Archive for the ‘1031 Exchanges’ Category

1031 Exchanges & Cash–Out Refis: How to Explode Your Wealth

Thursday, April 30th, 2009

By Jon Swire

Have you started investing in real estate and aren’t sure how to take the next step to grow your portfolio? If so, you’re going to want to read my tips on how to use 1031 Exchanges and Cash-Out Refis to Explode Your Wealth.

Now that you’ve taken the first step and started investing in real estate, the next step is to learn the basics of 1031 Exchanges and Cash-Out Refinances so you can use these tools to explode your wealth. By using each of these where appropriate, you’ll be able to grow your real estate portfolio and passive income stream, without paying any taxes. The key is to take advantage of each in the right situation.

Cash-Out Refis are used when you own a property that has appreciated in value, and therefore so has your equity. Under current tax guidelines you’re allowed to do a cash out refi and do whatever you’d like with the proceeds, tax free. So, you can take the money and use it to purchase another property, thereby increasing the size of your portfolio and your passive income stream. You’ll go from owning 1 property to 2, and having two income streams instead of one.

Like Cash Out Refis, you’re going to consider doing a 1031 Exchange once your property has appreciated in value and your equity has increased. 1031 Exchanges allow you to sell a property and defer taxes until sometime in the future. You can then use those funds that would have gone towards taxes to purchase another larger property that generates an even larger cash flow stream than the one you sold. You can do this over and over throughout your investing career, and I have clients who have been doing this for 30 years or more. Remember, there are time constraints placed on 1031 Exchanges that you must meet, and you should discuss these with your accountant and real estate professional.

Cash-Out Refis are best used in situations where the property you own is one you’d like to keep. Maybe it’s in a good location, has a solid tenant base, or has excellent prospects for future appreciation. 1031 Exchange’s on the other hand, are best used when you’re ready to sell a property and move on. This typically occurs for any number of reasons: you’ve exhausted your depreciation, the building is older and has higher maintenance costs, the area is declining or the tenant base is troublesome, meaning it’s difficult to collect the rent on time each month.

Make sure you analyze your real estate holdings at least once per year to figure out if its time to do a Cash Out Refi or 1031 Exchange. The key to exploding your wealth and climbing the Property Ladder is to keep your equity moving and continually increasing your real estate holdings and the size of your passive income stream. Remember; before you make any financial moves you should always consult your Accountant or Tax Professional to fully understand the implications of what you’re planning.

Understanding 1031 Exchanges

Thursday, April 30th, 2009

By Jon Swire

Are you thinking about selling an investment property but aren’t sure what a 1031 Exchange is or how to do one. If so, check out my tips that will save you thousands of dollars in taxes.

1031 Tax Deferred Exchanges are one of the biggest benefits of real estate investing. This tax code allows you to sell a property today and defer taxes on the gains well into the future, thereby using those monies to purchase a larger property with a larger cash flow. 1031 Exchanges are one of the tools you have available to help you climb the Property Ladder and grow a portfolio that can generate enough passive income for you to retire on.

The key to a successful 1031 Exchange is to understand the rules that govern them. There are 3 key rules that you must follow and not run afoul of. If you don’t, you risk blowing your 1031 Exchange and having to pay the taxes today that you’ll owe on your gains.

The first rule is that you must replace debt with debt and equity with equity. This means that the total value of the mortgage on your new property, or replacement property as it’s called, must be equal to or greater than the mortgage on the property you sold. And, you must use all of the equity from the sale for the purchase of the replacement property.

Next, the proceeds, or funds, from your sale property must pass directly from your escrow company handling the sale straight to your accommodator. An accommodator is a 3rd Party Intermediary that will help you with the transaction and will escrow your funds for the time between when you close your sale property and when you complete the purchase of your replacement property. Remember, you can NEVER take possession of these funds, or you will void your exchange and have to pay taxes.

The final rule deals with timing. Within 45 days of the close of escrow of your sale property you must identify in writing to your accommodator what your anticipated replacement property is going to be. This is critical as it’s necessary to have on file in the event of a tax audit. And, you must complete your exchange within 180 days of the close of your sale property. This is also critical as it results in an invalid exchange if it doesn’t happen. It’s one of the easiest things for the IRS to monitor, so be careful with regards to your timing.

If you follow the above rules you’ll successfully complete your 1031 exchange and defer your tax bill sometime into the future. You can continue to do this from one property to the next over many years and even generations. Finally, make sure you speak with your accountant or tax professional before making a decision to sell. You want to be clear on the tax code and any other issues you may not be aware of.

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