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.

Dave Foster Guest Interview On The Real Estate Nerds Podcast

          

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Renting to Yourself and 1031s

We all would like to have our cake and eat it too. For a real estate investor that might look like having a rental property and a primary residence all in one. Many folks would love to take advantage of the tax deferral for investment properties found in 1031 exchanges and then use the property as their primary residence.  And the idea of living in the property but still treating it as an investment by “renting to myself” comes up frequently.

Renting to yourself. is a tricky business that can land you in hot water very quickly.  If you simply move in and start paying yourself rent after a 1031 it’s very clear that your intent in purchasing that property was not to buy an investment property but to purchase your primary residence – 1031 disallowed.

You could set up an LLC to rent to yourself, but if that LLC is a disregarded entity (meaning that it doesn’t file its own tax return) the IRS will ignore the entity and say that you are the taxpayer for 1031 purposes. So, you would again be renting from yourself. And the whole intent issue once again rears its head.

If the LLC is a regarded entity with its own tax return and you are more than half member, then you are a related party to the LLC. You might be able to rent to yourself, but you better make it an arm’s length true rental. Collect the rent, declare the rent, etc.

Another issue, however, is that If you do that, then you are generating taxable income for the LLC from yourself.  So you’re paying tax for the privilege of paying yourself rent.  And at that point, you should be asking yourself “why?” Why not simply hold the property with an outside renter for a year or two and then convert you’re your primary residence by moving in. There is no statutory requirement that you keep the property as investment forever.  And there’s actually specific IRS code allowing you to convert a property into your primary residence AFTER demonstrating your intent to hold for investment purposes.

By that time, you would have satisfied your 1031 intent requirements and are simply changing the use. No rent needed at that time.

 

How Much Should You Be Paying for a 1031 Exchange? [New Research!]

Check out Dave’s recent article on the cost of 1031 Exchanges on the Bigger Pockets Blog here.

2 Things You Should Know About a Reverse Exchange

In simple terms, a reverse exchange is a 1031 exchange where the replacement property is purchased before the original investment property is sold. But they aren’t quite as simple as a 1031 exchange. It should be said before anything else, find a qualified intermediary (QI) before beginning the process.

1.   Financing can be a hassle if you are in need of funds for the purchase until you sell. In a reverse, the QI takes title to the new property in the EAT (Exchange Accommodating Title holder). So the loan has to be made to the EAT but guaranteed by you.

2.   The Reverse is relatively expensive because a holding company must be created to hold the replacement property until the exchange is complete.

Because of its complexity, taking some time with your QI to get fully educated on the nuances of the reverse will be well worth your while. It is always wise to check with your tax expert before making any moves towards a 1031.

What’s in it For Me?

If you are thinking of carrying out a 1031 exchange, you might be wondering, “What’s in it for me?” A 1031 has the power to transform your real estate investing strategy. More specifically, a 1031 offers you a chance to defer capital gains taxes and get your proceeds working for you. In order to qualify for a 1031, your intent must to hold the property for investment purposes only. What you will find is that as you hold your property for investing, it will also hopefully be accruing appreciation. With more equity to toy around with you are on your way to leveraging your first investment property into something better.

Once you are ready to exchange your first property, it is time to get imaginative. A 1031 gives you immense freedom when finding a replacement property. While primary residences, personal property, and inventory (fix and flips) are not allowed with a 1031, all other types of investment real estate are on the table. You can even leverage your first property into multiple replacement properties. A 1031 offers you a real chance to snowball wealth and build your fortune.

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.