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Amidst the turbulence of the housing market in the U.S., the easing of property prices has created some of the best investment opportunities for single-family home investments in the last 20 years. Therefore, now is the ideal time for eligible investors to capitalize on the current market conditions and build long-term wealth through acquiring high cash flow properties.  But first, it is important to consider disposing of underperforming assets by utilizing a 1031 exchange (1031x).

Section 1031 of the IRS provides investors with a legal means to defer their capital gains tax liability upon the sale of an investment property.  To qualify, an investor must identify a replacement property within 45 days of the sale of the relinquished property, and close escrow within 180 days with the assistance of a 1031 exchange facilitator.  The favorable tax treatment enables investors to sell properties currently in their investment portfolio – which may be under-performing assets – and avoid the capital gains taxes that would otherwise be due.

Presently, housing prices have declined sharply as millions of homeowners work through the foreclosure process. As a result, this has dramatically increased the market demand for rental properties as former homeowners are forced to become renters.  The good news is investors can take advantage of these conditions by exchanging into higher-performing properties without capital gains tax consequences.

The Obama administration has attempted to further stimulate the housing market by providing government incentives in the form of up to an $8,000 first-time home buyer’s tax credit.  While the unit sales volumes of single family homes has risen in recent months, these additional measures should add further fuel to the fire, which will likely cause property values to rise once again. Therefore, this will provide much-needed equity appreciation, making the positive cash flow available in today’s market an even more attractive investment for 1031 exchange participants.

The current crop of performing single-family properties may permit investors to increase their cash-on-cash returns to as much as 10%-15%.  Furthermore, the average rate of appreciation for single family homes has been more than 5% annually for the last 60 years, which has helped create internal rates of return of greater than 20% per year using leverage when acquiring a property.   Homes that are currently not performing at these levels should be carefully analyzed to see if better returns can be created by disposing the property and utilizing a 1031x to acquire new assets.

Kevin Conlon is co-founder of Meridian Pacific Properties.
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Primarily, there are two ways of making capital gains quickly and easily on real estate. They are compounding and leveraging. As a result of the application of compound interest in the case of the former, the investment grows exponentially. In the case of the latter, a loan is taken and it is invested such that the rate of return is many times higher than the rate of interest applicable on loan. Although the risks involved in leveraging are quite high, but the returns are also high. 1031 exchange is a unique law that provides you the benefit of both compounding and leveraging. It ensures that your investment in real estate grows by leaps and bounds.

What is 1031 exchange?

1031 is an IRS (Internal Revenue Service) Code that states that if a property is sold off and the money obtained from the sale of real estate is used to buy a like-kind property, then gain or loss is not acknowledged. This law simply defers the taxes that are applicable on the profits made during the sale of real estate. The most important feature of 1031 exchange is that it is a law framed by the U.S. Government. It is not loophole where people tend to take advantage of the convolute technicalities of law. Thus, it is a safe, secure and legitimate way to make capital gains on real estate.

What are the rule and regulations associated with 1031 exchange?

As per the 1031 IRS Code, the transaction should be like-kind that is the asset purchased should be similar to the asset sold. Secondly, the money garnered from the sale of real estate can only be handled by a Qualified Intermediary (QI). Neither you nor your real estate agent can handle this money. QI is basically a professional facilitator whose job is to collect and hold the money until it is used to purchase a like-kind asset. As per the third rule, the value of the replacement property should not be less than value of the property that has been sold off.

Additionally, two timelines are also associated with the law. One is the 45-days identification period during which you have to search, identify and suggest some replacement properties. The second one is 180-days exchange period during which you have to buy the replacement property and complete all the formalities associated with it.

What are the main benefits of 1031 IRS Code?

The taxes applicable on the sale of real estate can be as high as 35 percent. These taxes, on the one hand, can reduce your capital gains considerably, and on the other hand, they can prevent you from buying more profitable real estate. With the help of 1031 exchange, you can not only protect your profit from the havoc of taxes, but you can also buy more lucrative properties. It is one of its kind wealth-building tool that helps you to increase your net-worth significantly. One thing that should be kept in mind while using this law is that it is basically a device to defer taxes. Whenever you decide to sell off your property, the taxes will become applicable on your capital gains.

Some other remarkable benefits of 1031 exchange:

• You can buy replacement properties in different real estate markets of different states.
• Instead of owning and managing many small properties, you can buy a larger property and thereby reduce your ownership liabilities and increase your ownership benefits.
• You can buy a replacement property in a more desirable and profitable location.
• Last, but not the least, you can reduce your property management obligations dramatically by dumping high-maintenance properties and buying real estate that require little or practically no maintenance.

In nutshell, 1031 exchange provides a tremendous opportunity to make capital gains year after year.

For some of the best real estate properties, take a look at Anthem AZ Bank Owned Homes, Carefree AZ Golf Homes and Glendale Waterfront Property.

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