Yesterday I did a post on real estate timing and avoiding taxes and I promised to follow it up today with a way to pay ZERO capital gains taxes on your real estate investing.
The point of real estate timing is to buy low when a market is down and then sell high once the market has climbed back up again. We know which markets to do this in from the real estate timing market momentum charts at REMarketStats. Once you have purchased in a particular market you want to watch the charts to know when to sell. At the same time you want to be watching the market momentum charts in other real estate markets to identify the next markets you want to invest in. Once you sell your property from the current market you move to the next market where you can buy low and then sell high again.
The only catch with this is that normally you would have to pay capital gains tax each time you sell. It would be long term capital gains but it's still a big chunk of your profits getting eaten up by taxes. That's less profits you have available to put into the next deals. We want to grow our wealth in real estate and we do this buy increasing the number of deals we can do. If we are paying taxes on these deals each time we sell it means we have less money available to buy more deals.
Our goal isn't to just buy one property at a time. It's to use the profits generated from the last deal to buy more than one deal the next time. What I mean by this is, let's say you use the real estate timing charts to pick your first market to buy and you purchase 1 real estate investment. Once it comes time to sell you are ready to move onto another market. You can use the profits from that sale to buy 2 investment properties in the next market. Once those properties are ready to sell and you move on to the next market after that you can take the profits from those 2 properties and buy 4. See how this grows exponentially? Just starting with one real estate investment is enough to grow your wealth into many, many properties. Sure it takes time but the payoff is well worth it.
The only problem here is that if you are paying capital gains tax each time you sell it's that much less money you have available to put into the next properties. So how do you avoid captial gains? 1031 exchanges! This is a perfect legal tax deferred exchange that allows you to take the profits derived from one real estate transaction and move them into another without paying any tax at all! Think about it, let's say you make a $75,000 profit off your first real estate investment where you used real estate timing. If you had to pay taxes on that it would be a big chunk of your profits, like tens of thousands of dollars. The taxes alone would be almost enough for a down payment on another property!
If you do a 1031 tax deferred exchange you don't have to pay any of that tax and can move it into the next properties. Sounds too good to be true? It's not. This is a legal device set up by the US Government and recognized by the IRS.
There is one small caveat though, 1031 exchanges are tax deferred exchanges meaning that eventually the IRS would want their money. Except there are two great solutions even for this so that you NEVER have to pay them back. I'll talk about these tomorrow.
No comments:
Post a Comment