5 RULES FOR INVESTING IN REAL ESTATE AS A LANDLORD:
1. Never sell
2. No negative cash flow
3. No adjustable or variable loan rates
4. No balloon payments
5. Don’t buy in an area where you will be afraid to collect the rent
CONSIDERING A TAX DEFERRED ‘1031 EXCHANGE’?
A 1031 exchange, otherwise known as a tax deferred exchange is a simple strategy and method of selling one property, that’s qualified, and then proceeding with an acquisition of another property (also qualified) within a specific time frame. The process of selling a property and then buying another property are practically identical to any standardized sale and buying situation. A “1031 exchange” is unique because the entire transaction is treated as an exchange and not just as a simple sale. It is this difference between “exchanging” and not simply buying and selling which, in the end, allows the taxpayer to qualify for a deferred gain treatment. US CODE: Title 26 Section 1031.
Any Real Estate property owner or investor of Real Estate, should consider an exchange when he/she expects to acquire a replacement “like kind” property subsequent to the sale of his existing investment property. Anything otherwise would necessitate the payment of a capital gain tax. The two major rules to follow are:
- The total purchase price of the replacement “like kind” property must be equal to or greater than the total net sales price of the relinquished, real estate property.
- All the equity received from the sale of the relinquished real estate property must be used to acquire the replacement “like kind” property.
There are 2 timelines that anybody going for a 1031 exchange should abide by and know:
The identification period: This is the crucial period during which the party selling a property must identify other replacement properties that he/she proposes or wishes to buy. It is not uncommon to select more than one property. This period is scheduled as exactly 45 days from the day of selling the relinquished property. This 45 days timeline must be followed under any and all circumstances and is not extendable in any way, even if the 45th day falls on a Saturday, Sunday or legal US holiday.
The exchange period: This is the period within which a person who has sold the relinquished property must receive the replacement property. It is referred to as the Exchange Period under 1031 exchange rule. This period ends exactly 180 days after the date on which the person transfers the property relinquished or the due date for the person’s tax return for that taxable year in which the transfer has occurred, whichever is earlier.
For further information on these and other tax codes, please check out US CODE: Title 26 Section 1031.