July & August 2023
This month my work brings me to the north east side of San Antonio right near the Converse line.
A client has decided to sell his investment property that he has held on to for more than a decade. With the right pricing and marketing strategy, we were able to field more than two dozen offers for the property. Handling multiple offer situations can at times seem overwhelming. However, with the correct systems in place, sorting through dozens of offers can be efficient and less daunting. Click here for a simple spreadsheet that will show you all you need to know about each offer in a multiple offer situation.
I also advised the client on some, what I refer to as “flyover information,” regarding a 1031 exchange. A 1031 Exchange can occur when a home owner decides to sell an investment property, or any other property that is not their primary residence. The gains on the proceeds are generally subject to a higher tax rate when income tax season rolls around. Generally, one can anticipate around a fifteen percent tax rate on income earned from the sale of an investment property. One of the most important aspects of a real estate to me the collaborative effort to work with my clients to achieve their true goals. I knew through these efforts and discussions and just general conversations with my client that he wanted to at some point in the next few years, re invest that money back into the real estate market. This to me was the indicator that told me that a 1031 exchange could be used here and I advised the client of his options. It wouldn’t otherwise really make a ton of sense for him to cash out on his proceeds, pay the taxes on the income and then turn around and re invest the remaining of it in one to three years, he could instead re invest the proceeds now and be exempt in a sense from paying those hefty taxes.
The short hand version of how a 1031 exchange is this. (For the long hand version, learn more about 1031 Exchanges here.) Use the proceeds from the sale of your investment property to purchase a new property and avoid paying the capital gains tax. There are certainly some rules and stipulations that go along with this, but its a really good way to avoid paying tens of thousands of dollars in capital gains tax. Here are a few examples: An out of state investor who does not have a mortgage decides to sell their rental property for $300,000. After closing costs and other expenses, the investor stands to make $270,000. The tax on that $270,000 profit at 15% would be over $40,000. Instead of writing that check to the IRS at the end of the year, why not apply those funds to your next real estate endeavor and continue to build on your overall wealth. You could in fact, use the entirety of the $270,000 profit to purchase two like kind properties and potentially double your number of investment properties in your portfolio. You could purchase a duplex or a triplex in some markets and increase your rental income stream. There truly are copious amounts of possibilities when there is a well thought out strategy in place. It is also worth mentioning that it is not a requirement when participating in a 1031 exchange to re invest all of the proceeds. In this hypothetical situation, one could still pull $20,000 or $30,000 for other investments, personal use, to pay down debt or take a vacation, etc. In another example, a married couple decides to relocate from their lake front property now that their family has grown up and relocated themselves. They decide to sell their property that has been used for short term rentals for years now, for $1,300,000. After paying off the remainder of their mortgage which is around $300,000, they stand to make north of $800,000 from the proceeds of this investment property. Assuming that income would be taxed around 15%, they would soon to be owing the IRS $120,000. They could in turn, cash themselves out for $50,000 to purchase their next primary residence, and exchange the remaining, $750,000 to purchase a multi family income producing property in Texas where their anticipated annual income of those properties could be north of $60,000 in the right circumstances.
To learn more about the 1031 Exchange process, send me an email right here, and I would be glad to share with you all of the information I have regarding the matter, and I can put you in touch with a qualified intermediary who is a professional in the space of 1031 exchanges.
Josh Ledesma Real Estate Blog 