All Forum Posts by: Daniel Patterson

@dave 

@Dave Foster haha you did say it

Food for thought.

1. Can both of these tax exemption strategies be utilized in tandem?
2. Does the QI pay your taxes on the house? or do the taxes just disappear?
3. Say if you decide to stop investing and you finally pull yourself out of the chain, do you have to pay taxes on everything that you used the exchange on in the past? or do you only pay taxes on the most recent closing?

1. Yes both Sec 121 (the primary residence exclusion) and sec 1031 tax deferred exchange can be used together or leveraged off of each other. Some examples

a. Owning a duplex living in half and renting half. When you sell 50% of the gain is apportioned to your primary residence and the first $250K/$500K if married in gain from the half you lived in would be tax free and you could 1031 exchange the half that is investment.

b. You live in a house that you have more than $500K in gain on. So you move out and turn it into a rental for a year or so and then sell doing a 1031 exchange but taking 500K in taxable boot from the exchange. Normally that 500K would be taxable but because you have also lived in the property for 2 out of the previous 5 years that 500K becomes tax free by virtue of your sec 121 primary residence exclusion.

c. You 1031 exchange several small rental properties and consolidate into one really nice SF rental. After using that new property for investment purposes for a year or so you convert it into your primary residence by moving in. Now the rules of sec 121 again apply with a couple of twists because it was originally a 1031 property.

d. You 1031 properties into three or four beautiful vacation rentals all next door to each other. One at a time you move into each one and live there until it's time to redecorate and then you move into the next one instead and take the tax free opportunities of sec 121 on your sale (again there's some limitations on the exemption because of the 1031 but still tax free benefit available.

e. Using favorable FHA financing buy a property that would make a good rental and honor the financing guidelines and live in it. Then buy another, move out, rent the old one and repeat. Sell the investment properties and 1031 as necessary.

2. The 1031 exchange is a procedure that in essence is a sale of investment real estate followed by a purchase of real estate. The QI acts to provide documentation of the exchange portion of the closings. The QI also provides custodianship of the proceeds from sale until used for the purchase since you cannot touch the money either actually or by constructive receipt.

The QI also guides you through the rigorous guidelines necessary to have a successful 1031 including some valuation issues, use of proceeds, a 45 day identification period and 180 day exchange period and some titling guidelines.

Part of the process is that the contract rights for the sale are transferred to the QI from you but the property is deeded directly to the buyer from you. When you buy the same thing happens in reverse. The QI does not pay taxes determine taxes or document taxes. You do this with your financial advisors. Your accountant will have your adjusted cost basis for the properties and will file a form 8824 for every property you exchange.

3. There's really four ways to get off the 1031 train.

1. Sell and pay the tax (including the tax that has been deferred through the years and exchanges.

2. Keep exchanging until you finally consolidate your holdings into larger more passive investments that are providing income without management including income from the deferred taxes you haven't paid over the years.

3. Do what was suggested above and combine sec 121 and 1031 to mitigate a great deal of the tax burden through selective primary residence exclusions.

4. Die ( I really don't recommend this one). But if you do your heirs get your properties at what is called a step up in basis. Essentially the properties are appraised as of the day you die and your heirs inherit the property as if they paid that value for the properties. So in essence all the gain disappears into your estate.

Whew!! This is just a very cursory look at some of the opportunities and everyone has quirks, nuances, advantages and disadvantages. A good team of legal, financial, and QI folks can help you get wherever you want to go. It's just about knowing where you want to go and exploring the opportunities.

Done! I used the money I spent on my real estate education for my investment, as that's as far as I've come so far! :)

Hey Debrina,

There are tons of free resources for you to start your real estate career.

Take a moment and look at the learn tab on top and read through all the how to guides.
Next listen to all the podcasts. That should answer 90% of your questions.

I'd personally come back to NY. I was born and raised here so I guess I'm bias. Being a realtor on Long Island I can confidently say, money is defiantly being made in investments out here. Especially on the south shore. Now that people are starting to get over the whole Sandy storm, and most of the homes are being raised. The market is back and booming. Theirs new constructions on every corner, and plenty of homes that would be great for rent outs' as well. 

I'm not too familiar with Delaware but I do know that LINY is doing well for investors right now. Being that your already licensed in NY would make it that much easier. 

 Hey Stan, I asked some good questions the other day, and got really good responses back. I'm just going to pass along the advice to you. 

---------------------------

-First question.. Buy and hold? or Flipping? With ideal situations which would you choose?

-Second.. What is your most successful method of finding the perfect deal? MLS?

-Lastly.. Is it difficult to start investing starting off with small funds? Or is it just based on which type of deal you find?

And I got some great feedback that I will share to you!

Your first question is one of individual choice - it really depends on your long and short term goals. I couldn't say what the best one for you to do is. Generally if you are looking to make money quickly then a flip is what you might want to keep your eye out for - however, if your looking for longer term cash flow, then you may want to buy and hold -both have their pros and cons and risks and rewards. Personally, I have done more buy and hold than flips but I would actually like to do more flips moving forward. After all, I enjoy getting checks monthly - but it would nice to cash in a fat check once in while too.

Question 2 - Networking is key to finding good deals - MLS can have some good deals periodically - but the best deals are going to come from a distressed situation that you find out about through word of mouth - and that means staying in front of your network and growing it so that you are exposed to new situations and opportunities. Talk to contractors as often as you can and let them know you're interested in finding distressed houses and are willing to pay a finders fee to anyone who helps you locate a house that you buy.

Question 3 - First of all - what is your definition of "small funds" ? It's not impossible to get started in investing without a lot of money - but it's going to take a little more work on your part. Most lenders like to see you have some "skin in the game" , so may need a down payment and some closing costs at the very least - however , there are still opportunities to wholesale or bird dog which does not require down payment money but may be a lot more difficult without a marketing budget. There are many ways to get creative about the financing if you're motivated enough. If you're willing to live next door to your tenants, then you can look into a duplex where you can live in one side of it while renting out the other. This could be a good way to get your feet wet and collect a stream of income while saving up for your next property. You can use an FHA to get into a duplex for 3 1/2 percent down plus closing costs if you are going to owner occupy ( reside) in it for at least a year.

If you want to flip without a lot of money - well that going to be a tougher gig - you may want to see if you can partner up with someone who does have the money or maybe you can match funds - either way the point is a partner can open up doors to paths you may not have thought were available. Remember that a flip is usually going to be under market because of the condition - this typically means it is a cash deal - plus you are going to have to have a repair budget to bring it back up to par so you can sell it. You can look at hard money if you have a good enough deal - some I know will lend up to 75% of project cost on distressed property. So your still going to need some money, and this come from you or from a partner or both.

The important thing is to learn how to recognize a good deal and always be on the lookout for one as you build up your assets and your network - this way, you can be ready to strike when the iron is hot.

I hope you find this as insightful as I did!!!

Glad you find this site! You are in the right place to learn all about REI!

Wishing you the best!

Hey Brandon,

Welcome to BP!!

There are tons of free resources for you to start your real estate career.

Take a moment and look at the learn tab on top and read through all the how to guides.
Next listen to all the podcasts. That should answer 90% of your questions.

Best of luck!

Hi Bill,

Thanks for the history of it, I was pretty curious how a 121 Exclusion could be utilized! I definitely plan on making a transaction in the future and would love to use one of these tax methods. We're connected now, I'll be keeping in touch for the future if I have any further questions.

Thanks again!

Wow! That was exactly what I was curious about plus so much more! Thank you! This site continues to amaze me with the outstanding feedback you can get from so many knowledgeable users. Your examples are perfect! Really motivates me to want to try one of them in the future, and to think up some investing plans/goals. 

Thanks again Dave!