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Plan Ahead for a 1031 Exchange

Do you own a current investment or business property? Are you considering a 1031 exchange (also called a Starker Exchange) to defer the capital gains tax?

If so, plan ahead!

The 1031 Exchange Benefits

By using a 1031 exchange investors are able to defer the capital gains tax on a property by exchanging their current property for another property. Both properties must be held for investment or business purposes, they cannot be intended for personal use.

The use of an exchange allows an investor to accumulate more assets before paying taxes on previous gains.

Changes in 1031 Exchanges

1031 exchanges have been around for a long time. Many seasoned real estate investors have used them to defer capital gains taxes on their properties, thus accumulating larger assets. Recently, the IRS is under pressure to generate more revenue and is paying closer attention to all tax issues. 1031 exchanges are no exception to the IRS’ scrutiny.

The 1065 form that is reported to the IRS requests information that wasn’t previously tracked. This information can be a means of triggering an IRS audit. The “Drop and Swap” model of 1031 partnership dissolution is under close scrutiny and may require you to dissolve the entity a year prior to the close of escrow.

Plan Ahead

If you are considering a 1031 Exchange, plan ahead. Depending on your advisors’ counsel, you may need to plan as early as one year prior to the close of escrow.

  • Meet with your CPA or tax professional when even considering a potential sale. Your tax professional can help you plan ahead to avoid a disqualification of your exchange and undue scrutiny by the IRS.
  • Meet with your estate planner to make sure you end up holding title in the correct entity after acquisition.
  • Meet with your exchange accomodator to have them walk you through the timing and procedures that need to be followed.
  • Meet with your real estate professional. Let them know what you are planning to do and when you are planning to do it. Let them give you suggestions for maximizing the value of your current property. Let them help you begin to identify a replacement property prior to selling your existing property.

The guidelines and time frames for 1031 exchanges are very tight and inflexible and don’t allow for a change of heart after the fact. Planning ahead in a 1031 exchange can help you avoid mistakes that will force you to pay taxes and incur costly interest and penalties due to hasty, forced decisions.

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Tour of a Richmond, CA Investment Property

I took a brief tour of a Richmond, CA investment property. The property had 6 units that need a little bit of updating. Each unit has a covered parking space. There is a small onsite laundry room.

Here’s a short video of the outside of the property:

Contact me for all of your real estate investment needs at (925) 385-8798. Visit our real estate investment blog for more information about using real estate for retirement.

 


 

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Rising Rents Make Rental Properties More Attractive

CNNMoney.com is reporting that rents are rising as home prices fall. According the article the cities with some of the largest price increases in the past 12 months were:

  • Sarasota Florida -12.9%
  • Miami, Florida -12.1%
  • San Francisco, California 11.1%
  • Middlesex County, Massachusetts – 10.6%
  • Edison, New Jersey – 10.5%

As well, they reported that the vacancy rate for apartments was just 4.9%. Even cities in the Midwest saw significant price increases.

Market Forces

In a recent article, I shared about a potential wave of foreclosures that is yet to come. Should these foreclosed properties hit the market, pricing on homes should continue lower.

As well, those souls that have lost their homes to foreclosure or via short-sale  may be forced to rent for a period of time. This increased demand for rental properties, would put continuing upward pressure on rents.

These forces lead me to believe that it is a good time to own residential rental real estate.

If you would like more information on how you can augment your retirement with real estate, please contact us. Or call me at (925) 385-8798.

For other articles about investing in real estate, head over to www.maclennaninvestments.com.

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Another Wave of Foreclosures?

Reuters is reporting that another wave of foreclosures is about to hit the U.S. housing market. (HT: Zerohedge via BloodhoundBlog) The robo-signing settlement paved the way for lenders to resume foreclosure on many of their delinquent loans.

The Reuters’ article reports:

Although foreclosure starts were 50 percent or more lower than for the same period in 2010, those begun by Deutsche Bank were up 47 percent from 2011. Those of Wells Fargo’s rose 68 percent and Bank of America’s, including BAC Home Loans Servicing, jumped nearly seven-fold — 251 starts versus 37 in the same period in 2011. Bank of America said it does not comment on data provided by other sources. Wells Fargo and Deutsche Bank did not comment.

Market pricing is a function of supply and demand. If a large supply of housing hits the market, pricing will will have to fall to a level that demand picks up.

I wrote just yesterday about the lack of current inventory on the market. It will be interesting to see how this plays out in Contra Costa County.

If you are interested in real estate investing, please feel free to visit our website or our blog to get more information about investing. You can call me at (925) 385-8798 to discuss current investments or future plans for investing.

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Contra Costa County Real Estate Market Stats

The Contra Costa Association of Realtors® (CCAR) publishes monthly market stats. The February numbers were quite shocking to me. Below is a graphic that illustrates the inventory of homes for sale.

Market Inventory Graph for Contra Costa County

Notice that the number of homes for sale under $300,000 has fallen by 52.6% from last February. Across the entire market the inventory is down 40% from February of 2011.

Now look at a graphic illustrating the months supply of inventory. This metric analyzes the number of active listings divided by the number of homes sold in that month.

Contra CostaMonths Supply of Real Estate Inventory

In February of 2011, the market would have needed 5 months to clear the inventory of homes under $300,000. This February it would have only taken 1.7 months to clear the market of the inventory of homes under $300,000. This is a 67.2% decrease year-over-year. The entire months supply has decreased by 48% across all markets.

What it All Means

The market is very brisk at the current time. Properties under $300,000 are getting multiple offers. If you are looking to buy, you should be ready with a pre-approval and a competitive offer. If you are an investor, consider making an all cash offer. Many properties are going for at or above market price depending on the area and condition of the property.

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Investment Property Sales Pick Up

The Wall St. Journal is reporting that investment property sales were up last year. Particularly the sales of single family homes increased last year according to the National Association of Realtors.

One of the reasons I believe this to be the case is that interest rates have remained low. The ability for investors to finance a significant portion of their purchase with low fixed rate financing for 30 years is an incredible opportunity. This type of financing is available for 2-unit, 3-unit, and 4-unit properties as well.

I believe, another reason for the increased demand for investment property is that investors can buy some, not all, properties for below replacement cost. This means that when new homes are built, they will necessarily be more expensive than the investor’s property in order for the contractor to make a profit or break even.

For more information about real estate investment please head over to the Maclennan Investment Group, Inc. website.

If you are interested in buying an investment property in the San Francisco Bay Area, please call me at (925) 385-8798.

Company Profile

Welcome to Maclennan Investment Group, Inc., your East Bay Area real estate investment advisors. Maclennan Investment Group assists buyers and sellers of real estate maximize the investment potential of their real estate assets.

Learn More about us.
Offering real estate services in the communities of: Walnut Creek, Concord, Pleasant Hill, Martinez, Alamo, Lafayette, and surrounding cities.

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Disclaimer: Information deemed reliable but not guaranteed. This site is not meant to offer legal or tax advice.

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925.385.8798

Maclennan Investment Group, Inc.
3380 Vincent Rd, Ste HUB
Pleasant Hill, CA 94523
p. (925) 385-8798
Licensed Broker in the State of California, DRE#01871809
Equal Housing Opportunity
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