Don’t Change Your Horse in the Middle of the Race
Dear MSM reader,
Trading up to more lucrative properties tax-free is a powerful wealth-building strategy, but you have to play firmly by the rules. In this issue, tax-busting expert Tom Phelan tells how he helped one investor avoid a potentially costly mistake.
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Editor, Mainstreet Millionaire
Don’t Change Your Horse in the Middle of the Race
By Tom Phelan
Gene Roberts of Marion, OH recently wrote to me with a question about 1031 Exchanges. He said:
"My wife and I currently have a single-family rental that we purchased with a 1031 Exchange. We are looking at exchanging this single-family for a multi-family, as Dave Lindahl has been recommending in ETR. My question: Must the multi-family be titled the same as our single-family home? Or can the multi-family be titled in a trust or LLC and still meet IRS requirements?
"I have been told by a CPA that this is no problem, but would appreciate your comments on whether or not this would meet IRS requirements."
In the world of 1031 Exchanging, there is a saying: You cannot change horses in the middle of the race. Basically, this means that entity changes are not allowed when exchanging from one property to another. And it sounds to me like Gene wants to go from a TIC (Tenant In Common) entity to an LLC (Limited Liability Company) entity.
What someone in Gene’s position should do is a 1031 Exchange in the same legal entity, whether it be Tenants In Common, Joint Tenancy, Limited Partnership, or whatever. After acquiring the property, wait one year (yep, a whole year) before changing entities. One year is suggested because of the one-year "holding period" the IRS likes to see.
In Gene’s case, I would absolutely NOT listen to a CPA or realtor whose experience with 1031 Exchanges is probably limited. Instead, he should check with a professional 1031 Exchange Intermediary. These are qualified individuals, intimately familiar with regulations surrounding 1031 Exchanging, who will give the straight scoop for FREE.
I recommend Starker Services or Asset Preservations, both National Intermediaries with lots of experience that are bonded and insured. You can find their contact information by typing the company names into Google. Both are headquartered in California.
[Ed. Note: Tom Phelan is a leading real estate tax-loophole expert. He travels across the country, educating CPAs, realtors, lawyers, mortgage brokers, and individuals about the benefits of 1031 Exchanges and Self-Directed IRAs. Tom is also the co-author of ETR’s 1031 Exchange Course.]
You Don’t Have to Be "Trapped" in a Bubble Market.
Many real estate guides start out by telling you to invest in or near your own town. They reasoned that you’ll be familiar with the different neighborhoods, making it easier for you to manage the properties.
Sounds like pretty good advice…in theory. But you can waste a lot of time, energy, and enthusiasm trying to make things work in a bubble market.
The following criteria will help you determine if your local market is, in fact, the ideal place for you to invest.
Check the average price of homes in the city. How do prices compare to other cities?
Compare the average price of homes to the average rent. This is a critical ratio for investors interested in cash flow. If homes are selling at 15 or more times annual rent … it’s going to be difficult to see cash flow.
Look into the affordability of homes. In an affordable market, the average home price is no more than four times the average household’s income.
How is the economy? Job and population growth are essential to continued home appreciation.
Every local real estate market in the world is different (and constantly changing). Understanding which market is realistic for your goals will relieve you of frustration, and you’ll find profits are easier to come by.
[Ed Note: Mainstreet Millionaire is a program designed to take you from your first deal through your step-by-step system on how to purchase cash-flow properties below market value and use creative financing techniques to close the deals with the least amount of expense, time, and risk.]
