What You Need to Know: Rental Properties, 1031 Exchanges and Private Annuity Trusts

Investors are rushing to take advantage of the opportunity to buy a rental property at today’s discount prices and there could not be a better time! Taking advantage of purchasing in this buyer’s market means paying less and putting less down on rental properties so many are taking their first step into the real estate investment market.

Whether you have never purchased a rental property before or have long been an investor, learning how to defer capital gains taxes on the profits you will make is interesting and can greatly impact your bottom line.

Let’s review two different ways you can do just that—defer paying capital gains taxes on the properties you sell.

The first method is a 1031 Tax-Deferred Exchange.

Essentially, a 1031 Exchange is the sale of one property, followed by the purchase of another investment property. The profit of the sale is rolled into the purchase of the second property, allowing the investor to pay taxes on that profit at a later date.

The investor is able to continue to use the funds she would have used to pay taxes to buy another investment property.

The 1031 Exchange works like this: A qualified intermediary who holds the sale profits between the sale of the first property and purchase of the second is retained. Next, The property is sold to any buyer. The profit is held by the QI and the investor and his agent have 45 days to identify replacement properties. Within 180 days of the first sale, the investor must close on one of the properties identified and the profit is reinvested.

A second method of deferring the capital gains tax bill is the Private Annuity Trust.

The Private Annuity Trust works like this: the investor transfers ownership of the property over to a trust. The trust gives the investor a payment contract, known as a private annuity. The contract stipulates that the trust will make regular payments to the owner over the course of his or her life. The trust can then sell the property for cash.

You are deferring capital gains taxes when you use a Private Annuity Trust, but you are not obligated to purchase another investment property—so this is the vehicle most used when an investor no longer wants to reinvest, but instead would prefer to receive retirement income.
If you would like more information about either one of these methods or to discuss
would best serve your needs, please call me at (720) 275-3926.

Opportunities for finding a great Rental Property abound in Denver’s real estate market today.
Enjoy this update of sales in various Denver areas in the first four months of 2008. You can see that prices are affordable in several popular Denver Metro areas and purchasing to hold is a great opportunity to build your financial future.

Area, Average Price Year to Date, % Change in Price since January

AUN, $99,939, - 6.5%
AUS, $194,066, - 5.8%
DHL, $362,055, - 2.7%
DNE, $203,568, + .05%
DNW, $250,369, + 3.5%
DSE, $473,213, - 8%
DSW, $129,598, - 4.3%
DEP, $366,333, - 2.5%
JFC, $239,795, - 6.5%