What Is A 1031 Exchange In Real Estate?
A 1031 like kind exchange refers to the Internal Revenue Code (IRC) 1031 (26 U.S.C. §1031) which allows for the deferral of capital gains when selling and buying like kinds of property. In plain English this means when you sell one type of property and buy another piece of property that is similar in nature you can delay the paying of taxes on the gain from the sale of the first property. So if you are an owner of investment real estate that you want to sell you can delay the paying of taxes based on gains of the real estate by selling the real estate and then buying some other real estate that is similar in nature and whose price is equal to or greater than the property you have just sold.
The real estate you will be selling and purchasing must be held for reasons of investment, production of income or for use in one’s business. Real estate held for recreational purposes, residences (personal use) or any other non-investment purposes do not qualify for use of the 1031 provisions. While IRC 1031 applies to more than just real estate, this article’s focus is on the use of the 1031Exchange and real estate.
Why Use a 1031 Like Kind Exchange
One of the main reasons for doing a 1031 Exchange is for trading up property and not getting stuck with a tax bill that you cannot afford to pay since you are merely upgrading your real estate for business purposes. Common uses include a business who needs to sell...
Tips For Financing An Investment Property
Using a mortgage for financing an investment property is quite different than taking out a mortgage for a home you intend to live in. Since you will be living in the home you are borrowing for lenders are more comfortable lending you money to purchase that “owner occupied” home since as a resident you are more likely to take care of it while living there. On the other hand buying an investment property where you do not intend to live in may mean you are less likely to care for it or may take on higher risks with the property than the lenders are comfortable with. As a result the lending criteria for investment properties are much stricter and the interest rates are higher than they are for owner occupied homes.
How Much Money Do I Need To Put Down When Financing An Investment Property
The amount of down payment required for financing an investment property depends on who the lender is and what type of property you will be purchasing. Some smaller lenders who hold the mortgage in their own portfolio rather than selling to a government sponsored enterprise (GSE) may be willing to lend with less money down than a lender who intends to sell the loan down the line. The GSEs like Fannie Mae and Freddie Mac will often buy loan packages from lenders in order to ensure that the mortgage lenders can continue to offer mortgages and not be frozen out of lending more due to lack of liquid cash. For more information on the GSEs and mortgages check out 20 Important Mortgage Terms To Learn About.
Tips For Buying An Investment Property
Buying an investment property with hopes of making income from rent or flipping the home for a profit is a somewhat different process than buying a home to live in. Often times buying a home for flipping involves a quick transaction with cash or a ready to use line of credit used to purchase the home. When buying a home with the intent of renting it out for income the lender will look at your credit worthiness and asset base. Residential rental properties require active management and the legal requirements for dealing with residential tenants are much stricter than they are for commercial tenants. By understanding what is involved in the process of buying an investment property for rental income or with the intent of flipping for a profit you put yourself in a better position to make a smart decision as opposed to one that could cost you money in the long run.
Fix and Flip Investment
With a fix and flip investment the idea is to purchase a home with the intent of updating the home and repairing any issues that the home has. Once repairs and updates have been made the home is put back on the market in hopes of making a profit based on a higher value due to the repairs and updates made. Usually fix and flip investments are held for a short time frame while the repairs are being made. Before buying a home to fix and flip you should make sure you are very familiar with the home repair and remodeling process as there can be hidden issues within a home that can blow your entire repair budget which will then require you spend more than you anticipated. Be especially on the lookout for lead paint issues, asbestos issues and foundation issues which may...