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July 4, 2011

4 Reasons to consider a 1031 Exchange

Filed under: Real Estate — rcomadmin @ 12:00 pm

One of the main goals of investing is to buy low and sell high.  Often however, investors miss the opportunity to sell at the peak of the market, yet decide to unload an asset for other strategic purposes.  At Asset Exchange Company we have worked with clients who have sold real estate for many reasons during different phases of the economic cycle. Some of the reasons our clients have chosen to sell and exchange include:

Shelter Cash Flow – One of the significant tax advantages to owning real estate is depreciation.  However, if you’ve owned property for a long time, you may no longer be benefiting from depreciation.  In fact, it may be advantageous to sell a fully depreciated property and acquire a new (larger) property to obtain a new depreciation schedule hence sheltering more (or all) of your rental income from taxes.  

Harvest Dormant Equity – Many investors have considerable equity built up in their properties.  Often, this equity, if leveraged more efficiently, can produce greater returns.  For example, a rental home worth $1MM, owned free and clear, may rent for $3,000 per month, yielding a return of 3.6%.  Exchanging out of the property and acquiring an apartment building or a small commercial property, for example, may yield between 6-8% on the same amount of equity, effectively doubling the return.

Asset Class and Geographic Diversification – Wall Street has cialis drug been advocating the benefits of diversification for many years.   A diversified portfolio allows an investor to reduce the volatility of a portfolio and either increase return for a given risk or decrease risk for a given return.  It may be prudent for you to consider a diversified portfolio strategy for your real estate investments.   Real estate investors generally achieve a diversified portfolio by acquiring real estate in different geographic areas, by acquiring different types of real estate, or both.  If you own all of your investment real estate in a flood plain, or on a fault line, it may be time to diversify. 

Relief of Management Burdens – Tired of dealing with toilets, tenants and trash?  It may be time to exchange into an easier to manage property.  Triple Net Leased investments or Tenant In Common investments may allow you to own institutional grade property that is professionally managed, providing the same benefits you currently receive without the management hassles. Commercial properties may also be much easier to manage than Section 8 apartment buildings.  If you are looking to reduce your management burden, it may be time to consider a 1031 Exchange. 

Many investors choose to team up with a partner (or partners) to acquire investment real estate.  Doing so has many potential benefits including being able to control a much larger, potentially better property than one could acquire individually.

Often when partners team up to acquire phentermine real estate, title to the property is held in an LLC or some other legal entity.  This may be done to provide liability protection to the individual owners.  It is important to note that if an entity such as an LLC is created to hold title to the property, the underlying LLC owners do not own real estate.  The underlying owners merely own membership units. 

If the individuals who own the membership units of the LLC wish to do a 1031 Exchange with the property, the LLC may complete the exchange.  The LLC will sell the property and the LLC will acquire like-kind replacement property.  This works only when all of the underlying owners agree to stay together moving forward. 

However, problems can arise when some of the underlying owners desire to go their separate ways or some desire to cash out of the property and pay taxes and others desire to conduct a 1031 Exchange.inflatable water slides for sale

In this scenario, one of the best solutions may be to dissolve the entity and have the underlying owners take an undivided fractional interest in the property.  The entity should be dissolved well in advance of the sale, so that the individual owners have a sufficient amount of time to prove the intent to hold the property as an investment. 


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1 Comment

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