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An Alternative to Paying Tax Today

by Gina McKinley

This is a great strategy to take advantage of…my experience with one of our first rentals was to 1031 exchange the property into two additional rental homes in Chandler.  My husband and I were able to turn a monthly cash flow of about $100 into a $600 monthly cash flow. Read on until the end and I’ll have a resource for you to find out how you can do it too!

The cartoon character Wimpy would say that he’d gladly repay you Tuesday for a hamburger today. Some real estate investors say a similar thing to Uncle Sam to be able to hold on to their proceeds from the sale of an investment and agree to pay the tax later.

 

The benefit of a 1031 exchange is that it allows the investor to defer the tax due from the sale into the replacement property. This allows more money to be reinvested. In the example shown, the investor has 27% more to invest now by deferring the tax into the future.

The property to be exchanged must be like-kind which means real estate for real estate.   Rental property can be exchanged for other rental or investment property.  Personal-use properties like a first or second home are not eligible for exchanges.

There are some critical dates that restrict the validity of the exchange. The investor must identify the replacement property within 45 days of the sale of the relinquished property. The replacement property must be closed within 180 days of the sale of the relinquished property.

  • The replacement property must be equal to or greater in value, equity and debt than the one being relinquished.
  • All net proceeds must be used in acquiring the replacement property.

There are specific rules involved in constructing a valid tax-deferred exchange. There are three professionals that should be involved: a tax advisor, a real estate professional and a qualified intermediary who will assist in the acquisition and transfer of both the relinquished property and the replacement property. Additional information can be found in IRS Publication 544.

This is a very strategic process that should be started prior to listing your rental home for sale. I’d be happy to share the 1031 exchange company we used and to help guide you through the process of exchanging your existing Chandler rental home to purchase more income properties in Chandler or anywhere in the East Valley. Give me a call at 480-355-8645 or email me at Gina@LocateArizonaHomes.com!

Six Reasons to Consider Rental Homes

by Gina McKinley

Always a good investment Arizona's rental market has paid for many a child's college education. When buying a Arizona area rental for the child early in their life the equity position by their 18th birthday can be substantial, allowing Mom or Dad to utilize that or the monthly income to subsidize the tuition payments. But here are some other reasons to consider buying a rental property in Arizona...

Single-family homes offer an investor the ability to borrow large loan-to-value amounts at fixed interest rates for long terms on appreciating assets, tax advantages and reasonable control. Some of these characteristics are not available through other investments.

 

75-80% loan-to-value mortgages are available on most residential properties up to four units. Comparatively, the stock market allows you to borrow up to 50% on a stock but if the price goes down, they will require additional cash to keep the ratio at or below 50%. If it isn’t available, your stock can be sold to satisfy the loan.

Real estate investors call getting a long-term mortgage putting an investment to bed. The fixed-rate and the 20-30 year terms are exceptions to loans for most other investments, if they’re available at all. 

Real estate tends to go up in value over time. There can be a lot of variables that affect the price like supply and demand, condition and available mortgage money, in addition to the general economy.

Rental real estate has several different tax advantages. The profits are taxed at lower, long-term capital gains rates for investors who have owned the property for more than 12 months. While the property is being rented, investors are given a non-cash deduction based on cost recovery of the improvements. Tax deferred exchanges can also be available if specific conditions are met which allow an investor to postpone paying the tax on the gain.

It isn’t necessary to have a partner with most rental homes if the investor can qualify for the mortgage. This allows investor control to make all the decisions that an owner is entitled such as setting the rent, making improvements and determining when to sell.***

Rental real estate can earn a much higher rate of return than other available investments while providing income during the holding period. It certainly is worth investigating the possibility with a real estate professional who understands and works with rental properties.

***Often an IRA can be set up to buy real estate and a number of "Uncle IRAs" can join together, create a partnership or other agreement and buy much larger properties. You need the advice of 2 people here: a good Realtor and a good Accredited IRA custodian. I know both here in the Arizona area. Call me.

Reasons to Hire a Realtor

by Gina McKinley

Hiring a reputable professional realtor can help you whether you are purchasing a new build, purchasing for the first time, or have experienced the process a few times. A realtor can assist you through the process as it can be overwhelming and frustrating.

  1. A realtor represents you. The seller’s agent is loyal to their client even on a new build purchase. Remember the sales agent at a new build site works for the Builder. The buyer’s agent will keep your interests in mind.
  2. A realtor guides you through the process. They can explain the contract since they deal with it daily. Handle inquiries and spot potential issues.
  3. A realtor knows what to look for.  For a buyer, they may point out things you did not notice. As a seller, the agent may provide tips on staging or valuable update suggestions to increase value.
  4. A realtor is objective. They can help you find your ideal home or give you advice on marketing your home to attract buyers within your selling timeframe.
  5. Hire a realtor who is an expert of your local area. They understand the local market and can give tips to help you sell quickly or provide you with insightful information for the area.
  6. Realtors rely on experience and knowledge of the market to give you tips on inspections, price reductions and other issues that may arise during the process. For example, on new build purchase, a realtor may recommend you to hire an independent inspector to ensure the home is built properly.
  7. A realtor works on your behalf.  An agent uses their expertise and skill to communicate your interests with the other parties.
  8. A realtor continues to serve you even after you have closed on your home. They help you resolve issues that arise even a year after closing or connect you with reputable vendors or tradespeople within their network.
  9. Going it alone may end up costing you. By selling it on your own, you may price the home high resulting in sitting on the market too long and not marketed properly to attract the right buyers. By purchasing a new build without a realtor, it can cause you to add too many upgrades where the home may not appraise.

If you are thinking of buying or selling your home, please contact us today. 

Exciting News for Chandler – Hot Off the Press

by Gina McKinley

 

 

 

 

 

 

 

 

 

 

Intel is a major employer in Chandler with two large facilities. Intel just announced that they are going to more than $7 billion to complete the most advanced semiconductor factory right here in Chandler.  It will take about three to four years to complete the factory which will be known as Fab 42.  Intel is expecting to create 3,000 high-tech jobs for this Fab for process engineers, equipment techs, and facility support engineers and technicians.  This Fab is expected to create more than 10,000 long-term jobs in Arizona as Intel works with many indirect vendors that support the factory’s operations.

This announcement came today as Intel’s CEO, Brian Krzanich met with President Donald Trump in the White House.  This is great news for Chandler as FAB 42 was completed in 2013 but never opened.

This is great news for our local economy as the jobs listed are expected to be high paying positions which should continue to help our real estate and job recovery. If you have questions regarding our real estate market, please give us a call at 480-355-8645 as I’d be happy help.

2017 State of the Market

by Gina McKinley

 

Looking back at 2016 and reviewing the market stats is a great way to determine what 2017 may bring to the real estate market.  Some national publications are predicting the Phoenix metro area to lead the nation in appreciation in 2017 at a rate of six percent.  While this makes for great headlines, the reality of appreciation is not true for all price ranges.  Therefore, reviewing what happened in 2016 can be a good predictor for this year, so here is my annual State of the Market Report.

2016 finished as the 7th best year for home sales with demand about 11% higher than in 2015. 2017 should be stronger with loosening of credit and partial repeal of the stricter Dodd-Frank lending guidelines. Distressed properties (foreclosures and short sales) continue to decline are not a significant factor in the market.  Appreciation rate increases translate to equity in your home and 2016 finished with a 5.6% increase in the median sales price and an annual appreciation of 5.4% in price per square foot. However, the average for the market and price is greatly affected within each submarket price range as show below;

Price range                                                         Appreciation Rate

Less than $134,000                                                          15.4%

$135K - $163K                                                                    13.0%

$164K - $185K                                                                    9.6%

$186K - $210K                                                                    9.2%

$211K - $235K                                                                    7.9%

$236K - $262K                                                                    7.2%

$263K - $299k                                                                     5.3%

$300K - $355K                                                                    4.3%

$356K - $465K                                                                    3.2%

Over $465K                                                                         1.57%

 

I believe 2017 will see the higher appreciation rates expected as more buyers enter the market creating demand. The other change in the market is less homes for sale. For the amount of homes available, the resale market is down 4% year over year.  The market is optimistic as mortgage rates are not expected to increase significantly over the year and have continued to remain below 4.5%.  All of the indicators mean that 2017 should be a great year to consider making a move.

For more local information or assistance in listing or purchasing your home, please contact us today at The Gina McKinley Group with RE/MAX Masters. 480-355-8645

Rent or Buy - You Pay for the House You Occupy

by Gina McKinley

This is a follow up article to my last blog about the benefits of owning vs. renting.

The ironic thing about people who think they can’t afford to buy a home for themselves, end up buying the home for their landlord. There are several facts that support this notion.

 

Mortgages, whether held by an owner-occupant or an investor, are usually amortized so that each payment reduces the principal amount owed so that the loan will be repaid totally over the term. A tenant is inadvertently retiring the landlord’s mortgage with his monthly rent. 

In most cases, the mortgage payment including taxes and insurance will be lower than the rent tenants are paying as stated in my previous article.

Renting precludes a person from enjoying the advantage a home has as a leveraged investment. When the borrowed funds cost less than the investment is returning, the rate of return on the down payment grows much faster. As you can see from the chart, a 2% appreciation on a home could result in big returns on the down payment. In most cases, there are very few or no alternative investments that offer a homeowner similar returns.

Even if a buyer agrees with all of these things but doesn’t have the down payment or cannot qualify for a loan, they still need to investigate further since there are currently several down payment grant programs available currently. To find out exactly what types of loans are available and the specific down payment required which can be a whole lot less than 20%, they need to consult with an experienced, trusted loan professional (an Internet lender or a “BIG” bank may not be the best choice.) Call for a recommendation.

For more local information or assistance in listing or purchasing your home, please contact us today at The Gina McKinley Group with RE/MAX Masters. 480-355-8645

Start 2017 Off Right… List Your House for Sale

by Gina McKinley

 

 

As we are about to bring in the New Year, families across the country will be deciding if this is the year that they will sell their current house and move into their dream home. Many will decide that it is smarter to wait until the spring “buyer’s market” to list their house. In the past, that might have made sense. However, this winter is not like recent years.

The recent jump in mortgage rates has forced buyers off the fence and into the market, resulting in incredibly strong demand RIGHT NOW!! At the same time, inventory levels of homes for sale have dropped dramatically as compared to this time last year.

Here is a chart showing the decrease in inventory levels by category:

Bottom Line

Demand for your home is very strong right now while your competition (other homes for sale) is at a historically low level. If you are thinking of selling in 2017, now may be the time.

Turn Your Old Home Into A Rental Property

by Gina McKinley

With the turn around in our Phoenix market, some homeowners are finding themselves in the position to build wealth by turning their home into a rental after they purchase a new home.


For more information, call The McKinley Group at 480-355-8645 today!

Rental Income Rises 12% Since Last Year

by Gina McKinley

Great news for single family home investors, rental rates have grown faster than the economy. Overall there were disappointing results for the first half of the year and the economy grew 2.7 percent in the third quarter.  A large part of the increase was due to investment in residential real estate.


Cash flow, which is gross rental income less expenses and debt, has increased 12 percent from September of last year.  This reflects that the housing market is starting to turn around, driven by continued affordability in home prices and increases in rental rates


In Phoenix, the average gross rental income is just over $1,200/month and the average vacancy rate is approximately 44 days.  This means that if you’re considering investing in real estate, you may need to add in your first mortgage payment in addition to the cost of any repairs needed to get the property ready for tenants. However, the benefits of owning an investment property often outweigh the costs.


To learn more about building wealth through investing and real estate contact The McKinley Group today!

The 3.8% Tax: Myth vs. Reality

by Gina McKinley

Starting January 1st, a new tax will be enacted.  This tax was part of the Medicare Bill passed in 2010, and is expected to generate about half the revenue for President Obama’s Medicare and health care overhaul.  So what does it mean for you?

Myth #1: The 3.8% tax will be on every real estate transaction.
Reality: This tax will only be imposed on some investment income from interest, dividends, rental income less expenses, and capital gains less capital losses. In addition, this tax will only be for individuals who have an adjusted gross income above $200,000 and couples filing a joint return above $250,000. However, the tax will only be applied to the LESSER of adjusted gross income or investment income.

Myth #2: The 3.8% tax will apply on the capital gains from the sale of my personal residence.
Reality: Personal residences are tax exempt from capital gains up to $250,000 for an individual and up to $500,000 for a couple filing jointly.  If the capital gains from the sale of your personal residence exceed the tax exempt amount, only the excess is considered a taxable gain and will be subject to the 3.8% tax.

Myth #3:  The 3.8% tax will be calculated off of my adjusted gross income.
Reality: The 3.8% tax will only be calculated off of income earned above the income caps.  For example, if a couple filing jointly has an adjusted gross income of $325,000, the tax would be calculated from $325,000-$250,000 = $75,000 x .038 = $2,850.

Myth #4: The 3.8% tax will affect any interest, dividends, or capital gains I receive from financial assets.
Reality: Interest income, dividend income, and any capital gains from financial assets are added to the adjusted gross income.  If the new adjusted gross income exceeds the $200,000/$250,000, then the excess will be subject to the tax.  If the new adjusted gross income is less than that amount, than the tax does not apply.

Myth #5: The 3.8% tax will be charged on all rental income.
Reality:  Rental income is calculated from gross rental income minus expenses.  The net rental income is added to the adjusted gross income.  If the new adjusted gross income exceeds the $200,000/$250,000, then the excess will be subject to the tax.  If the new adjusted gross income is less than that amount, than the tax does not apply.


Myth #6: The 3.8% tax will apply to my real estate business.
Reality:  If the sole income is from owning and operated real property, the net rental income is not considered investment income and the 3.8% tax does not apply. However, the health care bill did create a separate 0.9% tax for high-wage and self-employed business income.  So, if the sole income earned exceeds $200,000/$250,000, the remainder will be taxed.  However, depending on how the business was set up, neither tax may apply.

For more help with real estate investing, contact The McKinley Group today!  For more information on the 3.8% tax and how it may affect you, please contact your CPA.

Displaying blog entries 1-10 of 35

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