# 12 – Tax Liens and Tax Deeds
# 13 “ Trade” or 1031 Exchange
SO MANY WAYS TO BUY( PART 2) BRUCE KELLOGG
# 12 – Tax Liens and Tax Deeds
In order to stay solvent, when owners fail to pay property taxes, countries will issue tax liens or tax certificates which are sold to investors at a certain yield. Depending upon the state, yields run from 6 % to 36 %, with 8 18 % being most common. Under some circumstances, investors can foreclose and obtain ownership of the property. Searching the internet under“ tax liens” will produce teachings and organizations offering to help investors get involved. Be advised, however, that this axquisition method is also sophisticated and has the same warnings as # 11, above.
# 13 “ Trade” or 1031 Exchange
A“ trade” of real estate involves swapping one property for another. An example would be if the owner of a vacant lot traded it with the owner of a mountain cabin, probably with some cash changing hands to even out the values. One party might obtain financing, or one trader might carry back some“ owner financing”. Noteworthy here is that the trade is not a taxdeferred exchange, but just a swap. These transactions are advertised on real estate and barter websites from time to time, saying“ For Sale or Trade”, or similar.
A taxdeferred exchange is a transaction governed by Section 1031 of the Internal Revenue Code and is designed to defer longterm capital gains taxes for the“ exchangor”, the one moving up in property. The properties have to be“ like kind”, such as real estate for real estate. They do not have to be identical types of real estate. For example, an airport hangar could be exchanged for a duplex. However, they do both have to be either an investment property, or a property“ used in a trade or business”. So, a plumber who is retiring could exchange his shop building into a fourplex for retirement income.
However, an investment property CANNOT be exchanged into a property that is promptly turned into a residence after the close. Capital gains taxes will be due. The Internal Revenue Service( IRS) has issued“ safe harbor” guidelines for a successful exchange, so real estate, accounting, and possibly legal experts need to be used.