Opportunity Costs: The unexpected costs of property ownership!
You've done quite well with your property...perhaps now is the time to cash in your midsize property for a larger one. Holding on to a property can actually limit your ability to go after a bigger property.
The occupancy is high, the debt service is low, maintenance is stable...did you know there's an opportunity costs associated with owning an apartment property?
There’s a phenomenal tax incentive available in a 1031 Exchange, which allows you to take the gain from the sale of a property and roll it over, tax-deferred, into another property.
When you sell the property, the original deferred gain, plus any additional gain since the purchase of the replacement, is subject to tax. Unless, that is, you opt to roll-over that gain into another like-kind property.
One way to avoid premature receipt of cash or other proceeds is to use a qualified intermediary or other exchange facilitator to hold those proceeds until the exchange is complete. Be careful! You, nor anyone who has worked for you (attorney, broker, etc) in these capacities (for the past 3 years), can act as your facilitator!
“Whenever you sell business or investment property and you have a gain, you generally have to pay tax on the gain at the time of sale. IRC Section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange. Gain deferred in a like-kind exchange under IRC Section 1031 is tax-deferred, but it is not tax-free." (Source: IRS.gov FS-2008-18, February 2008)
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If you think the price is fair enough, you may pay it in full price and negotiate for a lower interest or ask for a smaller down payment. Try to maximize the opportunity so that you would have a great deal of your money.
ReplyDeleteNicely written article Andy. One small clarification is probably in order. In the last paragraph you state "if you reinvest the proceeds in similar property". In actuality any real estate can be exchanged for any other real estate as long as both are held for investment. Therefore, you can exchange an office building for a single family home or a piece of raw land. The term "like Kind" is very broad. Good job.
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