What is a 1031 Tax Deferred Exchange?

Who Should Understand the 1031 Tax Deferred Exchange?

Investors who either flip properties or who decide to sell one or more of their current rental properties to invest in new ones should understand the 1031 Exchange rule. It is also known as a Starker Exchange or a Tax Deferred Exchange.

What is a 1031 Exchange?

It is a transaction covered by Section 1031 of the IRS Tax Code. It allows real estate investors to "exchange" (buy and sell) real estate without paying out capital gains tax (CGT) on the sale. The CGT is used to purchase the new property or properties. The CGT only becomes payable if a property is then sold without the proceeds being reinvested or is invested in a non-qualifying purchase.

Can Any Property Be "Exchanged" to defer CGT?

No. The transactions must all fall within parameters set out in the Tax Code and the approved steps must be followed. By working with a title agent or real estate attorney who is approved to handle 1031 Exchanges, known as a Qualified Intermediary (QI), the process becomes straightforward.

How Does a 1031 Exchange Work?

Like this:

• All properties must be in the USA or an American Territory.
• The purchased property(ies) must be of an equal or greater value than the sold property(ies).
• All properties must be what the IRS calls "like-kind." They must all be either raw land or improved real estate. Zoning and types (residential, commercial, industrial) are unimportant. So, for example, an investor can sell commercially-zoned raw land and buy a multi-family residential building. What matters is all properties must be for investment or business purposes.
• Since the 2017 Tax Cuts and Jobs Act, equipment, trucks, patents, etc. sold or bought with the real estate are no longer considered "like-kind."
• The term "sell" is replaced with "relinquish" and "buy" becomes "acquire." The QI will only use those terms on official paperwork.
• When one or more properties are relinquished, the QI holds the proceeds in an approved account. If it is released to the seller, the IRS considers it a regular sale and any CGT becomes due. When the acquired properties change hands, the QI releases those proceeds to complete the transaction. Technically, therefore, properties were exchanged and not bought and sold.
• There are time limits on a 1031 Exchange which must be adhered to. Properties must be exchanged within a total time frame of 180 days.
• In a "reverse exchange" new properties may be acquired before current properties are relinquished. We do not have the space to go into those details here, but a QI or an experienced Realtor will explain them.

Final Comment

When investors understand the 1031 Exchange process, they defer CGT giving them more liquid capital to reinvest. The 180 day flexibility built into the process enables investors to complete either side of the transaction to suit their own plans or the market cycle.

How to Recession-Proof Your Investment Portfolio

Recessions are a fact of life for investors, but they can still do a lot of damage. Successful investors survive and even thrive during the rough patches because they know how to plan for recessions and keep their portfolio in good shape.

Is a Recession Coming?

Investors are likely to have to deal with a recession during the next twelve months. The state of the bond yield curve indicates a strong risk, and there are also political factors to consider. That is not a guarantee of a recession, but the odds are high enough that it makes sense to start planning for it. Fortunately, there are a few things that most investors can do to reduce their risks.

Avoid Volatile Investments

Some investments lose more value during a recession than others. It can be wise to sell those investments while their price is still high and invest the proceeds into other investments that are less likely to lose value. Every market is unique, but luxury vacation homes, second homes, and other expensive luxury properties are very risky during recessions. Rental properties aimed at the average person and buildings in areas with a low supply of new buildings are much safer.

Plan in Advance

People make stupid decisions when they panic, such as selling their investments are their value plummets. Human instincts simply did not develop to deal with complex markets. The best way to avoid dangerous impulses is to plan ahead. Smart investors know that the may need to tweak the plan as they go, but they should only do so after careful thought.

Aim for Income

Rental properties and others that generate cash are a good choice during recessions. Their value may drop, but their previous income provides insulation from the losses. The added income also makes it easier to invest in new properties when their prices are low from the recession. Those new investments will often regain their value when the recession ends, which can turn the recession into an opportunity for investors who have the cash to make use of it.

Increase Value vs. Improvements to Sell Your Home Faster

When the time comes to make improvements to your rental property, you want to be sure that you're choosing the right improvements. Is your goal to increase the value of your home so that you can increase the selling price, or are you hoping to increase the odds that your home will sell quickly and effectively? Knowing the difference between the two can help you make the right choice about home improvements before you put your home on the market.

Question #1: Is the improvement appropriate for your area?

Take a look at the area around your home. Adding an extra bedroom, for example, can help add square footage and value to your home. It can also make it easier to sell the home if you live in an area dominated by families and you have a small, one or two-bedroom home. On the other hand, adding on an extra room or two might not add value in an area filled with seniors or young families with only a single child. Take a look at property values in the area, too: you don't want to substantially exceed the value of other homes around yours. 

Question #2: Does the improvement genuinely add value?

Fixing up things that are wrong with the house, including updating outdated appliances, can add both substantial value and substantial sellability to your home. On the other hand, some improvements are more a matter of personal preference than value. Upgraded utilities, for example, probably won't add value to your home. If your roof is on its last legs, you might be able to increase sellability by fixing it, but you might not improve its overall value. Carefully consider the benefits of each one before making changes to your home. Improvements that genuinely add value may include:

• Kitchen remodels
• Energy-efficient appliances
• Creating versatile spaces within the home
• Adding a deck

Make sure, before you get started, to calculate the cost of the changes versus the additional selling price you can expect to bring in. It may surprise you what additions, including a swimming pool, might actually cost more than you can make on them.

Question #3: What to buyers really want in your area?

Take a careful look at what buyers are looking for when they buy in your area. Improvements that add sellability might include things like:

• Improving curb appeal
• Updating appliances
• Adding a fresh coat of paint to make the house look its best
• Upgrading the bathroom

Take a look at the market and see what sells. Consider talking with a realtor to discover more about what potential buyers are really looking for. When you know what buyers are looking for, you can add those attributes to your home--and often, that can go a long way toward selling your house quickly and effectively. 

Are you putting your house on the market? Before you sell, consider these key elements of how to upgrade your home--and how to potentially improve your selling price. 

What to do with Lead Paint?

Whether you have just started to look at investment properties or you have finally found the perfect one that you want to buy, if you hear lead paint, you may have to take a step back. Lead paint is harmful and can change the way that you look at a piece of property.

So, what are the dangers of lead paint?

Lead is highly toxic and can cause a range of problems, especially in young children (who are more likely to consume it). These include:

• Overall bad health- headaches, stomachaches, irritability
• Damage to vital organs – kidney, liver, blood
• Brain damage, including seizures
• Behavioral problems
• Learning problems
• Death

Which properties commonly have lead paint?

Homes built before 1978 are more likely to have lead paint in them. Even if your older home has been repainted multiple times, it may still have traces of lead paint in it. It can also have lead pipes in it, poisoning people through the drinking water.

What you should do once you find out a potential property has lead paint?

Move on. Many investors decide that it is not worth their trouble to buy a property that has lead paint. They don't want the hassle of making the property habitable again. It can be too much work (or cost too much for their investment).

Abatement services. There are two options when it comes to dealing with lead paint. You can remove it, or you can paint the wall with special paint and sealants to make the home safe again. Either way, you need to hire a lead-safe certified contractor to do the job. These contractors know exactly what to do to remove the lead paint safely, without harming themselves, their crew, and you.

Though many run from lead paint, you don't have to. By hiring a certified contractor, you can make the home habitable again (and even profitable)!

Rental Home Improvements that Cost too Much to Maintain

Three Rental Home Improvements That Cost Too Much to Maintain

Though you may think about investments when you think about rental properties, the truth is that you have to think about the maintenance of it also. You aren't just going to sit back and make money. You have to care for the property in order to get the most out of it.

That being said, landlords want to give their tenants a home that they can be proud of by updating fixtures and offering extras. However, these improvements can sometimes cost too much to maintain, making them a bad idea.

Here are some rental home improvements that cost too much to maintain.

• Wood floors. Everyone loves the look of hardwood floors. However, they are easily damaged and need to be refinished on a regular basis. This is especially true when the family has children and pets. They can really do damage to your hardwood floors. Because of this, you may want to choose a tile or laminate floor that gives you the same look.
• Pool or hot tub. Many tenants look for extras when choosing where to live. As nice as a pool or hot tub is, you are going to have to find someone to come at least one or two times a week to maintain it. They will need to clean it and keep an eye on the chemicals, which are their own expense. You also have to think about shutting down pools throughout the winter and opening them up in the spring.
• Too much landscaping. Though people love the look of a garden around their home, the truth is that it can be a lot of work to keep up with it. You are going to have to weed it on a regular basis, plus get it ready for the winter and fix it up the following spring.

Though you want your tenants to fall in love with your home or apartment, the truth is that you can waste money trying to make it nice for them. They don't need hardwood floors that they are just going to damage when laminate will do. You might also want to have a swimming pool or a hot tub, but you are going to be spending a lot of money in chemicals. Same with landscaping. Big flower gardens are beautiful but they are also a lot of work to keep them looking that way!

Should Your Properties Have Utilities Included?

The biggest choice that you face as a landlord is how much to charge for rent. That is often determined by the rental market where you live, along with the extras that you include.

Utilities are some things included with rent, while other times tenants get billed individually. There are pros and cons to both.

Here are some reasons to include utilities in the rent.

Many older apartments don't have this option. If you are renting out an old house, your apartments may not have separate utilities.

It isn't very easy to do. If you don't have separate meters, you could spend hours trying to figure out what everyone owes each month. It might not be worth it to you.

You may be able to charge more. Many landlords who offer utilities do so by increasing the cost of rent. You might even up making more money by giving them this option, especially if your utilities aren't going to cost too much.

Here are some reasons not to.

You may notice that your utility bills go up. If they aren't paying the bill,  your tenants have no reason to watch how much electricity and internet they use.

In fact, your utility bill may be higher than expected. If your tenants are overusing the utilities, you are going to have to pay for this. You may not have factored in such high bills when deciding how much to charge for rent and you may be losing money.

You don't have to deal with the utility companies at all. When the tenants are in charge of their own utilities, it takes one thing off of your plate. If you don't want to deal with electricity, internet, and more, make your tenants do it for you (or them)!

While you may not be able to make the decision about utilities (because your apartments aren't set up with individual meters), most landlords can. However, it comes down to whether or not you want to deal with the utility companies or not.

Design Do's and Don't's for Houses with One Bathroom

When you're remodeling homes with just one bathroom, there are certain things that might not be the best upgrades for that home in order to make it work for most families. Remodeling the bathroom properly in a one-bathroom home is vital to making sure that it is appealing to as many possible homeowners as possible. There are also other remodel ideas that will limit the amount of prospective homeowners that are interested in your property and limit the value of the property that you are trying to sell.

The following are some do's and don'ts for remodeling a home that has only one bathroom:

Design DO'S:

• DO budget for the unexpected because problems can occur throughout your bathroom renovation. Issue such as hidden water damage or a leaking shower can cost you a lot more money than you planned to spend on your remodel. Budgeting 10-25% extra for those sorts of issues can help you offset any unexpected costs associated with your remodel.
• DO hide the toilet in as discreet of a place as possible. Whether you make a separate area or room for the toilet or hide it behind the door, it should never be the only thing you see when you walk in. Keeping the most personal part of the bathroom private can pay big dividends, especially if it's the only bathroom in the entire house.
• DO choose appropriate surfaces that are resistant to children and can accommodate the disabled. Remember, you only have one bathroom so you want to make it as usable and appealing to as many potential buyers as possible. Ensuring that it's durable enough for children to use and to withstand the daily use of everyone in the family is key to keeping the bathroom one that will not have to get remodeled again just a few years from now.
• DO splurge on the shower and make the design as tasteful as possible. Upgrading to a Roman style bathtub/shower combo and choosing a shower head with multiple settings can help the only bathroom in the house appeal to as many buyers as possible. It also helps increase water efficiency to help keep the household water bills in check while still providing a great showering/bathing experience to the homeowners.
• DO make sure that there is room on the vanity for people to use to get ready. Whether someone is doing their hair or putting on their makeup, having adequate counter space to store their toiletry and hygiene items is appreciated.
• DO offer drawers and cabinets in the bathroom for additional storage.

Design DON'TS: 

• DON'T simply decide to have either a tub or a shower as families with children will almost always need a combination so the adults can shower and kids can bathe.
• DON'T forget to include appropriate ventilation in the bathroom to prevent mold or mildew growth. That is key especially if the home only has one bathroom. Homeowners do not want or need those issues in the only bathroom in the house. It's also hazardous to health.
• DON'T forget to creative with your storage options, whether it's cabinets, a drawer, a medicine cabinet, or other shelving in the restroom that be both functional and great for decoration.
• DON'T pick design over function. There is one bathroom in the home the family needs it to function over looking like a luxury designer spa space. 
• DON'T design for the future. The family is living in the now and need the bathroom to function for the now and not what someone will want 50 years in the future.

These design DO'S and DON'TS will help you create a bathroom that's functional for the entire family. It's important when the house only has one bathroom to make the most of the design and space you have.

Conclusions:

One bathroom homes can be a challenge to design and sell, but with planning and expertise these DO'S and DON'TS can provide the homeowner with a bathroom that the entire family can use. That makes your single-bathroom homes all the more marketable. 

Sincerely,