BUY PROPERTY AND TRANSFER YOUR EQUITY WITHOUT PAYING CAPITAL GAINS TAXES What is a §1031 Exchange? A §l031 Exchange is a transaction in which a taxpayer is allowed to exchange one investment property for another by deferring the tax consequence of a sale. The transaction is authorized by §1031 of the IRS Code. The IRS Code actually reads: "No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment, if such property is exchanged solely for property of like kind, which is to be held either for productive use in a trade or business or for investment." Requirements for a 1031 Exchange • Timelines for a 1031 Exchange The investor (or exchanger) must follow the strict 45- / 180-day guidelines for an exchange. Once the exchanger sells his/her property (relinquished property) he/she has 45 days to identify property(s) of equal or greater value. Once identified, the exchanger has 180 days from the day he/she sold their property to acquire the property(s) identified (or 135 days from the end of the 45-day period). • Like-Kind Property in a 1031 Exchange The investor must acquire "like-kind" property. This means that it must be other qualifying forms of real estate. For example, the exchanger could sell a duplex and purchase a commercial property, or he/she could sell a piece of land and buy an apartment building. The property just needs to be "like-kind." • Exchange Property Held for Investment The property sold (relinquished property) and the newly acquired property (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 home. • Equal or Greater Debt and Equity in a 1031 Exchange If the exchanger sells a property for $1 million, in which $500k was equity and $500k was debt, then the exchanger needs to purchase $1 million or more worth of property. Furthermore, the exchanger needs to use all the equity and replace all of the debt to defer 100% of the capital gains taxes. The exchanger may add additional proceeds to the new purchase if he/she wishes and the exchanger can take on additional debt if desired as well. If the exchanger 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." • Constructive Receipt and Qualified Intermediary for a 1031 Exchange. The exchanger may not receive cash from the sale. This is known as "constructive receipt" and would trigger a taxable event on those monies received. According to the IRS safe harbor provisions, the exchanger must use a Qualified Intermediary or QI to facilitate the 1031 transaction. The QI is an independent 3rd party (not your attorney, agent, broker or CPA) who holds the sales proceeds and purchases the replacement property on your behalf. It is extremely important in today's environment to associate only with reputable, insured and bonded qualified intermediaries. • 1031 Exchange Risk As with any investment in real estate, there are risks associated with 1031'S and all investment vehicloes, always consult your attorney specializing in 1031 code or real estate investments. SELF DIRECTED IRA Want to use a self Directed IRA to invest in residential real estate? These Self-Directed IRAs allow you to invest in real estate, precious metals, notes, tax lien certificates, private placements and many more investment options. A Self-Directed IRA is a traditional or Roth IRA in which the custodian permits a wide range of investments that are allowable in retirement accounts. One of these alternative options, real estate investments, is appealing to many people who consider using a Self-Directed IRA to purchase rental properties. However, just because something is allowed by the IRS does not always mean it is the best choice for a portion of your retirement savings. Here are some important things to be aware of when it comes to using an IRA to purchase real estate. What Is a Self-Directed IRA? The term “self-directed” means that alternative investments are accepted or offered by the IRA custodian. An IRA custodian is the financial institution responsible for record keeping and IRS reporting requirements. The “self” directed aspect kicks in each year since you must accurately value your investment annually and report the value to your IRA custodian. How Self-Directed IRAs May Be Used to Buy Real Estate The first steps when using an IRA is to set up a Self-Directed IRA. Several reputable companies provide individual investors with the ability to set up self-directed retirement accounts. Due to the complex nature of Self-Directed IRAs, it is helpful to have a custodian that will help provide some much-needed guidance as you travel through the murky and confusing waters of the IRS tax code. Some IRA custodians have more complicated fee structures than others. Therefore, it is important to do your homework and examine all of the potential fees and expenses that will impact the overall return on your investment. In many cases, it is advisable to also establish a limited liability company (LLC) or other entity to hold the investment assets. With Self-Directed IRAs, you must generate sufficient cash flow that will cover all maintenance and repair costs without the need for you to add cash each year. Primary Benefits of Owning Investment Real Estate in an IRA Perhaps the biggest benefit of using a Self-Directed IRA to purchase real estate is found in the potential tax benefits. As is the case with any investment in your IRA, you benefit from tax-deferred income until the day you take withdrawals, or if your investment holdings are in a Roth IRA, your investment gains get to accumulate tax-free and you are able to withdraw it tax-free. You still must wait until you reach age 59 ½ to withdraw your funds without being subject to an early withdraw penalty and having that included as ordinary income on your tax return. But active investors may buy, sell, or flip properties and move funds from one project to another and still maintain the tax-deferral status of the IRA. Another benefit of owning real estate in an IRA is the familiarity. Investor interest is often sparked by global market uncertainty and this can lead investors to stick with more local investments. Self-Directed IRAs provide you with an ability to invest in investments that you know and understand. What Are the Biggest Downside Risks? As an account holder in a Self-Directed IRA you are responsible for doing the required due diligence on the property itself. This may be an appealing feature of real estate investing in IRAs if you are a real estate professional or experienced investor. However, it could lead to a bad investment decision or the potential of being a victim of fraud if you are not a savvy real estate investor. The Securities and Exchange Commission (SEC) has released an investor alert addressing Self-Directed IRAs and the risk of fraud. One of the biggest risks of owning real estate in a Self-Directed IRA is the potential lack of diversification. While not impossible for super savers who have accumulated substantial amounts of wealth in an IRA, many investors lack the ability to create a diversified real estate investment portfolio. Only focusing on the upside potential is a major risk to consider before purchasing an investment property. Liquidity is another big concern when investing in real estate within an IRA. There is always a possibility that you may not be able to access the value of your investment to make distributions when you may need the money the most during your retirement years. Are There Any Potential Tax Pitfalls? Owning real estate in an IRA allows your investment to grow on a tax-deferred basis (Roth IRAs provide the potential for tax-free growth). However, if you don’t follow the rules and purchase property the wrong way within an IRA you could disqualify the IRA and create a taxable event. IRA ownership of investment property also loses some of the tax breaks available to real estate investors if the property operates at a loss. You also cannot claim depreciation on IRA-owned real estate. If you are thinking that an IRA could be used to purchase a vacation home or a primary or secondary residence…think again! Self-Directed IRA investment transactions involving real estate must all be arm's length transactions. This means that no self-dealing or personal transactions are allowable with Self-Directed IRAs. This rule also applies to immediate family members. So, don’t think you can buy or sell property to or from a family member or yourself unless you want to create a taxable event. Unrelated business income tax (UBIT) is another potential tax issue. This will be important to pay attention to if you are thinking about the use of a mortgage to purchase an investment property. With a traditional IRA you must take required minimum distributions once you reach age 70 1/2. If you own real estate in an IRA, it is very difficult to sell off your real estate holdings in small chunks each year. That is the reason you must have enough cash in your IRA accounts to cover your required distributions to avoid tax problems.

John Edmunds Real Estate & Investments

Where Do You Start

Real Estate investing can be a profitable and rewarding adventure or it can be living nightmare, depending on when, why, and how you start your investing. Like anything in life, the first step to success is preparation, and the second step is knowledge. Many times beginning investors jump into the market before researching the trends or knowing their personal objectives. Many first time investors use inexperienced agents that just want to sell them a home or property with no long term relationship objective. Or the agent has no mechanical experience in plumbing, electrical, HVAC, remodeling, or rehab. In the end, good execution, timing, persistence, and of course a little bit of luck all help along the way. After years of working with investors of all levels, from large apartments to single family homes (and being an investor myself!) I've composed a list of some of the things that I consider key when considering getting into real estate investing.

If you analyze the current Las Vegas Market you will find only about 10% of the current listings are vacant and owned by banks, commonly called REO's. Another 10% are short sales and owner occupied. And the other 80% are Equity sellers a high percentage being flips (bought at the auction rehabbed and sold for quick profit). Personally I have no problem with flips as most flippers do a very good job rehabbing although a home inspection is always suggested unless your an investment pro. 

First time investor or seasoned pro, you must submit a good offer. Almost 60% of the offers I've received on my listings are poorly written or missing information, some will get rejected immediately by the seller or bank. A properly written and submitted offer will get submitted same day or 24 hrs. Right now the market is dominated with Equity Sales so your dealing with either the occupant of the home or an investor. 

Knowing what property to acquire remains one of the more difficult decisions for any home buyer or investor. It's much easier for an investor which I will go into below but for a owner occupant so many choices so many decisions...

You have to remember there is no perfect home. If you look at 5 homes you will finds things you like about each but are not included with the others on and on, so pick your priorities. Number of bedrooms and bathrooms is easy but size of lot, landscaping, kitchen amenities, location, bathroom amenities, etc. etc. etc.

The investor on the other hand looks at the financial numbers and tries to make decisions based on facts, and attempts to keep emotions in check.

The common way to evaluate different investment properties is through comparing CAP rates. CAP rates are determined by factoring all of the investment’s expenses (but not finance) and calculate that against the projected revenue. Too often, property management, repairs, maintenance and vacancy expenses are left out in determining a proper CAP figure.

But CAP shouldn’t tell the whole story in evaluating properties. An in-depth analysis should consider projected appreciation which will lead to a superior return on investment (ROI). Suppose you are offered two investment opportunities. One is located in Tallassee FL and offers a CAP rate of 8 per cent and another in Las Vegas NV that offers a CAP of less than 6 per cent. If CAP is the only component to consider, it is a no brainer. You buy the Florida property.

I'm sure you've heard the expression that past returns are no guarantee for future success. That is certainly true. But, it can be an indication. You also look at an area and see the growth within it to help estimate potential future growth. Based on your research, you conservatively estimate that the Florida property will grow at one to two per cent over the next five years.

Meanwhile, the Las Vegas property should appreciate at five to eight per cent over that same period.

Now calculate the projected ROI over those next five years. Ensure to include the numbers used to calculate the CAP rates, but add in the projected appreciation and you will likely find that the lower CAP rate property, with the better appreciation, winds up on top.

The other factor to consider is risk. If I'm going to take on a riskier venture, I want a better ROI. There is nothing wrong with a solid ROI on a low risk venture. If you acquire a well-maintained building in a desirable neighborhood, one might be willing to sacrifice some ROI to add that property to their portfolio. However, if one is willing to acquire a property that will include higher risk ventures, such as dealing with environmental issues, tear down and rebuild, complete renovations etc., then one should be looking for an ROI that can support that risk.

No one can tell you what an acceptable return on investment should be for any venture for you. A low risk individual who is accustomed to investing in GIC’s will not require the same return on a deal as a person who is more willing to gamble with his money.

My advice is not to wait around for the home run deal. Find a cash flow generating property in fair to good condition, located in a market that you have researched and understand to be a desirable area to invest and buy it. You can certainly use numbers to convince yourself not to take action in any deal, but, in my experience, the investors that do the best are those that take action.

When it comes to property investment, timing is everything. Ultimately, choosing the right time to enter the market will have a significant impact on the long-term success of your investment.

But how can you as an investor know whether the timing is right? Global property portal Lamudi has compiled a list of 10 tell-tale signs that now is the time to start building your investment portfolio.

1. You are financially ready. You have saved enough for the down payment and you have also established your emergency fund. You have taken into account home maintenance expenses. Your credit history is good and you are able to meet all the financial obligations.

2. You have set your long-term goals. You have a clear picture in your mind of the purpose of your investment and you are flexible enough to adjust to changing circumstances. You are not hesitant and when the timing is right, you are able to adapt to the market needs and the development of technologies.

3. You have done your research. You know the neighborhood of your future property well enough to foresee the coming trends and the possible changes in the community. You have researched all the schools in the area as well as the best commuting means and you are able to predict the next homebuyers needs.

4. You have chosen a stable economy. The area is financially stable, economic trends are promising and equities are surging. No demographic fluctuation or no irregular variation of population have been recorded in the area.

5. You understand the country’s policies regarding real estate. The policies of the region promote and encourage a positive, innovative environment as well as drive further economic growth. The tax policy in the state is positive for homeowners or investors. Global innovation index is rising in the area.

6. Infrastructure projects are underway and likely to lead to an increase in property values. The infrastructure of the area is being developed with a focus on: transport, energy, solid waste and water management developments. It's Las Vegas Baby.....

7. The region is moving toward sustainable development. The region’s awareness of global and local environmental issues is increasing, the demand for homes and apartments.  As more and more people head toward sustainable living, investing in sustainable property will increase its value in the future.

8. The location draws a lot of interest, Las Vegas Baby! Whether it is the best travel destination or the hot jobs spot, the location is always on the top of the search engine. It has become a successful startup hub already or is planning to do so in the coming years, driving a lot of job seekers into the area. The number of enrolled students is increasing every year, the area draws interest of international students.

9. You have found a reliable real estate agent. If you are an overseas buyer, it is particularly crucial to make sure you have a good representative on the ground. Your real estate agent is trustworthy and knows the local market well enough to be able to help you make the choice.

10. You have researched local differences in the property market. Whether you plan to invest in a single family home or residential apartment units, you are fully aware of all cultural differences that might occur when you deal with a property seller.