Trading Investment Property is Tax Free

 

Investors realize tax savings while upgrading portfolio.

 

HONOLULU ADVERTISER   November 25, 2007

 

BY LISA SCONTRAS

Custom Publishing Group

 

While sellers are hoping for the market to rebound and buyers are waiting for prices to drop, investors are taking advantage of current market conditions to upgrade their real estate portfolios.

 

 

Successful real estate investors don’t wait for the market to change, they jump on opportunities the current market brings, says Bill Chee, CEO at Prudential Locations LLC.

 

“If you look at the way stocks are rated — low cap, high cap, triple A — properties can be rated much the same way,” says Chee. “Some can hold more value or have a more favorable outlook than others.”

 

Because the real estate market is not moving as quickly as it has in the past, there is more time to look at trading one investment for another — one that has more potential for growth — according to Chee, a 30-year veteran Realtor and investor.

 

“Today, you can act in a prudent, more investor- like manner,” he says. “It’s not something that is going to last forever. Once the market gets more active, this window of opportunity will start to close.”

 

Chee himself has taken advantage of the market timing.

 

“In my own portfolio, for example, I had an investment property in Aiea which I exchanged for a townhome in Kahala,” says Chee. “I did it because Kahala has much more of an international appeal and is more likely to maintain or increase in value over the long term.”

 

Trading or exchanging properties is a popular tool among investors who don’t necessarily want to sell, but want to move their real estate holdings around. And an IRS tax code — section 1031 — allows investors to trade properties like this while deferring any payment of capital gains taxes as long as the proceeds are reinvested.

 

According to Julie Tumbaga, vice president and regional manager of OREXCO 1031 Exchange — a leading exchange facilitator and consultant — the initial motivation for exchanging properties is the huge tax savings, but there are other benefits as well.

 

“The real advantage lies in the fact that those tax dollars are re-invested into replacement property allowing an investor to leverage money that he would otherwise never have received,” she says, referring to the use of money that would have gone to pay the taxes.

 

Using the exchange process allows an investor the flexibility of shifting their holdings as often as they like, with no detriment.

 

“It can be a way of relieving a property owner of the burden of a high-maintenance property or difficult renters,” says Tumbaga. “It allows for diversification of a property owner’s portfolio, and it allows a property owner to replace non-income-producing property with income-producing property — for example, exchanging vacant land for a rental property.”

 

Whether it’s closer to the ocean, closer to town or in a more off-shore-friendly neighborhood, investors are opting to trade in their rentals for something better. Some have opted to sell one property and replace it with two.

 

Exchanging condos for condos seems to be the most popular, according to Tumbaga. Condos, because of their low maintenance and easy rentability, appeal to off-shore buyers. And it’s not as complicated as you may think.

 

 

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