Realized Blog

Mention “individual retirement account,” and what might come to mind is “tax-deferred contributions.” You add cash, or cash equivalents, to your individual retirement account (IRA), to build value over time. An account administrator uses those tax-deferred contributions to buy stocks, bonds, funds, or other securities. When you retire, you have access both to the original contributions, and investment returns.

Maybe you’re ready to do some estate planning and are figuring out what to do with that rental cottage in the Berkshire mountains, or the small office property you own in Texas. You might be thinking of leaving that property to your family or donating it to your alma mater or favorite charity.

Once considered an outlier when it came to investments, alternative investments, or alternatives, are becoming more mainstream. How mainstream? According to Willis Towers Watson’s (NASDAQ: WLTW) Global Alternatives Survey, total global alternative assets under management (AUM) stood at almost $6.5 trillion in 2016. Investors are finding that alternatives may be effective in balancing portfolios, generating higher rates of return and boosting the diversity of their holdings compared to a portfolio consisting only of “traditional” assets such as stocks and bonds. But alternatives do come with higher risks.

According to the National Association of Realtors (NAR), pending home sales fell in May 2017. This could seem to be dismal news on the surface. But, according to the article, sales fell, not due to lack of demand, but because of too much demand, combined with a shrinking housing supply. This is nearly a 180-degree flip from a little less than a decade ago. At that time, home sales suffered because of too much supply, little demand, and frozen capital.

Single Tenant Net Lease (STNL) properties are a popular option, particularly for investors doing a 1031 exchange who no longer want the day-to-day burden of being a landlord. STNL properties can be great investments, but they aren’t without risk.

You might already be familiar with the 1031 exchange rules. Thanks to the Internal Revenue Code (IRC) Section 1031, you can exchange proceeds from your investment real estate property sale into a like-kind property, within a certain time frame. Thanks to the exchange, you might be able to avoid a tax hit on the profits.

Realized is carefully monitoring the discussions in Washington concerning tax reform and receives regular updates from trade group lobbyists. Among the topics discussed is the elimination of IRC §1031 “like-kind” exchanges. Legislators in favor of doing away with 1031 exchanges often cite a 2014 Joint Committee on Taxation Study that estimates this will increase Federal tax revenues by $40.6 billion over ten years.

Let’s take a hypothetical situation.

Let’s say you own a rental house, small apartment building or other investment property, and you’re interested in selling it. Specifically, you’re interested in conducting a 1031 Exchange into another asset. However, after chatting with your financial advisor and/or business manager, and/or accountant, you learn that you might not qualify for financing on a replacement property.

Part 2 in the Realized Series "2017 Tax Reform Impact on Real Estate"

It’s no secret that President Donald Trump and the Republican-controlled Congress have made tax reform a huge item on their agendas. Though the rhetoric is plentiful, what has been released so far is a one-page reform proposal from the Trump Administration, and the House of Representative’s tax reform proposal, A Better Way Forward on Tax Reform which was issued in 2016.

A recurring theme in our writings is managing risk in real estate investing. While most investors understand that debt can be a powerful tool to enhance returns, it is a “double-edge sword” that may increase the risk profile of an investment. However, a lesser understood risk of mortgage financing is its potential to increase losses beyond the amount of equity invested.