Blog :: 04-2014
Your taxes may have been filed, but here's an opportunity for Real Estate Investors, to grow their proceeds through the Section 1031 exchange. Section 1031 exchange for rental and investment real estate, is a tool that allows investors to move the gain from one property to another without immediate income tax consequences. An instant benefit is to postpone the tax due which gives the investor a larger amount of proceeds to invest.
In the example shown, the investor has 21% more proceeds to invest and grow over time than if he had paid the taxes due instead of exchanging. A legitimate long-term goal might be to make qualified exchanges from one property to another until the investor dies. The heirs would then receive a stepped-up basis on the property based on the market value at the time of the decedents death and possibly avoiding taxes altogether. There are specific requirements to be met in order for the exchange to qualify.
For more information on exchanges, see IRS publication 544; the Sales and Exchanges explanations begin at the end of page 2. In addition to enlisting the services of a real estate professional familiar with investment property, seek the help of a Qualified Intermediary to facilitate the intricacies of the exchange.
With interest rates lower than they've been in over 40 years, it may be difficult to think of a window of opportunity closing. Consider this - rates will only go up from here. It may be a slow rise, but a steady one (the rise of home prices illustrates the same trend). Zillow recently reported results from a nationwide study that home values are expected to appreciate by 4.5% through the end of the year.
Coupled with Freddie Macs projection that rates are going up, the cost of housing for buyers by the end of the year will be higher than it is now. While the uncertainty of the future can stagnate some people, the fear of loss can be much more devastating when a person realizes that the amount they pay to live and enjoy a home could have been considerably lower had they acted when prices and mortgage rates were lower.
The following example considers a $250,000 purchase today with an FHA mortgage compared to what it might be at the end of the year with a higher price and interest rate as discussed earlier. The net effect is that it will cost $191.87 more per month to live in the very same home if you wait. To see what the cost might be for your price range, use this Cost of Waiting to Buy spreadsheet.