BRRRR?

Real estate investment bloggers and founders of investor networking site Bigger Pockets, Joshua Dorkin and Brandon Turney, created an acronym to describe a powerful business model for the long-term holding investor.

It’s called the “BRRRR” Strategy (as in, I’m shivering cold).

B- Buy

R- Rehab

R- Rent

R- Refinance

R- Repeat

BRRRR is all about buying real estate investments with the long-term goal of holding, fixing the property up, and getting a renter in it. When the property appreciates, you can access the additional dollars of equity to then go buy a new real estate property. When you use this strategy, you leverage yourself toward becoming a very serious real estate investor very quickly while using the 1031 exchange to defer capital gains tax. You can adapt that model very easily into a buy, rehab, rent, refinance, repeat, and then another r for “relax” for a period of time. This allows you to demonstrate your intent to hold that property. You could also add “reevaluate” to decide whether it’s time to sell the original property. This valuable strategy will help keep you on track with the 1031 exchange and help you keep in mind what you have to do in order to use this program lawfully.

What’s most important is that you begin the process with your accountants and other team members knowing that this is a property that you will be holding, not one that you are “flipping” and reselling. Once you’ve established your intent with the property, you can use the 1031 exchange to eliminate due taxes and transfer them to your next investment.

Can You Take Money Out Of A 1031 Exchange?

If you’re willing to incur some tax, you may purchase less than your net sale. And you may take cash out without jeopardizing the entirety of your 1031 exchange. But if you want to purchase less than what you sold or want to take some cash out, then the IRS will call that “booty” and tax it as profit. The IRS is willing to leave its tax in the game, but they are expecting you to leave your profit in the game as well. So, there’s no taking your “booty” and buying an island without paying at least some tax. And it is taxable because their interpretation is that the first dollar you take out is going to be a dollar of profit.

Free Webinar: 1031 Exchange Investor Essentials

Register here for this October 18th webinar from 5:30 p.m. to 6:30 p.m. ET.

Not sure what to make of all the buzz about 1031 Exchanges? Let me introduce you to this powerful section of the IRS tax code and walk you through its legality and benefits.

Confused by what you have heard about all the requirements? Intimidated by the deadlines? I’ll help eliminate the fear factor with clear and concise information.

Think this option doesn’t apply to you? I’ll provide 1031 exchange options for when the replacement property is identified first or requires renovation.

Whether you have 50 properties or are new to real estate investing, I encourage you to join me for one hour and learn how 1031 Exchanges can accelerate your portfolio growth.

Register here for this October 18th webinar from 5:30 p.m. to 6:30 p.m. ET.

Can You Exchange a Hotel for a Restaurant with a 1031?

A 1031 exchange is a useful way for investors to defer capital gains taxes while reinvesting their proceeds. In order to carry out the exchange in a proper manner you will need to make sure that your replacement property is of “like kind.” Seeing that a 1031 exchange is also called a “Like-Kind Exchange,” it is reasonable to assume that it is very important to ensure that the new property is of like kind. But what does like kind mean in regard to a 1031?

Like kind essentially means that the replacement property must be used for investment purposes only. Primary residences do not qualify. A replacement property can be any type of real estate as long as it is being used for investment purposes. You can exchange a hotel for a restaurant. A warehouse for a farm. Even oil and gas interests for a single-family home.

Why do Fix and Flips Not Get Along With 1031 Exchanges?

I have said it before, and I will say it again; a 1031 is all about the intent. A 1031 exchange is designed to help investors exchange investment real estate while deferring capital gains tax. To qualify as investment real estate a property must be held for productive use. Productive use is a rather broad phrase that essentially means “The land must be doing something.” It could be used for renting, appreciation, agriculture, etc. It just has to be clear that the intent of the land is for productive use.

A fix and flip is a property that is bought to be sold. There is no intent to hold the property for productive use. As such it will not qualify for a 1031 until it can be proven that the real estate in question is for more than just selling. If you really want to carry out a 1031, your local tax guru might have a few ideas on how you can demonstrate your intent to hold your property for investment.

Does a Vacation Home Qualify for a 1031 Exchange?

A 1031 exchange is all about intent. In order for real estate to qualify for a 1031 exchange, the property must clearly be for investment purposes. A multifamily home that is being rented out is a clear example of a piece of real estate that is being used for investment purposes. A vacation home that is rented out for people to stay in is another example of an investment property.

But one of the reasons to own a vacation rental is to use it yourself. And family members will certainly be asking you to let them stay for free. Free stays from family members and personal trips to the lake house count as “personal use.” So how do you know when you’ve crossed a line and turned your investment property into a second home. Luckily, the IRS has a clarifying “Safe Harbor” rules. A vacation home qualifies for a 1031 if;

(a) The dwelling unit is owned by the taxpayer for at least 24 months immediately before the exchange (the “qualifying use period”)

(b)  Within the qualifying use period, in each of the two 12-month periods immediately preceding the exchange,

(c)  The taxpayer rents the dwelling unit to another person or persons at a fair rental for 14 days or more, and

(d) The period of the taxpayer’s personal use of the dwelling unit does not exceed the greater of 14 days or 10 percent of the number of days during the 12-month period that the dwelling unit is rented at a fair rental. For this purpose, the first 12-month period immediately preceding the exchange ends on the day before the exchange takes place (and begins 12 months prior to that day) and the second 12-month period ends on the day before the first 12-month period begins (and begins 12 months prior to that day).

It is always a good idea to check with your local tax expert to ensure that your property meets all the requirements listed above

Can You Exchange One Property into Multiple Properties With a 1031 Exchange?

One of the most powerful aspects of a 1031 is its ability to truly broaden your investing horizons. Rather than simply exchanging one property for another, investors have the potential to diversify and place their tax deferred proceeds into multiple investment properties. Turning one piece of real estate into two or three is not a bad way to start building an investing empire.

It is also good to remember that “like kind” in a 1031 does not mean that the properties you are exchanging have to be exactly the same. You can exchange a residential apartment complex for an industrial warehouse. You are limited only by your imagination and desire to diversify. Though, it is also wise to see what your local tax expert advises.

Which Florida Cities Are Hot Right Now?

It has been a good year for Florida. With northern buyers drawn to Florida by the 2018 tax plan, the state is booming at the moment. But which cities in the Sunshine State are especially growing right now?

1.   Sarasota

Home to the fastest growing luxury housing market in the United States. Prices in Sarasota’s luxury housing market grew by 21% in June when compared to one year ago. Half of all luxury houses in the city sold within 157 days.

2.   Naples

Home sales in the city of Naples rose 11 percent year over year in January. A month in which national sales dropped over four percent. Fun fact: the Naples zip code of 34102 is ranked as one of the fifteenth richest zip codes in the United States.

3.   Fort Lauderdale

According to Forbes, Fort Lauderdale has become a city of choice for savvy investors of commercial and residential real estate. The city is currently in the midst of a building boom. Some 7,000 residential units were under construction or approved in 2017.

Something Exciting is Happening in Chicago’s Real Estate Market

Chicago’s luxury housing market seems to be doing quite well for itself these days. Riding off the longest bull market in U.S. history, a multi-million dollar property is being sold once every five days in the Chicago metro area.

Not all tiers of Chicago’s housing markets are experiencing the same boom that the top tier of the market is. But this has not had an effect on the luxury market. In the month of August alone over 51 houses and condos in the windy city sold for at least $4 Million. More than were sold the previous two years. 6 sales for homes over $10 million have taken place this year alone.

What Are the 2 Timelines in a 1031 Exchange?

There is a very specific timeline that the IRS lays out for your exchange calendar that must be followed to the letter. From the day that you close the sale of your investment property, it is important to know that there are two periods for you to respect: the identification period and the exchange period.

1.   45-Day Identification Period

The 45-day identification period is the time in which an exchanger must either identify potential replacement properties or take title to their new property and finish the process. However, at the minimum, one must have a list that shows the properties that are being considered for purchase. On day 46, the list is finalized and cannot be changed. Whatever is on that list is there for the remainder of the exchange period. Make every effort not only to get into contract during the 45-day period but also to close and purchase a replacement property or properties.

2.   180-Day Exchange Period

Concurrently, with the 45-day period is the total exchange period of 180 days. From the day that you close the sale of your property, you have 180 days to complete the process. The purchase has to be one or more of the properties that are on your 45-day list. If you start your exchange in such a way that you’re going to run up against your tax return deadline prior to the 180 days, file an extension and you’ll still get the full 180 days for your exchange period.

While these strict timelines might seem intimidating, there is no need to worry. There is no penalty for starting and not finishing a 1031 exchange. If you start a 1031 exchange but do not complete it because of a 45-day issue, or any other reason, simply do not report the exchange on the next tax return. Let the time periods motivate, rather than intimidate you.