to $500,000 from taxation.

John Mangham, Atlanta CPA, is a licensed broker, real estate investor and nationally-recognized speaker on 1031 exchanges and real estate investing. John works with Starker Services, the oldest and largest independent intermediary company in the nation that handles thousands of successful 1031 exchanges for clients each year. For more information, call Starker Services or John at 404-352-1031 or 800-332-1031.