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Thanks for that clarification. None of the info I'd found before stated that all three of those were required. Now that I understand that all three of those requirements must be met, I'm definitely re-evaluating my plans.

I'm planning on selling one property for about $360,000. It currently has a mortgage of about $270,000, or about 75%.

The property I'm thinking of buying would be of lesser value and in a different state. Probably two properties totaling about $270,000. If I do a 1031 exchange, I know this won't completely satisfy the like-kind requirement, so I'd be taxed on part of it. I'm trying to figure out how I would calculate capital gains taxes on this.

I've been reading up about "mortgage boot" and it seems like if I were to end up with less debt, that that would be considered a gain. So could I reduce the capital gains tax by getting bigger loans? I'm aware that all cash proceeds from the original sale would have to go towards the new property in order to not have it be "cash boot."

The way I calculate things, if the deciding factor is the difference between the sale price of the old house and the total price of the new houses, that would be a $90,000 difference. But if it's the difference between the debt values, and I put 20% down instead of 25% down (20% down will just about use up what's left after realtor fees) then the difference between the old loan and the new loans would be about $55,000. Obviously I'd be better off in the second scenario. So which is the correct one?

Also, do I then just take that figure (the "gain") and multiply that by the percentage of my tax bracket (federal + state) to see what the capital gains tax would be?

And one more question: is capital gains tax like income tax? I mean, is it lumped in with income tax so that deductions will reduce it?

Okay, so in buying a lien you are loaning the money that is used to pay off the tax debt. That makes sense. What about the rest of what I said above?

Also, if you could elaborate on the risks involved and what kind of research I'd need to do ahead of time, I'd appreciate it. I realize that any investment will require some due diligence, but in this case I wouldn't even know where to start.

Thanks.

This Thanksgiving I met a new in-law who is a Realtor. She and I had a long conversation about tax lien investing and she sang it's praises to no end. It all sounded too good (and too easy) to be true.

Here's what I came away from that conversation with. Please correct me if I am mistaken on any of these points.

- When you buy a tax lien, you are paying off what is owed, by the property owner or mortgage payer, in back taxes to the city/county/state/feds/etc., in exchange for owning the debt.

- Owning the debt of the lien means owning the rights to receiving all payoff of that debt. The property owner or mortgage payer still owes for that debt that used to be back taxes, but they now owe it to you, the lien holder, rather than to the taxing agency of the government.

- Any late fees or accrued interest on that tax debt after the sale of the lien gets compounded to that debt owed to the new lien holder.

- If the property owner does, after the sale of the lien, pay off that debt, the money (plus any fees and interest) goes to you, the lien holder, and not to the government. The property owner is now in the clear, and remains the property owner. The lien is released and the transaction is complete.

- If the property owner does not pay off the lien right away, the lien debt, still having first priority over all other debts, must be paid off before any more mortgage payments can be made. Because of this, the property is likely to go into foreclosure.

- If the property goes into forclosure, the new buyer of the property must pay off the total of the lien, including any accrued interest and fees. This would mean that whoever buys the property would pay you, the lien holder, the total of the original investment (purchase price of the lien) plus interest.

- If the lien is held for successive years (four years?) the lien holder becomes the property owner by default. Can this be?

- Because the lien has priority over all other debts, it WILL always be paid off, either buy the property owner or the next buyer of the property, meaning that buying a lien guarantees AT LEAST a complete return of the full investment, and likely a substantial chunk of interest and fees.

- The reason that governments sell liens like this is because they want their tax money right away, regardless of who pays it. They need to fund their essential services (fire, police, schools, etc) and do not want to be in the collections business.

- The funds used to purchase a lien can come from a Roth IRA because those accounts allow for discretionary investment, and purchasing a lien is considered an investment.

Is it true that this is a very safe investment because you are guaranteed to, at the very least, get back what you put in... very likely to get a substantial return through the accrued tax debt interest... and also possibly becoming the owner of the property simply by being the lien holder for a number of years.

It looks like, from what I was told, this kind of investment is more about money than property. You don't necessarily do it to become the owner of the property, but more to buy the debt owed and wait for it to be paid off, to you, plus interest.

I've tried to do a little research, but it looks like what I've been told is rather different from the other information online. Am I even close to reality here?

Thanks!

Good point.

Which is exactly why I'm thinking about a 1031. Price increases have levelled off in most of California, and in Merced (central California valley) where I bought the house, prices are starting to decline. Perhaps I'd have been better off thinking about selling late last year before things tapered off...

But I think I should just keep the place and find myself a cheaper investment. Something I can afford without selling the house I already have. Merced has a brand new university, so a newly created college town, or rather a long-existing town which has recently become a college town, is probably a good place to own property. I think it is a long-term investment.

I really keep going back and forth on this. I know there are some places that would give me much more immediate gain if I were to do a 1031 exchange, but I like the idea of owning property at least somewhere in California, even if I can't afford it where I live. San Francisco is just ridiculous right now.

I guess I've already sort of started out, but perhaps it's not a very good start. I have a single family home that makes $1000 in rent but costs $1500 in mortgage. I guess it's not so bad, though, because it also increased $150,000 in value since I bought it in summer 2004.

So, that place makes a good long term investment, but I think I want to get some places that acutally give me income every month. I guess I'm just fishing for where to start with this. My plan is to perhaps 1031 the place I own and try to get an apartment building. I figure something with a lot of units would make a decent income. Here's something that I came up with, just as an example:

http://realtor.com/Prop/1056864059

Is this too good to be true? I assume this is 26 rather similar units, so that would (I think) be $375/month * 26 units = $9,750/month rent. Then there would be perhaps a $2,500/mortgage, and some maintenance and management fees. So Maybe it would make $6,000/month profit? Really!? Can this be!!??

Is it common to find a place that makes so much more in rent than it costs to buy? I'm used to the California market where buildings are so expensive that mortgages are just as much, if not more than rent.

What is a common rent to mortgage ratio on an investment property?

Hello, there.

I live in one of the most expensive cities in the US: San Francisco. Yeah, yeah... :violin:

So anyway, I'm hoping to use some out-of-area real estate as leverage to eventually own my own home. I'm sick of renting. I'm not looking to be a real estate mogul, I just want to be able to buy myself a house one day.

So far I own one investment property. It's a single family house in Merced, the new site of the latest University of California campus. In less than two years it has gone up about $150K!

So, now that I see that this works, I'm thinking about getting some more places. The only problem with the Merced place is that it is severely lopsided in rent ($1500 mortgage vs. $1000 rent). I've been looking around in some of the US' smaller cities and I think some cheap multi-family unites would be the way to go.

Anyway, I'm probably going to just lurk and browse for a while. I'm certinly not in any position to buy again right now.

Well... it will buy you a 1 bed / 1 bath TIC in a building built before the big quake... circa 1902. And that's it. Nothing else under $251k but undevelopable land.

TIC, for those unaware, is Tennancy In Common, which is more or less a dangerous way to put multiple unrelated parties on one mortgage. So a large house that has been divided into four units, but has not officially been converted into legally recognized condos, can be sold to four parties.

Not recommended.

So $250k gets you a small slice of a house that others share. Pretty insane.

The only nearby trailer parks are either across bridges in the East Bay (Richmond, Oakland, etc) or south on the Peninsula in South San Francisco, Daly City, or Colma (San Francisco's cemetary). Those trailers usually have at least $700/mo space rental.

You just can't win anywhere near San Francisco. And renting an apartment around here isn't pretty either.