Here are the core skills you need to succeed in the real estate business:

Screening -  You must be able to find potentially profitable properties. This is probably the toughest aspect of real estate investment. Finding a lucrative asset and a willing seller is the first job that you need to accomplish as an investor. If you need help, select an experienced real estate agent to help locate investment quality properties. Once you have narrowed down on a few properties, half the battle is already won.

Analysis  – This is crucial. You must know beforehand what you are actually getting into. Thoroughly inspect the target property. Use an inspector, engineer and/or contractor to help identify all structural and service system defects (i.e., foundation, roof, windows, plumbing, electrical, septic, gas, etc.) prior making any purchase offer. Calculate the cost to repair these defects to a condition suitable for rapid resale. And then, most importantly, calculate the time it will take to make those repairs and resell the property. Then add up all your renovation costs, carrying costs and profit expectation and subtract that sum from your etimated market price at resale. The target property is not worth more (to you) than this value.

Negotiating - Having found an apparently lucrative property, the next step is to convince the homeowner to sell it to you. You will likely have competition when seeking to buy a lucrative property.  You must understand the homeowner’s reasons for selling and craft your offer to address these reasons. Your variables will be price, financing terms, inspection terms and closing date. Also, it is far better to use an experienced real estate agent as an intermediary during negotiations in order to keep negotiations from becoming personal.

The opportunities abound for the determined real estate investor. However, real estate has a steep learning curve, and there will be bad times as well. Experienced investors will make money even in the worst market slumps.

1031 Guide A 1031 exchange allows you to defer the payment of capital gains taxes associated with real estate transactions. By selling one property and buying a higher-priced property, you can also get additional depreciation deductions, which can act to increase your after-tax income. Only a few simple rules must be followed in order to qualify a real estate transaction as a 1031 exchange. First, only property held for business or investment purposes can be used in a 1031 exchange, and both properties in the transaction must be of "like kind". Like kind property is real estate or other tangible property that is similar in nature or classification. It can be frustrating wading through online information on the 1031 tax exchange and how it can benefit you. This website will help you become familiar with several real estate, tax-deferred exchanges. In this way, you can be better educated when contacting a qualified intermediary for a 1031 exchange. You should ALWAYS consult your tax accountant and tax attorney before initiating a 1031 exchange. Call Tom Sheldon of the SheldonTeam.com to get started.

FAQ - Frequently Asked Questions

What are the tax advantages in a 1031 exchange?
You can defer the payment of capital gains taxes associated with real estate transactions. By selling one property and buying a higher-priced property, you can also get additional depreciation deductions, which can act to increase your after-tax income. In addition, you can eliminate paying taxes on the recapture of depreciation you've taken on the property.

Can I use my primary residence or second home in for a 1031 exchange?
No, only real estate property held for business or investment purposes can be used in a 1031 exchange, and both properties in the transaction must be of "like kind".

What is meant by "like-kind" property in a 1031 exchange?
Like kind property is real estate or other tangible property that is similar in nature, characteristics, or SIC classification in a 1031 exchange. Whether two properties are of "like kind" can also be dependent on state law.

Can I sell or buy multiple properties in a 1031 exchange?
Yes, you can exchange multiple smaller properties for a larger one and vice versa. The key is always trade up in value in order to maximize the amount of capital gains taxes that are deferred.

Are their time restrictions on a 1031 exchange transaction?
Yes, there is a 180-day time span in which the 1031 exchange must take place. During this period there is also a 45-day period where the exchanger must identify which replacement property will be purchased.

How can I defer the maximum amount of capital gains tax in a 1031 exchange?
The main rule is that the replacement property being purchased must be equal or greater in value to the relinquished property being sold. The net effect must be that the entire net proceeds from the sale must be used to purchase the replacement property.

Does one receive cost basis for the replacement property?
No, cost basis from the relinquished property is carried forward to the replacement property in a 1031 exchange. This is one drawback and is often overlooked or misunderstood.

What is a Qualified Intermediary and must I use one in a 1031 exchange?
The Qualified Intermediary (QI), also called an accomodator, is a third-party that facilitates the transaction and is required by the IRS to qualify a 1031 tax exchange. The IRS does not allow your accountant, attorney, or escrow company to act as the QI.

Can I do multiple 1031 exchanges and avoid paying taxes altogether?
Yes, by continuing to sell and buy like-kind properties and following 1031 exchange rules, your estate when you die can avoid paying capital gains taxes.