Flip or Hold?

In response to your questions about taxes, I am not a tax expert. However, we like to use the 1031 exchange if we sell more than one property in a year.

Expert Cary Losson tells you more about the 1031 exchange:

More Return On Equity For Your Investment Property Dollar

Few would deny that real estate is a solid investment. It
provides an attractive combination of stability, reliable cash
flow, preservation of principal and capital appreciation.
However, many investment property owners nearing retirement find
themselves in a quandary. They are equity rich, but cash poor,
with increases in the value of their property far outpacing
income growth. They also are often tied down by the day-to-day
issues of property management and, particularly in cities like
San Francisco, California, shackled to the constraints of rent
(and eviction) control. In fact, San Francisco is home to some
of the lowest cash return on equity in the state's real estate
marketplace, which is somewhat counter-intuitive given
California's ever-booming property market.

The obvious answer is to sell the property and unleash the
dormant equity, but that can be problematic. These investors
face the reality of prohibitive capital gains taxes and
recaptured depreciation, as well as the task of identifying an
alternate investment venue; or locating, acquiring and financing
suitable replacement property in the time period allowed, taking
advantage of tax deferral under IRS code section 1031.

An ideal solution for many investment property owners may be to
reinvest the proceeds from the sale of their property and
utilize a subsequent 1031 exchange into a tenancy-in-common (TIC)
ownership type, also known as co-ownership of real estate (CORE)
interest in a suitable replacement property.

1031 exchanges, also known as Starker exchanges or tax-deferred
exchanges, permit owners to sell investment property and defer
tax payments by reinvesting the proceeds into another investment
property (or investment properties). In order to completely
defer the payment of tax, among other things, the replacement
property must be of equal or greater value and all the equity
from the sold property must be reinvested in the new property.
The marriage of 1031 exchange and TIC/CORE allows investors not
only to defer their capital gains taxes but also to upgrade
their investment real estate.

TIC/CORE is a way of sharing ownership of property among two or
more persons whereby each tenant holds an undivided interest in
the property. Tenants-in-common may own interests of differing
sizes. TIC/CORE investors are on the title and considered
separate owners of the real estate. They share pro rata in the
income, tax benefits and appreciation of the property. Their
TIC/CORE interest can be purchased, sold, gifted, bequeathed by
will or inherited; and it is subject to property taxes, gift tax,
and estate and inheritance taxes in the same manner as any
property held in sole ownership. With a TIC/CORE property, each
of up to thirty-five investors have the opportunity to own an
undivided fractional ownership interest in an investment-grade
property, such as an office building, shopping mall, apartment
complex or industrial property, costing anywhere from $10
million to $150-plus million.

The benefits of investing in TIC/CORE properties are
substantial. Such properties employ professional asset and
property management, relieving the investor of day-to-day tenant
headaches. More important, investors often receive greater cash
flow and overall returns than they had in their previous sole
ownership property. Typically, many people receive between 2-3
percent of their equity in their property in rental income. By
selling this property and placing the equity into a larger
investment-grade property, they can potentially experience
annualized cash flow from 6-8 percent, paid monthly, and 12-16
percent overall return on their investment. Also compelling is
that TIC/CORE exchange investors can diversify among several
property types, and geographic locations through fractionalized
ownership, while still enjoying 1031 exchange benefits on each
amount. Thus, investors can potentially reduce risk in their
overall real estate portfolio.

Investors seeking to exchange for a TIC/CORE property are best
advised to work with a financial advisor experienced in 1031
exchanges. Such advisors work closely with top real estate
providers, who give the investor access to the best properties
available. In addition, many TIC/CORE opportunities have
pre-arranged, non-recourse financing in place, which is perfect
for investors working within the 1031 exchange time frame.
Numerous hours of upfront investigation, evaluation, due
diligence and life cycle planning transpires before a property
is offered to an investor group. Investors faced with only a
45-day window to identify a suitable replacement property to
complete a 1031 exchange can select a suitable project with
confidence.

Given the tax deferral, institutional-grade quality of the
property, professional property management and pre-arranged,
non-recourse financing aspects, a 1031 exchange replacement
property structured as tenancy-in-common ownership can be a very
wise and profitable solution. It allows the investor to maintain
everything they like about real estate (monthly income,
preservation of principal, capital appreciation, etc.), while
eliminating most of the hassles of property ownership.

(c) 2005, 1031 Exchange Options. Reprint rights granted so long
as the article and by-line are reprinted intact and all links
made live. This article is neither an offer to sell nor an
offer to buy real estate or securities. There are material risks
associated with the ownership of real estate. You must be an
accredited investor. Securities offered through Sigma Financial
Corporation, Member NASD/SIPC.

Cary Losson is the Founder and President of 1031 Exchange Options. A luminary in the TIC/CORE 1031 exchange
marketplace, Mr. Losson is frequently quoted in journals and
periodicals concerned with investment property issues and
advice. For more resources to assist in your learning:
http://www.1031exchangeoptions.com/resources.html