Making correct investments can help at tax time and increase your wealth.

This page is for investors. The forms below are designed to assist in estimating the first year benefits of a real estate investment. It does not consider the effect of selling or exchanging (if you don't know what is meant by exchange see below) the property in the future. This form is not a substitute for legal or tax advice. Anyone contemplating the purchase of a real estate investment should seek the services of competent legal and tax advisors. Having said all that, used correctly, this form can help in the decision process to buy investment property based on Return On Investment.

          There are 4 financial benefits from owning investment property:

1. Income: Cash flow before taxes.

2. Principal pay down (by renters).

3. Income tax savings.

4. Appreciation.

It is important to look at 3 items closely: Income, Expenses, and Financing. Missing just one of these items and there is no way to determine if the investment is good or not. This form can also be used to determine when to sell investment property. Yes, you don't keep investment property forever and you don't pay cash for investment property. Both ways you lose the tax advantage and money. When buying investment property obtain the seller's Schedule  E which the seller sends to the IRS. This should give you all the important information such as Gross Operating Income and Annual Operating Expenses. This is the most important information you can receive from the seller. If the seller will not give you the Schedule E than I would worry the figures the seller is stating are not correct.  With that information it is easy to figure the Return-On-Investment as shown below.

Some information on Depreciation:

1. Land: does not depreciate.

2. Personal property: refrigerator, stove, etc, depreciate value over 5 years.

3. Residential rental buildings: home, duplex, 4 plex, (live in it more than 30 days), etc, depreciate value over 27 1/2 years.

4. Non-residential buildings: motels, condos, (rented by day or week), etc, depreciate value over 39 years.

5. Land improvements: sprinkler system, pool, fence, landscaping, parking lot, etc, depreciate value over 15 years.

For tax purposes the depreciation starts the day you buy the property. It doesn't matter how old the item or building is or if the seller took all the depreciation on his/her tax return. Each time the property is sold the depreciation on Personal Items, Building, and Land Improvements starts over.

Another important item to remember: when putting an offer in on a property, write in the Earnest Money Agreement Land value (15% of the purchase price), Building value (65% of the purchase price), Land Improvement value (10% of the purchase price), and Personal Property value (10% of the purchase price).

Tom Lundstedt Real Estate Investment Seminar April 19 and May 17, 2006.

The form below is filled in using the following example:
Purchase Price: $85,000
Down Payment/Cash Invested: $15,000
Owner Financing: $70,000, 30 years @ 10%
Monthly Rent: $1,100
Annual Expenses: $4,800 as listed
Tax Bracket: 35% (state & federal combined)

Your Return On Investment is 12.89%! This is a good investment!!

Exchange: is not where you actually trade or exchange one property for another. A tax-deferred exchange permits a seller of nonresidential real property (your residence) to sell property, and defer tax on the profit earned from the sale. The seller “exchanges” by using sale proceeds from the sale of the “relinquished” property to purchase a “replacement” property. With the help of an intermediary, also called a Facilitator, the seller relinquishes one property, and replaces it with another property without actual receipt of funds. In this manner, the IRS considers the transaction to be an exchange of one property for another. Clients who exchange property may defer tax consequences until they actually receive funds. In fact, some clients may avoid tax consequences entirely. The properties sold and purchased must be real property located within the U.S., and neither may be one’s residence. At the closing of the sale, the Facilitate approves the closing documents and provides a set of exchange documents for signature. The sale proceeds are deposited with a local bank, directly into an interest-bearing trust account.  The client receives the interest earned. When the closing of the purchase of the replacement property occurs, the Facilitate wires the exchange funds to the closing agent selected by the client. The IRS does not permit the seller to have possession of these funds. Two deadlines begin to run on the date the sale of the relinquished property closes. Within 45 days, the client must provide the Facilitator with a letter identifying up to three potential replacement properties. Within 180 days (or prior to filing one’s next IRS Return), the closing of the purchase of the replacement property must be concluded. This is very important! If you close on the new property on the 181 day, you will owe capital gains. 180 days or less you don't pay taxes. Notice I said 180 days and NOT 3 months. It is important for Facilitator to receive a copy of the Real Estate Purchase and Sale Agreements involved, and each Agreement should indicate that the transaction may involve a 1031 Exchange. It is also important for the Facilitator to be placed in contact with the closing agent early in the closing process. A Facilitator charges about $750 to process a tax-deferred exchange. 

Here is a Spokane Facilitator who can help with the 1031 Exchange process or any questions you might have:

 SPERLING FACILITATOR SERVICES, INC.
601 S. Division St.
Spokane, WA 99202
(509) 455-8883
Facsimile: (509) 624-2902
Web Site: www.spokanelaw.com

If you have any questions or would like me to help you locate investment property, feel free to contact me at:
 genesmith9@aol.com (E-mail) or 509-217-3380 (Cell)