1031 Exchanges are another Tax benefit to investors:
In 1979 T.J. Starker was a property owner with timber. He sold his property to Crown Zellerbach. They are a large paper manufacturer. This sale spurred into a litigation suit with the IRS. The results of this case changed the IRS rules in 1984. They officially came out with the regulations in 1991. This section of law is known as 1031.
This allows a investor who owns investment property to sell it but if the intent is to buy another investment property of equal or greater value then, the investor can defer paying the capital gains tax on the property. This is done by following the rules of the 1031 tax code of the IRS.
An investor would employ a 1031 exchange accommodating company to assist in this process to make sure the strict rules are followed. The basics are, the new properties closing must be complete within 180 days of the initial closing of the first investment property that was sold.
This tax benefit can ease the burden of an investor when he or she is working to sell one property and then keep building their portfolio to larger priced investments.
Eventually the investor will have to pay all of the accumulated deferred taxes unless they roll it all into personal property or another form of tax break.
We also discussed how investors really can effect a particular real estate market. This is explained in an article from cnbc:
Investors can effect substantial changes in real estate markets:
The Phoenix housing market was not only the poster child for a reckless, investor-driven housing crash, it was also the same for a more calculated, investor-driven recovery.
Rampant foreclosures slashed home prices in half, but investor demand for those distressed properties sent them right back up again.
By the start of 2014, investors had essentially priced themselves out of Phoenix, and so they moved on. Median prices rose just about 5 percent through 2014, from $200,000 to $210,990, and sales fell, according to Mike Orr, real estate analyst with the W.P. Carey School of Business at Arizona State University.
“Prices in the Phoenix-area housing market remained relatively flat in 2014, when you take into account the general level of inflation,” Orr wrote in a recent report. “When you look at the change in the mix of sales—with more expensive luxury homes being sold—there is not much real upward price momentum.”
The fall in sales masked the fact that supply in Phoenix was getting ever tighter. That tight supply kept prices from falling. Now, investors may be returning to the market again, which could overwhelm the current supply and push prices significantly higher again, according to Orr.
They won’t find the same landscape, however. Foreclosures are significantly lower than they were during the crash and even below long-term averages for the area. Investors are now buying no distressed homes. They accounted for 16 percent of November 2014 buyers, the highest level since last May.
“While investor purchases are still below the peak levels we saw in the Phoenix area after the housing crash, the levels have started to recover over the last four months,” Orr wrote. “However, we may see fewer international buyers in the market now because of the recent dramatic rise in the value of the dollar against most foreign currencies.”
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