INVESTMENTS

the ROI Realtor team

WE INVEST IN YOU

 

1

TAX DEFERRED 1031

PLAN YOUR FUTURE TODAY.

Concerned about taking a tax hit when you sell your investment property? Don’t be.

In general, capital gains taxes are due when you sell something that has increased in value over time, like some shares of stock or a piece of real property. If you held this asset for longer than a year, then your capital gains are considered “long-term” and are taxed federally at a rate up to 20%. Investments held less than one year before sale are taxed at your regular tax rate, up to 39.6%.

Selling Your Investment Property 

Unlike selling your home, capital gains from the sale of a rental or investment property is not excluded but is instead deferred. This allows you to roll one investment into another (or several others) in a 1031 “like-kind” exchange to avoid paying capital gains tax at the time of the sale.

What qualifies as “like-kind” replacement property is very broad. For instance, we have managed the sale of a single family property here in California and the “like- kind” exchange of that property for fourteen rental properties in Florida – without a single cent of capital gains tax due. Used properly in cases like this, a 1031 exchange can be used to sell (with no tax hit) a Silicon Valley property that has seen significant appreciation and purchase of high cash flow rental properties (single family, multifamily, mixed use, or commercial) in areas of the country where rents are much higher relative to the cost of property.

There are, however, several rules for 1031 exchanges that the IRS strictly applies, so working with a team that thoroughly understands these rules is imperative. 

The Tim & Ryan team along with their 1031 exchange partners are experts in helping investors maximize current equity by redeploying the after sale capital into investments that are equal to or greater in scale, more diverse or more aligned with their business or investment strategy.


2

 FIX, FLIP AND PROFIT

PLAN YOUR FUTURE TODAY.

“Flipping” a home seems simple enough – you buy a house that needs some work, you improve it, and sell it. Trying to fix and flip in Silicon Valley changes the equation a bit because of exorbitant home prices. Flipping a home in the Bay Area puts a lot of money at risk, but if its done right the reward can be huge

Sure, buying and selling your personal residence can be fun, but little in real estate compares to the satisfaction of buying a home, putting your unique stamp on it through renovation, and quickly selling it for a hearty profit. There’s money to be made – or lost – depending on how much homework you do and the quality of the team you choose to help you. (Make no mistake, when “time is money,” you need a team – contractors, handymen, builders, Realtors, and, oftentimes, accountants and real estate attorneys – to save you from expending far too much time, energy, and, ultimately, money on your fix-and-flips.) 

Historically, Silicon Valley is a high appreciation market. Nevertheless, don’t buy assuming appreciation. Rather, if you’re buying the right properties at the right prices, you should make money even if home prices drop. If you overpay when purchasing a property to flip and the market subsequently dips, you may quickly find yourself in a world of hurt. Given Silicon Valley home prices, applying the fundamentals – identifying the right deal, utilizing the right financing, and obtaining and utilizing a competent team – are especially important. Those flipping a house for the first time often misjudge the time necessary to complete the deal and underestimate the many costs – of purchasing and closing on the property, loan costs, repairs and improvements, insurance, pro-rated property taxes, maintenance costs, selling costs, and, in some cases, HOA fees. Surrounding yourself with experience you trust is the surest way to avoid these pitfalls. 

Now, fixing and flipping a house in Silicon Valley offers the opportunity to turn a bigger profit per deal than almost any place in the country, but with the potential for sizable reward comes sizable risk. A few things should be noted when considering flipping a home in Silicon Valley. It probably goes without saying, but a more expensive home will require greater investment in down payment and interest. With investment loans often requiring 25% down or greater, even the most distressed single family home will likely require a six figure down payment. And, in neighborhoods populated with predominately upscale homes, high-end materials and labor may be necessary for the home to conform. High-end materials and labor often cost high-end prices, and high-end remodels take longer to complete as there are fewer contractors qualified to complete these jobs. When repairing and remodeling any home, it is important to obtain bids (in writing) from multiple contractors and, where possible, utilize contractors who have repeatedly produced quality and timely work for people you trust. 

So, where do you find properties ripe for fixing and flipping? While deals can be found off-market and through zealous networking, the overwhelming majority of Silicon Valley fix-and-flips are found on the MLS. Yes, the MLS, not FSBOs, which account for less than 10% of home sales. Sure, there is plenty of competition on the MLS, but deals can be found if you stick to the fundamentals and surround yourself with a highly competent team. If you are not an agent well versed in the Silicon Valley market, hire the best agent you can find to be your advocate and fiduciary – but make sure they understand investment properties and have an investment mindset. Fixing and flipping houses is not a solitary endeavor, and surrounding yourself with experienced investment-minded practitioners you can trust is key to your short and long term success in this high risk/high reward market. 

3

 TAX FREE GAIN

PLAN YOUR FUTURE TODAY.

Concerned about taking a tax hit when you sell your home? 
Don’t be.

It’s no secret that the tax benefits that come from owning real property are plentiful and significant. Beyond the vast array of deductions unlocked by property ownership, however, the tax breaks don’t end when you sell your property. Your tax treatment upon sale depends on whether the property you’re selling is (or has recently been) your home or whether the property has been an investment. 

Selling Your Home 

Whereas the tax benefits while owning rental property exceed those while owning a home in which you live, the inverse is the case when it comes time to sell. If single, you can exclude $250,000 of profit from the sale of your home from your taxes and, if married and filing jointly, you can knock off $500,000 of the gain from your tax bill. The gain is calculated by deducting all of your selling and closing expenses from the sales price.

Not such a bad deal, huh? In order to claim this benefit:

1) You must have owned the home for at least two years, and
2) You must have lived in the home as your primary residence
3) for at least two of the previous five years.

If you were active duty in the military, this five year time period can be extended. Additionally, the two year requirement may be pro-rated if a work-related move has prompted the sale.

Now, it’s no secret that home prices in Silicon Valley have shot up over the past 5 years before recently leveling a bit, so you may be asking, “What if my home has appreciated more than $500,000 since I bought it?” You can add up all the home improvements you made over the years to further reduce your tax bill. The money you paid on improvements – such as refinishing your kitchen, replacing the roof, and transforming the landscape to name a few – can be added to the purchase price of your home to increase the cost basis of your home.

For instance, if you purchased your home for $550,000 in 2004 and sold it in 2016 for $1.2M, you would owe capital gains tax on $150,000 of profit (that left over after the $500,000 exemption, if filing jointly). If, however, you spent $150,000 improving the home over the 12 years you owned it, then that $150,000 could be added to the purchase price of the home and you would owe nothing.

Please always consult with a tax professional.