This section is for investors who already own residential, income or commercial real estate. In it, I will explore the power of the IRS Section 1031 exchange, which allows capital gains from real estate to be rolled, tax-free into another real estate investment. Please note that this exchange is subject to specific guidelines. Also you should consult with your tax professional before making this type of decision.
A 1031 Tax Deferred Exchange is a specific exchange that allows you to sell one piece of real estate and buy another with the proceeds, without paying any capital gains taxes. This can allow you to greatly increase your real estate holdings without losing any money to taxes.
Let’s continue the previous example of the $400,000 building purchased with $100,000 down and now worth $464,000. After sales costs, the new balance of equity that you have is $140,000, which can buy a $600,000 building. You will still get your 5-7% first year returns, which are now $7,000-$9,800. Those returns will still double by the 5th year, to $14,000 to $19,600 per year – a significant increase over your previous building’s cash flow. And, as in the previous example, the building appreciates roughly 15% over 5 years, so that it is now worth $690,000. After sales costs you are able to pull out roughly $200,000 in total equity, which can put you in an $800,000 building, with similar increases in cash flow.
As the buildings get larger the percentage returns go up. Also, once you get to 16 unit buildings and higher, your building comes with a property manager. This process can be repeated over and over again. Many investors aggresively improve and re-rent their buildings to increase their gains in equity even more.
I can help you with any part of this process, just let me know what you need.