Tips, Tricks, News and Market Trends for Home Buyers, Sellers and Real Estate Investors

Aug. 24, 2018

What Is a 1031 Exchange?

What Is a 1031 Exchange?

A “1031 exchange” is how investors refer to a special provision in Section 1031 of the U.S. Internal Revenue Service’s tax code. This section states that investors may use a 1031 exchange to exchange one investment property for another to defer capital gains (or losses) that they would otherwise have to pay at time of sale.

 

Why Is This Important?

Why do so many real estate investors use a 1031 exchange? Because it allows investors to defer paying capital gains, super charging their ability to build wealth through real estate investing.

For example, if you buy a piece of real estate for $200,000 and then sell it for $600,000, you are subject to paying capital gains taxes on your $400,000 profit. From that $400,000, you might lose, say, $100,000 to capital gains taxes. With a 1031 exchange, you may be able to use the full $600,000 to purchase a new property (or several new properties), without paying capital gains taxes at the time of sale. This means you maximize your equity to purchase new investment properties, which may generate more cash flow and/or better appreciation. It's similar in concept to a 401K, allowing your investment principal to grow tax deferred. 

What Types of Properties Qualify?

The language the IRS uses in the tax code is vague, stating that properties must be of “like-kind.” Most real estate will be "like-kind" to other real estate. For example, you may exchange a single-family home for an apartment complex, retail strip mall or even vacant land. Nevertheless, it is best to seek the assistance of a qualified 1031 exchange professional if you’re considering a 1031 exchange as there are plenty of pitfalls to be aware of.

1031 Exchange Requirements

- Timelines: Once the investor sells his or her property he or she has 45 days to identify property(s) of equal or greater value. The investor has 180 days from the day he/she sold their property to acquire the property(s) identified.

- Investment Properties Only: Both the property sold (the relinquished property) and the newly acquired property (the replacement property) must be held for investment or business purposes. Therefore, you cannot sell your primary residence and buy an investment property, nor could you sell and investment property and purchase a primary residence.

- Equal or Greater Debt and Equity: If the investor sells a property for $1 million, in which $500K was equity and $500K was debt, the investor must purchase new property(s) worth $1 million or more in total. Furthermore, the investor must use all of the equity and replace all of the debt to defer 100% of the capital gains taxes. The investor may add additional proceeds to the new purchase if he/she wishes and the investor can take on additional debt if desired as well. If the investor does not wish to use all of the sales proceeds he/she may do a partial exchange and pay the applicable capital gains taxes on the difference. This is referred to as "boot."

- Facilitation through a Qualified Intermediary: The investor must use a third-party Qualified Intermediary (QI) to facilitate the 1031 transaction. Feel free to reach out if you need a referral.

As you can see, 1031 exchanges offer immense benefits. But their execution is tricky. Plenty of caveats wait to ensnare investors. If you don’t get the whole deal right, you may end up paying taxes on the entire sale.

 

*Disclaimer: This article is for informational purposes and should not be construed as legal or tax advice. Please consult with a professional for further information and application to your specific situation.*
March 28, 2018

Preparing Your Home to Sell

Living roomSelling your home requires more than just sticking a sign in your front yard and waiting for someone to call or knock on your door. There are a number of things you can do to prepare your home and ensure you get the best offer possible in the shortest time. Here are four big ones:

1) Make repairs. Just because you’ve gotten used to the cracks in the walls and the rattles in the radiators doesn’t mean a buyer will too. Refinish those hardwood floors, fix those sticky doors and drawers as well and don’t forget to address any issues with the exterior—fences, shingles, sidewalks, etc. After all, without curb appeal, some buyers may never get to see the inside!

2) Neutralize. You want buyers to see themselves in your home. If your living room has yellow wallpaper (hello, 1970's!), wood-paneled walls, and all your collectibles and personal photographs, this will be much harder for them to do. Try replacing any bold color choices in your floors and walls with something more neutral—beiges, tans, and whites. Repainting and reflooring will make everything look fresh and new, and help prospective buyers imagine all the possibilities.

3) Declutter. Sometimes less is more. The less stuff you have in your home, the bigger it will feel. Try to store excess items in your garage to give your rooms better flow and a larger feel! 

4) Stage. Once your house is clean and updated, it’s time to play dress up. Home stagers can add small details and décor touches that will bring out the possibilities in the various spaces in your home: lamps, mirrors, throw rugs and pillows, flowers, decorative soaps and towels, patio furniture. Home staging can be particularly useful if your home is especially old or if the exterior looks dated. 

Posted in Selling a Home
March 28, 2018

My House Paid Off My Student Loans

Student loans. The bane of so many college grads’ financial existence! Americans owe over $1.48 trillion in student loan debt, spread out among about 44 million borrowers. Crazy!

My wife and I were in the same predicament not too long ago, owing over $100,000 in student loan debt. After moving to wonderful Washington (yay for no state income tax) and landing steady jobs, we faced the question that so many young professionals face today: Do we buy a home or focus on paying off our student loans? We chose to buy.

We purchased a “cosmetic fixer” in a good location that needed updating. With some help from our amazing parents, we removed the wall paper, painted, redid the flooring and updated the bathrooms (sorry, the 1970’s called and asked for its bright yellow shower tile back). We lived happily for a few years until a funny thing happened: The Washington housing market took off!

Tech companies started popping up right and left and companies like Amazon and Expedia grew and grew. Realizing we were sitting on a whole bunch of equity, we decided to sell our home and move to a more cost effective (but equally awesome) city nearby. We bought a new(er) house, paid off our student loans and purchased an investment property that we still hold today. This decision changed the course of our lives and helped us understand just how powerful real estate investing can be!

Could buying or selling a home make a positive impact on your finances or lifestyle?

Contact me today and find out!

 

March 28, 2018

Book Recommendation: Rich Dad Poor Dad

During the past few months, I have had several people ask me questions such as: How do I develop the mindset of a real estate investor? Or how do I educate myself/child/family about money and investing? Topics like money and investing are taboo in some families but in the age of credit cards, self-directed retirement savings and six-figure student loan debts, it is extremely important to equip ourselves and our children with the tools needed to succeed financially.

Rich Dad Poor Dad by Robert Kiyosaki is one of the books that changed my life and my view on money and investing. It seems that I am not alone! According to a recent CNBC article, former Seahawks star Cornerback and Maple Valley resident, Richard Sherman, said Rich Dad Poor Dad opened his mind to the way money works in general.

The next time you’re looking for a quick read, pick up a copy of Kiyosaki’s masterpiece at your local library or bookstore!

Read this book or have another to recommend? Leave me a comment in the comments section!

July 31, 2017

Curious About Local Real Estate?

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Curious about local real estate? So are we! Every month we review trends in our real estate market and consider the number of homes on the market in each price tier, the amount of time particular homes have been listed for sale, specific neighborhood trends, the median price and square footage of each home sold and so much more. We’d love to invite you to do the same!

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You can sign up here to receive your own market report, delivered as often as you like! It contains current information on pending, active and just sold properties so you can see actual homes in your neighborhood. You can review your area on a larger scale, as well, by refining your search to include properties across the city or county. As you notice price and size trends, please contact us for clarification or to have any questions answered.

We can definitely fill you in on details that are not listed on the report and help you determine the best home for you. If you are wondering if now is the time to sell, please try out our INSTANT home value tool. You’ll get an estimate on the value of your property in today’s market. Either way, we hope to hear from you soon as you get to know our neighborhoods and local real estate market better.

Posted in Market Updates