How to pyramid up to bigger real estate

[Phil Sabella]

Hi Everyone! I am actively searching for my first multi family property here in the suburban Philadelphia, PA area. I am 24 and new to the investment game. What I would like to do is to get FHA and live in one of the units and rent out the other 1-3 units. My end goal is to eventually pyramid up so that after my first year I can eventually sell and purchase a bigger property so on and so forth. I have heard about a 1031 exchange but not sure exactly how that works and if it is my only option or not. Thanks to anyone willing to help!

Phil

[Dave Foster]

@Phil Sabella, Good luck on your search.  Sounds like a well thought through plan.

The 1031 exchange is a process you'll use when selling investment real estate that allows you to defer paying tax on the gain (fed only in PA unfortunately) and instead using those tax dollars to purchase additional investment real estate. In essence it is a long term loan from the IRS acting almost exactly like an IRA but outside your IRA. You get to use the tax money as long as you play by the rules.

You're searching for a property that you can mix the use on - part primary residence and part investment.  If you live in part of it for two out the previous 5 year period  you will be able to take out the gain from the allocation of the portion you lived in (up to 250K if single or 500K if married) tax free!.  And you will be able to defer the tax on the portion you use as investment with a 1031 exchange.  An excellent way to get the free use of govt money to ratchet your portfolio up.