Benefits to Real Estate Investors Using 1031 Tax Deferred Exchanges

Originally posted 2008-12-01 08:11:17. Republished by Blog Post Promoter

According to Internal Revenue Code Section 1031, an investor can sell a property and reinvest the proceeds in a new property.  The usage of the Section 1031 allows the investor to defer capital gain taxes when selling any property ” held for investment purposes”.  There are many advantages to using the 1031 tax deferred exchanges.

One benefit to using the 1031 exchange is preservation of equity.  If the exchange is structured properly the investor can defer 100% of both Federal and State capital gain taxes.  This equality to an interest-free, no term loan on taxes.  It will, of course, be due when the property is sold for cash.  As an investor you could defer your capital gain taxes indefinitely if you continue to exchange from one property to the next.

Another benefit to using the 1031 exchange is leverage.  You could exchange from one property that is free and clear to one that is more valuable and creating a larger cash flow thereby providing greater depreciation benefits which in turn increase your return on your investment.

Still yet another benefit to using the 1031 exchange is diverisifcation.  An investor can diverify by changing geographic location of their investment property or type of investment property.

Another benefit to using the 1031 exchange is managment relief.  If you have several single family homes, you can exchange from those to an apartment complex with on site managment and maintenance. 

The last benefit to using the 1031 exhange is estate planning.  If you have inherited one large property from a family member and there are disagreement about what to do with the property.  By exchanging the property, the large property can be divided in to several different for each individual to list or sell.

What Involved in Purchasing a Property as an Investor

Originally posted 2008-12-17 03:49:47. Republished by Blog Post Promoter

If an investor is interested in an investment property that is 60,000.  The investor acquires a loan for 90% of that amount. By the way, if the property is located in an area that is deemed declining then the mortgage company will require more down, so you may have to do 85% of the purchase price or pay 15% down to acquire the loan. For now, we will work with 90% of the purchase price.  The mortgage will be for the amount of $54,000; however, the interest rate will be higher because the mortgage company is taking on more risk because the investor does not live in the property.  The interest rate can be as high as 13%.  The higher interest rate though, is for mortgage that would include a rehab loan, but we will talk more about that scenario later.  In this example, the investor is just acquiring a mortgage to add the property to his or her portfolio.  The interest rate that the investor secured was 8% making his or her payment $396.23.  This payment is for principal and interest only.  The investor would also have pay property taxes, landlord insurance, and maintenance fee, and in some instances utilities.  In this scenario, the property taxes are $3000.00 annually.  Therefore, the monthly property tax is $250.00 a monthly.  The landlord insurance is 750.00 annually for 62.50 monthly.  There is also a monthly maintenance fee that the investor needs to account for which is 75.00 monthly.  The reason for the maintenance fee is that the investor is buying the property to make a profit. Therefore, the maintenance fee is to cover household repairs to the newly acquired property so the investor do not have use his or her on own money to make the repairs.     

 

 

Now, the investor must determine which property type he or she would like then move forward.  Always remember it is easier to rent three plus bedrooms than two or one. 

               

Up until now I have spoken only about the possibility of buy and hold.  What is buy and hold?  Well, buy and hold is when the investor buys the property and holds it to rent it for a pre-determine number of years.  It is important to note that in order for this to be successful the investor needs to know the area that is desirable to both renters and homeowners.  If the investor is not familiar with the area, he or she can determine if the area is desirable to both homeowners and renters is visit the area several different times of the day.  Another way to determine is to observe the upkeep of the exterior of the homes in the community.  Most homeowners keep the exterior appearance of their homes up to a good standard.  By doing this, it makes it easier to sell for a profit when you determine you want to sell. 

               

There is yet another way to be a real estate investor and it is called fix and flip.  Fix and flip is fixing up the property to flip or sell it to someone else.  Under the fix and flip, if your buyer is acquiring financing to purchase the property then you will have to have owned the property for at least six months to be able to sell.  Be aware that some lenders may require that you owned it longer.  You may be wondering how the financial institution of the buyer knows how long the seller has owned the property well the lender requires a clear chain of title.  The chain of title will show if there is any liens and/or judgment, but it also shows the chain of ownership.  The chain of title yet again let’s the lender know if the property is marketable and free to transfer ownership.  You may be wondering where the chain of title comes from?  The chain of title comes from an abstract of the title.  An abstract of the title is a condensed history of ownership of the property which is gathered by the abstracter through public record. 

 

 

Once the Title Company and lender determine that the property is free and clear to sell. The lender needs to know that the buyer is free and clear of liens and judgments as well.  The reason is that the liens and judgment that the buyer may have may attach to the property, so a search is done on the buyer by their name and social security number.  If the buyer has a common name then a name affidavit can clear up most information that may come up.  The name affidavit has the buyer’s name, social security number, marital status, last five years of addresses, etc.  This information is used to rule out judgment that may appear as the buyer’s judgment or not.

 

Further Reading

Common Myths about Foreclosure - This article is about myths about foreclosure.

What is the difference between a Chapter 7 and Chapter 13 Bankruptcy

Originally posted 2008-12-15 04:18:31. Republished by Blog Post Promoter

Chapter 7 Bankruptcy

 

All assets are frozen when a Chapter 7 bankruptcy is filed.  The attorney creates an automatic stay. Under an automatic stay, the homeowners will not be able to buy anything, the homeowner will not be able  to sell anything, and the homeowner will not be able to give away anything.  All unsecured debt like credit cards, unsecured loans, etc. are eliminated or wiped out. However, the debtor or homeowner still may have to pay some of the debt.  The trustee or attorney who represents the court will evaluate all the assets (house, car, furniture, equipment) anything of value and decide what must be liquidated to pay some of the debt that was wiped out.

 

If the homeowner is in foreclosure, Chapter 7 stops the foreclosure proceedings.  Typically, the lender will ask the court to release the property from the automatic stay.  When this happens it may take an additional three to five weeks before the foreclosure process begins again.  

 

Chapter 13 Bankruptcy

 

A Chapter 13 is similar to debt consolidation.  The payments on the assets are discounted pennies on the dollar, and the homeowner pays an agreed upon amount to the Standing Chapter 13 Trustee every month for the next three to five years.  This bankruptcy option allows the homeowner to keep his or her home and other assets.  However, if the homeowner misses a payment the trustee can dismiss his or her bankruptcy and the foreclosure proceeding will begin again

There is another solution to foreclosure that is available it is called the Soldier Relief Act of 1940.  This program is for a person in the military that is behind on his or her mortgage payments.  This program may stop foreclosure based on certain criteria.  The criteria are:

 

 

 

• The serviceman has to be in active duty in order to qualify.
• The loan had to be established before the soldier was called out to active duty.

*****It is important to note that this act will stop the  foreclosure and  stop seizure of any personal property while the soldier is actively serving and several months thereafter.****