The Improvement Tax Exchange in a Nutshell

Can I do an improvement tax exchange with a property I’m building? What must the home’s value be? I’ll cover that and more in today’s overview of this type of tax exchange.  

Some of you have expressed interest in or have had questions about improvement exchanges in
the way of taxes. In light of this fact, today I’ll help you gain a richer understanding of how this
process works.

One such question I’ve received is, “Can I do an exchange while I build a new home?” As
a matter of fact, that’s precisely what these types of exchanges are for. For example, say you
sold a home for $600,000, and you subsequently bought a new home for $450,000. Then, during
the 45-day identification period, you decide that, because you have additional land you can build
on, you’d like to do so. Further, let’s say the additional unit will cost another $100,000, bringing your
purchase total to $550,000.

Unfortunately, you’d still be short of the requirement for an improvement tax exchange. If you’re
selling a home and would like to make this exchange, the replacement property that you
purchase must be of equal or greater value to the one you’re selling. One thing of
note, though: Having two units will amount to $900,000 as long as you close exchange escrow
(not to be confused with traditional escrow) in 180 days.  

As you make your way through the process, the exchange accommodation titleholder will hold
the title while you’re conducting construction improvement on the property and, after that 180-day
window is up, it will close. There doesn’t need to be a certificate of occupancy on the property
nor does it have to be completed; the only stipulation is that its value has risen.

The magic number for the home’s value is $600,000 or more—if you can meet or exceed
this, you can bank on your ability to carry out an improvement tax exchange. Although there’s
a little more intricacy and finesse involved than with a 1031 exchange, this is a totally feasible option
for a range of buyer types, such as someone looking to convert a commercial office building into a
medical office building.

If the prospect of making an improvement tax exchange on property intrigues you or you have further questions related to this, I welcome you to give me a call at 626-643-7090 or email me at I’d be happy to sit down and speak with you!

Get Better Cash Flow With a 1031 Exchange

If you want to increase your monthly cash flow, it’s time to take advantage
of the 1031 Tax Exchange.

Did you know you can get up to 20% more monthly cash flow without spending a penny?
It’s true, and it’s as simple as implementing the 1031 Tax Exchange.

You’ve probably heard of the 1031 Tax Exchange in the past, but now’s the time to truly take to
heart what this strategy can do for you.

Through the 1031 Delayed Tax Exchange, you have 45 days after closing escrow to secure a
replacement property. You’ll also need to close escrow on the replacement property within 180 days
after closing on your home sale.

1031 Tax Exchanges allow you to avoid Capital Gains Tax upon the sale of your property assuming
you meet certain requirements. If you don’t pursue this strategy, there are three tax-related
concerns you’ll need to consider:

1. The State Tax. Depending on how much you make from your home sale, the amount you owe in
State property taxes may increase if you don’t use a 1031 Tax Exchange. To learn more about
what your taxes would look like without a 1031 Exchange, check out this calculator.

2. The Capital Gains Tax. When your sale is subjected to Capital Gains Tax, this means you could
lose a significant percentage of what you earn from your sale.
To learn more, check out this Capital Gains calculator.

3. The depreciation recapture rate. This is the federal tax rate that will be levied on the year that you file the tax return on a property sale without a 1031 exchange. The depreciation recapture amount is based on the cumulative depreciation that you have taken each year that you have owned the property and the rate is at 25%  on the total depreciation that you have expended on your tax returns.  For residential income property including apartment buildings over 5 units, the depreciation is taken over 27.5 years on the improvement value, not on the land.  For commercial properties such as retail, office, and industrial buildings, the depreciation is taken over 39 years. Check out this step-by-step guide to learn how to calculate a recapture rate for a given property.

If you have any other questions or would like more information, feel free to give me a call or send
me an email. I look forward to hearing from you soon.

How Should You Use the Equity in Your Home?

If you have a lot of equity in your home, keep reading. I’ve got some great tips for how you can use it to create even more wealth.

If you have equity in your home and you’re looking for different ways to use it, I’ve got a few
recommendations for you today.

First, you can get a line of credit. Depending on the institution you’re working with, you could
use that line to take out money via arbitrage. You could also invest in stocks, such as the S&P
500 Index, which returns about 9.7% per year historically.

One of the best ways to use your current equity to create more wealth is by investing in
real estate. Nowadays, you can get a great return cash on cash and with appreciation. Since 1980, we’ve
seen roughly 6% appreciation every year. A $500,000 home appreciating conservatively at 5% will gain you
$25,000 a year in value. That return is pretty spectacular on paper.

Finally, for those preparing for retirement, you can use your equity to get a reverse
mortgage. This will allow you to make one large down payment and not have to make a
mortgage payment. You will have to cover yearly property taxes and insurance, but there will be
no monthly payment.

As you can see, there are a ton of different ways to use your equity. If you have any questions for
me about this topic or about anything else related to real estate, don’t hesitate to give me a call
or send me an email. I look forward to hearing from you soon.