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.

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.

2 Ways to Defer Capital Gains Tax in Real Estate Investing

While no one enjoys taxes, we should never avoid payment of any taxes rightfully owed. I enjoy driving on paved roads, going to national parks, and being able to enjoy all the things that my taxes help fund. Nonetheless, there is absolutely no reason to pay taxes you don’t legally owe. It is your right to follow the rules to eliminate unnecessary taxes. Supreme Court Justice Learned Hand once said, “There is nothing sinister in arranging one’s affairs so as to keep taxes as low as possible. Everybody does that, rich and poor and they all do right. Nobody owes a public duty to pay more than the law demands. Taxes are enforced exactions and not voluntary contributions.”

So, what are some ways that you can defer payment of capital gains taxes?

1.   A 1031 Exchange

One way to defer capital gains tax while investing in real estate is to carry out a 1031 exchange. A 1031 gives you the ability to exchange one investment home for another without the burden of capital gains tax. While there are strict requirements all can be easily met.

2.   Qualified Opportunity Zone

Opportunity Zones are new and still very much in a growing process. That being said, if you have always wanted to invest in Guam or Puerto Rico, there has never been a better way. Investments are made through Qualified Opportunity Funds and subject to numerous tax benefits. The island of Puerto Rico is considered a Qualified Opportunity Zone and is essentially a tax-free place to invest. For a map of qualifying areas look here.

While it is easy to get excited over the prospect of deferring tax, always make sure to consult with your local tax expert before making any big decisions.

Why is the Housing Market Heating up?

The housing market is booming in many parts of the country. According to MarketWatch, buyer traffic across the country has been on the rise. But why are buyers scrambling to buy? The impending possibility of rising mortgage rates has many buyers looking to purchase while they can. Low inventory has led to frenzied buying in many areas where affordable housing is scarce. The 2018 tax reform also helped to set up states like Florida as favorable places to relocate. In fact, 6 of the nation’s fastest growing metro areas are in the Sunshine State. With its favorable tax environment and beautiful weather, it is no mystery as to why many are choosing to flee the cold and relocate in Florida.

Relocating Your Real Estate Investing to a Second Tier City

Big gateway cities like New York and Miami are exciting and alluring. But they are also home to expensive and oversaturated markets full of real estate investors from all around the world. Rather than struggle as a little fish in a big pond why not relocate to a smaller secondary city? Secondary markets like Raleigh and Tampa Bay are some of the fastest growing areas in America. With strong job growth and an influx of driven young professionals, these markets are hungry for housing.

A deliberate strategy of relocation of investment portfolios from gateway to second tier cities can be incredibly advantageous. Traditionally, gateway cities and larger urban areas are appreciation rich but cash flow poor areas for investment real estate. When appreciation begins to slow in primary markets it is a good time to seek cash flow in smaller secondary cities. Second tier cities often come with numerous tax advantages of their own and with much less investor competition. The 1031 is the key. Carrying out a like kind exchange from a primary city to a secondary city will give you the power to maximize your real estate investing without worrying about capital gains tax.

Timing is Everything With a 1031 Exchange

When it comes to a 1031 the IRS has a specific and rigid timeline laid out for your exchange. 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 honor — the identification period and the exchange period. From the day you close the sale of your old property you have 45 calendar days to produce a list of potential replacement properties. Forty-five calendar days is all you have — weekends and holidays count. During that period of time, you must either identify potential replacement properties or take the title of a new property and finish the process. At the very least you need a clear and easy to understand list that shows the properties you are considering purchasing. It’s important to remember that on day 46 your 45 day list cannot be changed. You are stuck with what is on that list for the remainder of the exchange period.

Alongside 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 replacement property that you purchase has to be on or more of the properties that are on your 45 day list. The 180 day exchange calendar does have one little caveat that you need to pay attention to; it’s actually not always 180 days. The statute reads that “You have 180 days or until the date of your next required tax filing.” If you find your tax filing date rapidly approaching, filling for an extension with IRS will get you back on track. The 45 day list can be daunting and along with it there are some additional identification requirements that can complicate it, so make sure you are working with a good QI.

How to Swap a House for an Apartment Complex

A 1031 link-kind exchange is a powerful tool. The process allows you to defer capital gains taxes on investment real-estate while reinvesting your money into new real-estate. But just because you’re selling a rental house doesn’t mean that you need to exchange it for a rental house.

“Like-kind” refers more to its use than its type. Any type of investment real-estate can be exchanged for any other kind of real-estate used for investment. Real-estate located in the United States can only be exchanged for real-estate in the United States and a select few U.S. territories. Real-estate outside the United States can be exchanged for other investment real-estate outside of the U.S.

If you meet those requirements you have an immense amount of freedom when it comes to choosing a replacement property. Your like-kind property can be located in any state or city whether you currently reside there or not. If you are getting bored managing a vacation rental you could even make the switch from residential to commercial and choose a business warehouse as a replacement property. With a 1031 and some creativity you have an immense amount of power to shape your portfolio for your benefit.

Choosing the Right Qualified Intermediary For a 1031 Exchange

If you are planning on going through with a 1031 exchange you are going to need a qualified intermediary to help carry out your like-kind exchange. But what makes a qualified intermediary qualified?

The law is only specific in that it must be an unrelated third party. Someone that you have no ties to. This disqualifies anyone that you have a familial or business relationship with. Your realtor, hairdresser, and accountant cannot be your 1031 exchange accommodator. But just because someone is not disqualified from being your intermediary does not mean that they necessarily qualify. This is why it is important to vet intermediaries that you might be looking to hire. You should ensure that they have the proper experience and demonstrable results to show.

It is also vital that you find a qualified intermediary before you begin the exchange process. If you close the sale of your property without an intermediary in place, three things will prevent you from doing an exchange. First, the QI was not involved per the IRS code. Second, the exchange was not documented properly on the closing documents and statements. Third, you received the money. The IRS will not allow you to have control of your money when you are doing a 1031 exchange. Whether you have the actual money or whether the money is sitting in your attorney’s escrow account or your title company’s account, waiting for your direction, it isn’t allowed.

Experiences, references, and results are everything, investigate thoroughly to ensure that you get the best possible service from your QI.

Dreaming Big with Your Real-Estate Investing

It is easy to feel trapped if you have been doing something one way for a long time. Real-estate investing is no different. The prospect of moving to a new city or investing in a different kind of real-estate might seem beyond your reach. But if you utilize the proper tools your real-estate investing is limited only by your imagination.

One such tool is a 1031 exchange. A 1031 exchange lets you sell investment real-estate and defer capital gains taxes, giving you the opportunity to use your tax dollars for your benefit. If you are looking to move from one type of real-estate to another that is very much an option. And the best part is that the property that you exchange for can be located anywhere in the country.  A 1031 exchange gives you the opportunity to maximize your investing and broaden your portfolio.

Multi-Member LLCs and 1031s?

When it comes to 1031s, it is all about whose name is on the original tax return. This goes for LLCs as well as individuals. Multi-member LLCs follow the same rules as everyone else. The name on the original tax return must be the name on the title of the replacement property. If an LLC is multi-member, they probably file taxes as a partnership. Each LLC can sell the property it owns and do a 1031 to buy a replacement property. If you find a replacement property that is big enough, then each LLC could sell and buy a % of the larger replacement as a tenant in common.

Example – each LLC owns a property that is worth $500,000. They could both sell and 1031 each into a 50% tenant in common interest of a property worth $1 million.

Once the LLCs have completed their exchanges, they could simply remain as tenants in common. Or could work with their accountants to dissolve one or both and leave the property in one LLC with the same membership interest allocation.