As a potential investor, you have thought about the type of property you want to purchase, “A”, “B” or “C” property.   You know the area in which you would like to concentrate your investment(s).  Find a good Realtor who is familiar with 1031 tax deferred exchanges, who can suggest a good lender to provide financing for investment properties.  Your aim is to create a relationship which will last for years.  

    Ask your Realtor to sit down with you in a meeting with a 1031 Tax Deferred Exchange Facilitator.  There are companies which specialize in faciliating 1031’s, and often Title Companies have departments that are knowledgable about 1031’s.

    Talk with your accountant about 1031 Tax Deferred Exchanges.   The impetus for these exchanges comes from Section 1031 of the Tax Code.  A reliable team is extremely important because any mis-step in timing can trigger big tax liabilities.

    How does a 1031 work?

    Let’s say you purchase a multi family unit for $200,000.  You put the requisite 20-25% down.   That is $40,000 to $50,000.  In a nutshell, you hold that property for five years, and each year it appreciates 5%. In five years, the property is now worth $256,671.  You have a gain of more than $11,000 a year.   Additionally, you have had the rent on the units as well as the tax deduction of interest and depreciation, plus the costs to maintain the property. 

     With a tax deferred exchange, you must  take your proceeds and reinvest them in another property within the required period of time.  You now  have the initial $40,000 or $50,000 plus the gain of $56,671.  Adding the initial down payment to the capital gain, you would have between $96,671 and $106,671 to reinvest depending upon your initial investment.

    Using a 20% formula for down payment on the next property, you can now purchase a property between $386,684 and $483,355, or $426,684 to $533,355 for the 25% figure. 

    If you were not to defer the taxes, you would pay long term capital gains tax on the proceeds of $56,671.  That is now 20%.  Uncle Sam would take $11,334 right off the top.  That $11,000 plus can purchase $44,000 to $55,000 more property!   Ideally you want to defer taxes until you are dead and allow your heirs pay the tax,  or at least defer the taxes until you are not working.

   Create a long term plan.  Within a hypothetical 20 years, you would do this four times.   Each time, you will have more cash to purchase a property.  At the end of 20 years, you will have property valued at million dollar levels. 

   Adhering to the timing is imperative.  Putting  a competent and professional team together and having all work synchronistically is paramount.  Deferring the taxes on the sale of these properties is what maximizes the leverage so you can purchase more property.  You must eventually pay the taxes, and if you want to pull some cash out, you can also do that, but be aware, taxes will be due!

Resources:  Internal Revenue Service

    http://www.irs.gov/newsroom/article/0,,id=179801,00.html

National Association Realtors:

     http://www.realtor.org/library/library/fg408

 1031 Faciliatator:

       Brigitte Echave
Leverage Exchange Group LLC
7840 E Broadway Blvd Ste 209
Tucson AZ 85710
 866-988-1031 
 520-722-2578 
520-465-8690 520-979-8256

 brigitte@leverageExchange.com

http://www.LeverageExchange.com

Tags: 1031 Tax Deferred Exchange, Investor Properties, Tucson Real Estate

This entry was posted on Tuesday, January 6th, 2009 at 10:10 am and is filed under Financing, Investment Property, Short Sales and Foreclosures, Tucson Real Estate. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.