Back in the good old days, when the real estate market was white hot, there were many ways in which savvy investors sought to turn a minimal real property investment into quick and ready cash.
Now that the market is coming back (at least I hope its coming back), I fear a great many of these little tricks will be lost to the ages. However, I think a few will survive this long and dark downturn.
One of my favorites (and one that I would bet my entire house on that wont survive) was a trick a lot of real estate professionals used to perform.
Say you know of a new town home development being built in a popular area of town. What the investor would do is to try and be one of the first, if not the first, person to purchase in that development. Assuming it took 30 days to settle on the property (and within a month or two from the contract date, at least the first or second row of townhomes would be completed), the investor would settle on the property at the low opening price, the market being what it was, the next row of houses would be offered for at least a 50 to 75 percent mark-up. Thus, the initial purchaser could sell their first or second townhome, without even having to move in or improve the property in any way at a 40 to 60 percent profit. Not bad.
Another trick (which has long been outlawed, but you still have to look out for it if youre a purchaser) is to buy a property in a slightly run-down area of town. Slap on some paint, put down some sod and throw up some new fixtures and curtains and then sell the place for at least twice what you bought it for.
This happened a lot in the Baltimore City, so much so that the city and state legislatures banned the practice outright. Now you have to hold a property for a certain period of time and actually have pictoral evidence, as well as receipts and such to prove the improvements you made to the property warrant the higher asking price.
One strategy will never go away. Thats a 1031 tax deferred exchange, or, what insiders like to call a Starker Exchange. A 1031 like-kind exchange allows the exchange of investment or business property for other investment or business purposes. Any rental or investment property in the United Statesis eligible for a 1031 exchange. An even better bonus is that real property is not the only property that qualifies for a 1031. You can exchange any type of equipment, cars, trucks, anything thats used during the regular course of business. That can be pretty cool.
The purpose for a 1031 is to defer the capital gains tax on the sale of such property. Now, that might not mean very much, given how far values of just about anything haqs fallen. However, in the past, and hopefully in the future, this was, and will be, a very important method of saving some money.
Not everything is so cut and dry, especially when it comes to the kind folks at the Internal Revenue Service. Thus, there are a few requirements for a 1031 exchange.
When you sell your property, the replacement property must be equal to, or greater than, the sale price and existing debt of the property being sold and all the equity from the property youre selling must go into requiring the replacement property. Additionally, you, as the exchanger, can never have control or dominion of the proceeds from the first sale. You have to obtain an escrow agent to hold the money while you search for the replacement property. The cost for this service is usually minimal (heck, it could be a few thousand dollars, and you would still save a ton from the charge of the capital gains).
If those conditions are satisfied, you must identify the replacement property within 45 days of selling your property and you must close on that property within 180 days from the closing of the first sale or the due date for the tax return for the year of sale.
There are a number of benefits to a 1031 like-kind exchange; however, they can be tricky little deals to set up. So, if youre looking to engage in any of the above-mentioned exotic deals, best get the help of a professional.
Christopher L. Markham is a general practice attorney based in Frederick. He can be reached at firstname.lastname@example.org.