One of the National Association of Realtors “30 Under 30” real estate agents, serving the Del Mar and San Diego luxury residential market.
As a real estate agent working with new and experienced buyers, I’m used to fielding questions about how to make strategic decisions when investing in real estate. Sometimes those questions are in my wheelhouse; other times I refer clients to accountants and CPAs for tax and financial expertise. While it’s always important to have the right experts answer important real estate investing questions, it’s even more important to know what questions you need to be asking.
It’s common for inexperienced and first-time homebuyers to feel intimidated by real estate investing. Millennials have been much slower to invest in real estate than previous generations, but as young Americans gain more real estate education, that’s changing. Today, 31% of Americans from all age groups prefer real estate investments compared to 20% who prefer stocks – while 36% of millennials prefer real estate to other investment strategies.
American millennials have even more incentive to learn about real estate, as the U.S. is on the cusp of the largest generational wealth transfer in history. Over the next 20 years, millennials will inherit $30 trillion from their boomer parents and grandparents. In preparation for this inheritance, millennials should start to see real estate as an approachable tool to grow and diversify their net worth in preparation for their own retirement.
Staying Abreast Of Changing Legislation
A large part of your real estate investment strategy depends on where you live. Each state has its own legislation that will influence the way you might structure your investment and make decisions that are advantageous not only for appreciation but for potential tax benefits down the road. These regulations can change frequently with changes in state and federal government.
For example, this past November, California voted to approve Proposition 19, the Home Protection for Seniors, Severely Disabled, Families and Victims of Wildfire or Natural Disasters Act. This new law will allow homeowners who are over age 55, disabled or victims of a natural disaster to transfer their primary residence’s taxable value to another home (with an upward adjustment for a more expensive home) anywhere in the state, within two years of a home’s sale and up to three times over the course of the individual’s life (or more, in the case of natural disaster).
This is a substantial change, as the previous law (Proposition 60) only allowed for a one-time tax basis transfer to a property of equal or lesser value within the same county or between certain counties. It’s important for those who may be buying, selling or inheriting real estate to keep abreast of changes in local and state legislation in order to assemble a team with the necessary experience – including a qualified real estate attorney and tax advisor – in order to take advantage of the current laws while staying in compliance.
Understanding Federal Tax Codes
One of the most important things to understand when you’re new to real estate investing is how to utilize a 1031 exchange to defer paying capital gains taxes. According to IRS rules, home owners can swap one property for one or more properties of equal or greater value without paying taxes on the sale.
There are several scenarios where investors may benefit from doing a 1031 exchange, including consolidating or diversifying investment properties, changing property management or boosting passive income by acquiring properties in areas with higher rent.
Understanding the basics yourself and hiring an experienced and qualified team – including real estate agents in both markets, a qualified intermediary (QI) to facilitate the cash transfer on your behalf, a CPA and a real estate attorney – can help ensure you take full advantage of all the ways you can benefit from a 1031 exchange while staying in compliance.
For example, though a 1031 exchange pertains only to investment properties and not to primary residences, according to Section 121 of the Internal Revenue Code, you only need to have lived in a home for any two of the most recent five years for it to qualify as a primary residence. This means that you could purchase and live in a home for two years, then rent it out and earn passive income for another three years before having to pay capital gains taxes or enter into a 1031 exchange.
When it comes to investing in real estate, knowledge is your number one asset. No one is born with real estate knowledge, but anyone can learn the fundamentals of a good investment strategy. Consulting and hiring the right experts can help you take full advantage of state and federal laws according to your particular market and unique lifestyle considerations.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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