This article is meant to be an introduction on the topic of performing tax-deferred exchanges. There are a number of legal hoops that the IRS makes you jump through to complete a tax-deferred exchange, but they are actually not that complicated once you study up on them a bit.

A tax deferred exchange allows us to sell a piece of investment (i.e. rental), trade or business property, buy a new property with the gain or profit from the sale, and not owe taxes on the sale immediately. If you eventually sell the new piece of property, you would owe taxes at that time. Generally, all gains and losses on sales of real estate are taxable, but an exception lies where the property sold is traded or exchanged for “like-kind” property. The new property is seen as a continuation of the original investment, so taxes are not due at the time of the sale.

Many people view tax deferred exchanges as being for huge corporations, or only for professional investors. I believe that everyone should take advantage of these where they can. Strategy — purchase a rental home below market value, rent it for a year, sell it, and buy two rental properties with your gain. Note that if you do this too many times, the IRS may take the view that you are not a long term investor, and disallow such exchanges. When you get ready to do a tax-deferred exchange, you will need the services of a qualified CPA or Attorney. This is a basic introduction only, and you should always get professional advice from someone who has all the details on your deal, since so much liability is at stake. In my course I list the company that I use for these real estate exchanges. They are a national company and can help you out wherever you are in the country. I have used them for several deferred exchanges, and they have been an excellent resource and extremely competent.

Let’s look at how one of these deals would work. Assume that you own a rental property that has gone up in value. You’d like to sell this property and then reinvest the proceeds into some other rental real estate. You can avoid the tax bill if you can find suitable property to exchange for. The difficulty of the tax deferred exchange is that the property you are going to purchase must be identified within a certain amount of time, and it must be closed within a certain amount of time after it is identified. Unfortunately, no extensions are possible.
Identifying Property
You must identify property in a written document signed by you, and delivered to the party assisting you with the exchange (cannot be related to you!) on or before 45 days from the date you sold the original rental property. There is a growing body of support for identification of properties, and closing of new properties before the original property is sold. This is somewhat controversial and outside the scope of this discussion.

Technical Note: You can identify more than one property as the replacement property. However, the maximum number of replacement properties that you may identify without regard to fair market value is three properties. You may identify any number of properties provided that the total value of these properties is not more than 200% of the value of the original property you are selling. Note that you don’t have to close on all the properties you identify. You can name several if you’re not sure what will close, or not close, but you have to observe the rules in this technical note in terms of the value of properties you identify. If at the end of the identification period you have identified more properties than you are allowed, you are generally treated as if no property was identified. This means that you pay taxes!
Time Limits For Completing the Exchange
If you have correctly complied with the identification phase of the exchange, you have up to 180 days to complete an exchange, but the period may be shorter. Specifically, property will not be treated as like kind property if it is received more than 180 days after the date you transferred the property you are relinquishing, or after the due date of your return (including extensions) for the year in which you made the transfer.

For multiple property transfers, the 45 day identification period and the 180 day exchange period are determined by the earliest date a property is transferred.
Avoid Boot!
Boot is defined as any money or any type of property of unlike kind (example, a car received as part of down-payment). You will be taxed on this boot regardless of whether or not you carry out the exchange correctly. You will want your exchange company, or attorney to examine your transaction closely to make sure you don’t receive anything that could count as boot. Special rules apply for exchanging property with assumed mortgages.
Summary
The tax-deferred exchange is a great way to maximize your wealth. By keeping your investments growing without immediately paying taxes, you can do wonders for your net-worth. You will need to search out a good intermediary. I am happy to provide the name of mine for our members. This may seem like a dry subject, but it is important to understand when you begin to accumulate some rental properties.

Remember that this article is to provide basic information only. If you are planning on doing a tax deferred exchange, you really need to speak with a professional that handles these transactions on a regular basis. Information here is subject to change by IRS regulations or statute, so be sure to use current information provided by your accountant or other professional when planning a strategy involving tax deferred exchanges.

Unlock the potential of your house by treating it like an investment. Although Real Estate requires constant attention, it can be just as rewarding as stocks or bonds.

Everyone should think of their home as an investment. Perhaps your home is not your only investment, but it is probably your largest asset. Like stocks and bonds, your home should be managed for maximum future value. At first it may seem peculiar to think about your home as a piece of your portfolio, but good home management now can pay off handsomely in the future.

Consider, first, stocks and bonds. Investors watch these investments like hawks. They study the markets to ensure they are invested at the right time and that they are fully diversified. Even investors who simply invest in index funds (stocks that represent the total market) understand how macro environmental factors affect their investment. This same vigilance should be applied to the home you live in.

Pick the Right Place to Invest

Many homeowners treat their home as nothing more than a place to live. Any benefit they receive in the form of appreciation or interest rate reduction is often more a result of luck than planning. Sadly, many homeowners don’t get the maximum value out of their home because they don’t treat their home like other investment vehicles.

It starts with where you decide to live. Look beyond the obvious: Good school districts, proximity to business, or access to major road ways. Homeowners should be looking at where the neighborhood is going in the next five to ten years. Ask questions like…

· Are businesses moving in or out?

· Are people beginning to move out of the major city into the suburbs?

· Is there new construction planned that will make this neighborhood more or less desirable?

· What kind of people are moving into the area?

· What is most important to the people in the area? Schools, jobs, infrastructure, preservation, etc.

The #1 rule of investing, past performance is not indicative of future performance, holds true in home purchasing. This is even more important if you plan to live in an area for more than five years.

My first house was 8,600 square feet with an indoor pool and six bathrooms. Post divorce, my second house was 600 square feet with one bath. But it was all mine. And it needed a lot of work.

Could You Remodel a House?

In case you’re thinking I had a lot of experience, I did not. I thought that electricity was magic, and I did not own a single power tool. I knew I was clueless; I sold houses, I didn’t fix them. So I bought a Reader’s Digest Handyman Repair book, which explained what kind of tools to buy and gave detailed instructions on all kinds of repairs such as how to unclog a sink, replace a receptacle, patch a hole in the wall — even how to frame a closet.

How to Get Started

• Buy books on home remodeling / maintenance.
• Talk to contractors and handyperson specialists.
• Tour recently remodeled homes for clues and ideas.
• Go to home improvement shows.

My First Remodeling Projects

• Uncovered & refinished the oak floors.
  First time around, this was not a job I did myself. I hired pros, after calling a dozen floor refinishers. Here is what I learned:

1. Think before moving furniture so exits are not blocked by stacked furniture.
2. Rolled carpeting is very heavy to lift.
3. If you throw carpet out the window, you will scratch the window ledges. It is better to leave a path to the door.
4. Finishes vary and that will affect the price.
5. Oil-based polyurethane has an amber hue and is very durable.
6. Water-based polyurethane is clear and easy to clean up.
7. Polyurethane finishes require three coats minimum.

• Laid ceramic tiles.
  To avoid cutting tiles, I laid out a pattern for the front porch entry that utilized full-sized tiles. Around the ceramic perimeter, I installed peel and stick carpet tile, which I cut with a regular pair of scissors. Then I covered a kitchen counter in ceramic. This is what I learned about ceramic:

1. Shopping for sale prices can save a lot of money
2. It costs less to mix your own mortar and grout than to buy premixed.
3. Never mix more mortar than you can spread in 30 minutes.
4. Adding latex to thinset will help to strengthen the bond.
5. Always wash tools promptly and dry them.
6. The back of a toothbrush helps to smooth uniform grout lines; if you use your fingers, they’ll be raw.
7. Buy big sponges, rinse often and squeeze dry when wiping grout film.
8. If you are cutting only a few tiles, you’ll save money if you take your tiles to the store to be cut (over renting a wet saw).