Two Big Challenges of 1031 Exchanges
Every year, hundreds of thousands of investors subject themselves to the anxiety that comes with the challenge of completing a 1031 exchange. That anxiety, however, is avoidable. In this post, I’ll lay out the two major exchange challenges investors often face, and how to overcome them. The key to avoiding anxiety is to plan ahead, before you sell a property.
How to Determine Cash Flow
While talking about a real estate investment the other day, I fielded the question: “What is cash flow in real estate?” It's a great question. No doubt, one of the hallmarks of investing in real estate is the ability to generate current cash flow. When I began explaining the concept, it dawned on me that there are several definitions for the term in real estate, depending on who is asking and answering the question. So in this post, I’ll dig into a few ways it can be calculated, and how real estate investors use it to evaluate potential real estate investments.
What is a Cap Rate?
In commercial real estate, a property’s capitalization rate, or "cap rate" is used by investors to understand the relationship between the price or value of the property and the net operating income it produces. It's a mere rule of thumb used by investors to compare different real estate investments, much the same way the price/earning (P/E) ratio is used to compare stocks.
1031 Exchange into Delaware Statutory Trust, 3 Easy Steps
Delaware Statutory Trusts (DSTs) are a popular option for many 1031 exchange investors. Through DST “Replacement Property Interests,” or RPIs, investors have the opportunity to co-invest in institutional-quality properties that may otherwise be out of reach. The appeal of RPIs is that they offer the flexibility to fit almost any exchange. Investing in one is a quick and simple process, and investors are forever free from any landlord duties.
Non-Real Estate 1031 Exchanges
Did you know that 1031 exchanges aren’t just for real estate? In fact, you can exchange much more than you might think. For example, a farmer could exchange a herd of cows for another type of livestock, and in doing so defer capital gains tax. How is this possible?
What is a Cash on Cash Return in Real Estate?
“Cash on Cash” is a ratio often used to evaluate cash flow from income-producing assets. It's typically used as a quick litmus test to determine if a given real estate investment qualifies for further review and analysis.
What is 1031 Exchange Boot?
Although not specifically defined (or even mentioned in IRC Section 1031), the term “Boot” is a vernacular term and used frequently. It refers to the fair market value of cash, benefits, or other non “like-kind” property that a taxpayer receives in an exchange, and which is subject to capital gains tax. The determination of 1031 exchange boot can be tricky, because it can include any item in an exchange that is not considered like-kind as defined under IRC Section 1031.
What is a 1031 Exchange?
There’s been a lot of buzz about 1031 exchanges lately, but they are nothing new. Savvy real estate investors have been using them to defer taxes since 1921. It’s a common, fairly straightforward strategy that allows real estate investors to sell (or as the IRS calls it, “relinquish”) an investment property, while deferring capital gains taxes on the profit by reinvesting the proceeds in a “replacement” investment property. It’s arguably one of the most effective ways to build wealth, and a tool that every real estate investor should know about.
