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Real Estate offers an investor many advantages over other alternative investments. For example:
Leverage:
Leverage is the most important advantage in real estate investing. Unless you choose to be a margin player in the stock market, only real estate allows you to buy more product than you have cash. With a 25 percent down payment, an investor can purchase up to four times the investment value than they have in cash. Combining your cash with a bank loan creates the magic of positive leverage, earning money on your cash and the bank’s loan simultaneously. An unleveraged 7% return becomes 13% when leveraged. Borrowing money on real estate is the most powerful tool in real estate investing. John Propp Commercial Group strives to locate returns in the 10% to 15% range.
Depreciation:
Depreciation is the theory that a physical asset wears out and loses value over time. Current Federal tax law allows you a tax deduction for your property’s depreciation, when in fact the property may actually be appreciating! No other investment vehicle offers this benefit. The depreciation deduction protects a portion of the actual cash flow distributions from taxation.
1031 Tax Deferred Exchange:
The “Like Kind Exchange,” or “1031 Exchange” are commonly used nomenclature when describing the Internal Revenue Federal Code section 1031, relating to a “Tax Deferred Exchange.”
Unlike most every other type of investment, when selling a piece of real estate at a profit, one can choose to replace that property with another and defer having to pay capital gains taxes on the profits made from the sale of the first property. The idea behind this section of the tax code is when an individual sells a property to buy another, no economic gain has been achieved. There has simply been a transfer from one property to another.
This important tax treatment benefit is a useful tool for real estate investors. It allows them to delay tax payments and to keep their untaxed gains working for them alongside their own equity as they move from one real estate investment to another.
A 1031 Exchange is a simple sounding but completely confusing process, requiring careful planning and strategic execution. Several tricky requirements and short timeframe deadlines must be met in order to ensure that a tax liability is not created upon the sale of the first asset. After all, the IRS would just as soon you pay taxes, so they don’t make it too easy for you.
Can I close on the replacement before I sell the first property?
Can I take “boot” and replace it with “debt?”
What is a like kind property?
Can I buy more than one property?
Having helped numerous clients in the past, we are well versed in the 1031 process and can direct you to legal and accounting professionals. We are glad to share our knowledge and advice with our clients.