1031 Tax Exchange: Creating Wealth with Real Estate Investment

Anyone who purchases property understands the importance of making smart financial investments. In real estate, homebuyers and sellers have the same goal - to build wealth. There are many strategies that can help real estate investors maximize their investment potential and increase their return on investment (ROI). A popular strategy that benefits both residential and commercial real estate investors is the 1031 tax exchange. According to the National Association of REALTORS®, http://www.realtor.org, "Section 1031 of the U.S. Internal Revenue Code allows investors to defer capital gains taxes on the exchange of like-kind properties. 1031, or tax-deferred, exchanges hold great advantages for both investors and REALTORS®." The 1031 tax exchange can give homebuyers and sellers the maximum return on their real estate investments.

1031 = Tax Deferred = More Wealth

What is a 1031 or tax-deferred exchange? Typically, property owners are taxed on any money gained from the sale of the property. Section 1031 of the IRS code allows homeowners and real estate investors to defer payments of these federal and state taxes until a future date if the property is in use for trade, business or investment purposes. In order to complete a 1031 tax exchange the properties in question must be of like kind. The deferment of taxes on like-kind properties gives commercial and residential real estate investors more available money to purchase new property and maximizes the ROI of their commercial investment. This leads directly to greater wealth and financial success! Always remember to hire a trustworthy, experienced real estate agent that specializes in 1031 tax exchanges and real estate investment, especially when considering the sale of commercial land or properties.

The Wealth Building Process of a 1031 Tax Exchange

Section 1031 of the IRS code is very clear about the legal process of a 1031 tax exchange. First you determine the current market value of the property and list the property for sale. Next, make certain a proper, legal contract has been written with the correct escrow language. At closing, the sale proceeds are transferred to the accommodator of the exchange and the investor has 45 days to identify a minimum of three like-kind properties available for purchase. Once the investor identifies like-kind properties an acquisition escrow account is opened and the purchase of a like-kind property must be finalized within 180 days. The 1031 tax exchange strategy is perfect for real estate investors that own rental homes, multi unit apartments, land, farms, businesses, condemned property, small retail or industrial property.

Tenancy in Common: A Commercial Investment Strategy that Works!

Tenancy in Common (TIC), also referred to as real estate syndicated trust, is a commercial real estate investment strategy many people don't fully understand. It is complicated with many legal and tax issues to consider, but with the right advice from a trusted, experienced commercial investment advisor you can use TIC and 1031 tax exchange strategies to build wealth. According to a Realty Times article entitled 1031 Exchange Options: Tenancy-in-Common by Cary Losson, TIC (also known as Co-ownership of Real Estate or CORE) allows investors to "hold an undivided fractional ownership interest in investment property evidenced by a deed of trust". Losson also states that TIC "enables an investor to participate in the ownership of institutional-grade, professionally managed properties. The investor's equity can be diversified among several different properties, geographic markets and real estate companies, potentially increasing both the value and safety of the real estate investment."

Why Choose a TIC 1031 Tax Exchange?

Essentially with TIC, one investor joins forces with other investors to purchase large investment properties. Once the group has received the deed to the property each investor assumes a percentage share of the non-recourse financing. The investors can then reap the benefits by receiving a percentage share of the income generated and profit from sale of the property. Once an investment group has chosen to sell a TIC property it is possible for the individual investors or co-owners to then reinvest their equity by purchasing a like-kind TIC investment property and completing a 1031 tax exchange. This allows them to defer the gains tax and make their second investment with more money in hand. TIC offers investors a few major perks including:

You only invest the amount that fits your budget.
You are free from management duties.
You can regionally diversify your investment portfolio.
A professional acquisition team acquires institutional quality properties.
You receive a monthly cash flow.
In 2007 the world of commercial real estate is always changing. Make sure you find a commercial real estate expert that has experience and the knowledge necessary to assist with 1031 tax exchanges and TIC investments. For more information visit my web site at http://www.voncannonrealestate.com.

Contributor's Note

How much do you really know about investment property? Accurate research and professional expertise applied to the purchase of an investment property builds a solid foundation for financial success. You may want to work with a REALTOR who can help to identify the great opportunities in investment properties in the area of your choice. Or, you may choose to do the work on your own. A REALTOR can provide the inside line on properties with potential in the geographic area where you are looking for property. If you do choose to work with a REALTOR, you will save time, and you may have more choices and opportunities.

Research the Property's Past and Present
Some essential information must be obtained about the property's past. For example, do you know the history of property, or even how old it is? What sort of upgrades have been made to the home? Is the roof waterproof, and is the plumbing and electrical in working order?

What's the Neighborhood Like?
Once the overall condition of the property has been assessed, tax assessment records must be examined to determine property value trends. A good realtor will be familiar with the neighborhood where the property is located and if he or she is not, the REALTOR should check the neighborhood at different times of the day and night and speak to some neighbors. If there is a homeowners association, check the guidelines, assess fees, and be certain they allow rental of properties.

Assess the Bottom Line
For what purposes are you, the investor, going to use the property? To rent? To house your business? Or, to rehabilitate the property and sell it at a profit? Once this is determined, you can assess the bottom line.

Are you paying cash for your investment property? If not a mortgage will have to be paid. Have your REALTOR determine if rent and applicable fees will cover the mortgage, property management and maintenance. Consider property management if you do invest in property. Research fees and services provided by different property management companies, or ask your REALTOR if they provide this service, because many do. If you do not want to collect rents and contract repairs, find a property manager with the skills to negotiate, be your intermediary, and facilitate business in your absence.

For investors who rehab and sell buildings at a profit, a decent turnaround is 60-90 days from the time of purchase to the time the property is put back on the market. Three to four contractors should be researched and they should provide written bids with time estimates on their projects.

Document Fund Availability with Your Offer
Once you find that dream investment property, don't forget that offers need to be accompanied by your financial institution's statement of fund availability or a lender's approval letter. This will help make certain your offer will be accepted over other offers that may not come with appropriate paperwork.

There are still plenty of great deals on investment properties in this real estate market, and there are some less than desirable properties as well. Do your research. Or, hire a professional who will do it correctly for you. With proper planning and decision making, your real estate investment should be a profitable and worthwhile endeavor.