Tag Archive for: home buying

Are you interested in reinvesting your capital gains tax instead of paying it out? A 1031 exchange may work for you.

Put simply, a 1031 tax exchange allows for the investor to defer capital gains tax, which then results in more capital to invest in a substitution property. Normally, when an investor sells a property they must pay a portion of the sale in capital gains – both federal and state taxes. A 1031 exchange allows the investor to waive capital gains (for now) and instead invest in a replacement property.

Not only does this let real estate investors defer capital gains tax while buying and selling property, it also gives them access to exciting new investment strategies.

The IRS code dictates that the exchange must be done with “like-kind” properties, there are strict timelines to adhere to, and there must be a qualified intermediary involved in the transaction.

Investors looking for homes in Montana to lease out will find a number of attractive, newly built homes in the Belgrade areathat will qualify as replacement properties to take financial advantage of the 1031 exchange

Why is it Called a 1031 Exchange?

Within Section 1031 of the IRS Code, you’ll find the essentials necessary for a successful property exchange. This exchange is recognized by the IRS as a means of deferring capital gain taxes.

Properties Eligible for 1031 Exchange

Not every property is eligible for this type of exchange; however, a number of properties are which means investors have more purchasing power than they may realize.

  • Single-family rental homes
  • Multifamily rental homes
  • Motels & hotels
  • Raw land
  • Offices & commercial properties
  • Farms & Ranches
  • Leasehold interests of 30+ years
  • Rental ski condo for a 3-unit apartment building

There are other eligible properties and to get more information, contact your tax advisor if you are interested in this type of exchange.

What Exactly Is a “Like Kind” Property?

Although this term is not specifically defined in the IRS tax code, professionals do have a definition for it. Any kind of real property that is held for productive use as in an investment, business or a trade may be considered a like-kind property.

The kinds of property that can be exchanged in a 1031 transaction are very broad. For example, a single family rental property may be exchanged for a duplex (or more), a shopping center, raw land or even an office for apartments.

Any property that’s been relinquished that was held in investment will be in like kind with property with the intent to be held in investment.

Properties Not Eligible for 1031 Exchange

The main idea behind what might be eligible for a 1031 exchange and what isn’t, is the intent to which you purchased the property, and your intent for the exchanged property. Both sides of the equation must be that they are held in investment, so personal residences and partnership interests do not apply.

  • Real estate investment trusts (REITs)
  • Stocks, notes or bonds
  • Personal residences
  • Flips for resale (though there is a possible way around this – if you flip and then rent for a period of time, it may be eligible after a certain time period, likely a year, for the 1031 exchange, check with your tax advisor).
  • New construction

Tax Benefits with a 1031 Exchange

Reset Depreciation

The IRS allows owners of real estate to depreciate their assets. After 27.5 years, investments may be depreciated due to deteriorating condition over time. After reinvestment is made into a new property, the depreciation schedule is reset.

Fewer Taxes

Investors can reduce the taxes they pay by exchanging property in a state that imposes income taxes with an investment opportunity in a state that does not have income tax. Some states that do not have income tax include Nevada, Texas, Florida, Wyoming and Alaska.

Deferred Capital Gains

This benefit is one of the primary reasons investors make a 1031 exchange. It allows the deferring of the capital gains tax upon the selling of a property until they cash out. There are no limits on how often this can be done, and for many investors it’s a lucrative way to continually leverage their financial position.

Important 1031 Exchange Vocabulary

Relinquished Property refers to the property that the investor will be selling. It must be an investment or business property and not a vacation home or primary residence.

Replacement Property refers to the property that is to replace the relinquished property. It must be of equal or greater value and “like kind” to the relinquished property.

Qualified Intermediary refers to the person or the company who holds the real estate sale proceeds and subsequently facilitates the exchange. This person or company holds the exchange funds because IRS tax law dictates the seller of the property cannot or the funds will be subject to tax liability. The qualified intermediary can’t have any other formal relationship with the seller and must be a licensed professional. Overall, a 1031 exchange lets the investor reinvest money that would normally be paid out to capital gains tax and put it into a replacement property.

Are you moving to Montana? Regardless of where you are moving from, you’ll need a complete home-buying checklist to help make your move to the Big Sky state as seamless as possible. After the chaos of the pandemic and its influence on the real estate market, things are finally settling down, and purchasing homes in Montana is easier and more affordable than ever before.

Save Up for a Down Payment

Your down payment is your first contribution to the home’s purchase price. You pay this at closing. The remainder of the balance is paid by your mortgage lender. Ideally, a 20% down payment is a great goal to strive for. However, there are various loans that can lower your down payment. Being able to contribute a healthy down payment will lower your monthly payment and the overall total cost of your home.

Determine What You’re Able to Afford

Figuring out your debt-to-income ratio is the first step toward creating a realistic budget and from there, determining what price range you’ll be considering when you start to look at newly built homes in Belgrade, Montana. Make certain to include all of your recurring bills and anything that you pay on a month-to-month basis.

Securing a qualified mortgage from most lenders generally requires a DTI of no higher than 43%, so shoot for that as you analyze and rework your budget.

Build Breathing Room into Your Budget

Taking the step to purchase a newly built home in Belgrade, Montana is an exciting one and you want to be sure that you leave sufficient breathing room in your budget for other day-to-day living expenses such as entertainment, indoor and outdoor furniture, as well as unexpected expenses that come your way.

Types of Loans

You may be eligible for various government-backed loans such as FHA and VA loans. These let you contribute 3.5% and 0% of the home’s purchase price (respectively). Conventional loans allow for down payments that may be as low as 3-5% as determined by the lender.

Here are other loans you might qualify for:

5/1 ARM Loan: this is an adjustable rate mortgage loan (ARM) that has a fixed rate for the first five years but then has a variable interest rate from the sixth year moving forward.

3-2-1 Buydown Mortgage: this loan charges a lower interest rate for the first three years of the loan. The first year is 3% less, the second year is 2% less, and the third year is 1% less. For the fourth year and beyond, the borrower pays the full interest rate on the loan.

Permanent Buydown: a permanent buydown allows the buyer to pay a large lump sum of cash to the lender to lower the monthly payments for the life of the loan. This is different than 5/1 ARM loans and 3-2-1 mortgages because interest rates are only lowered temporarily and not for the life of the loan.

Get to Know the Neighborhood

A bird's eye view of the Prescott Ranch neighborhood. When moving to Montana, it's best to know your neighborhood.

In many ways, the neighborhood where you decide to put down roots may be just as important as the home itself. Befriending neighbors, the schools your children will be attending, and your family’s house of worship, as well as community events, are all a part of what constitutes a content and thriving life. Montana neighborhoods are coveted for their unique offerings of both superior outdoor recreational opportunities combined with folks who take great pride in a small town and family values.

Homes Available at Prescott Ranch

The homes available at Prescott Ranch are crafted in a variety of floor plans designed to meet your needs. These newly built homes range from single story to three stories with 12 total plans across three series: The Morgan, The Appaloosa, and The Lusitano. These Prescott Model Homes are poised at the foothills of the Bridger Mountains. The homes blend modern and traditional styles to create an elegance that is unmatched in the Belgrade area.    

People who live in Montana tend to be nature lovers and prefer to take advantage of the gorgeous scenery and the larger, greener blueprint of the geography in the area. That’s why, with Prescott Model Homes, there is a comfortable and spacious spot for more than one vehicle. Each plan in the three series features either a two or three-car garage. Both the Appaloosa and Lusitano Series offer a more traditional look with garage bays as part of the front schematic while the Morgan plans are designed with the garage bays accessible along the back side of the home. You’re sure to find your own personal preference within the intricacies of these unique home layouts.