The real estate market is a tricky game to play, but if it is executed strategically, investors can make a lot of money on other people’s flops.
One of the tools that can be taken advantage of is a 1031 exchange. This is an IRS code that allows investors to sell and buy property of like kind while deferring tax consequences.
Typically, if an investor buys a piece of property and then sells it, he has to pay taxes on all of his gain even though a large chunk of it will go into paying off the loan he used to initially purchase the property, or a large chunk will go into the next property he purchases.
If the investor buys and sells several properties this can be a very heavy tax on him that could prevent him from making as much money as he should. A 1031 exchange makes it so no gain or loss is recognized from the purchase or sale of like kind investment properties, allowing the investor to pay less in taxes.
If the proper paper work is filed to the IRS, investors can take advantage of the exchange and be able to pocket more of the money they make from buying and selling investment properties.
With U.S. foreclosure rates at an all-time high, investors who have enough money should take advantage of the bank owned properties that are selling at below-market prices. These homes usually require cosmetic repairs, which, after being fixed can sell for a large profit.
Usually investors can negotiate with the bank on a foreclosed home and purchase them for lower than the listed price, and then higher a contractor to do any needed repairs or cosmetic renovations to increase the value of the home.
Though many foreclosed homes are sold through auction and cannot be inspected before the bidding, it is important to ensure that the house will not be a money pit. Houses with termite damage, mold, rotted floor boards, bad plumbing or electricity, or severe roof damage will be extremely costly to repair and difficult and time consuming to bring up to code with city ordinances.
Properties showing characteristics of any of the above pitfalls should be evaluated by a contractor who can give the investor an estimate of how much it will cost to repair the existing damage. Doing this inspection before the purchase of the home can save contractors and the buyer a lot of time, money, and stress.
After a home is purchased, there is a great opportunity to make the house look nicer by doing some minor renovations, like replacing carpet and tile or re-finishing hardwood floors. Kitchens and bathrooms should be updated since they are the rooms that sell a home.
After the major things like kitchens, bathrooms and flooring are taken care of, new paint goes a long way to make a house look a lot nicer. To boost the curb appeal, the landscaping in the front yard should look nice for first impressions of potential buyers.
These repairs can cost anywhere from $5,000-$50,000 to finish, but the value it adds to the house will make your return well more than double the money you put into repairing the house. This will allow investors to make more money in a months time than most people make in an entire year.
Without the 1031 Exchange, investors would have to pay taxes on almost half of the profits they made from the houses they sell, even though a large portion of those profits go right back into another investment property. The 1031 exchange allows investors to not pay so many taxes so they can continue to buy and sell investment properties without tax penalty.
The 1031 exchange is a great motivator for individuals wanting to be able to make more money,and have considered real estate but shied away because of the tax laws on property. The 1031 exchange not only helps investors make more money so they can continue to buy and sell real estate, but it allows more properties to be fixed up nicely so they can be purchased by people in need of homes.
Tommy Greene has worked since 1991 in property investments. He loves all things financial. He recommends (http://www.stanjohnsonco.com) for your property investment needs.
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