Real Estate can be like your IRA, only much much better, and you must play by the rules

Concept 1:
Take $100,000 and put it in the bank at 5% interest

guess what, the interest is taxable! Your $5000 income is just that, Schedule B Ordinary Income, after tax, maybe $4000

So after 5 years of toiling to locate the best interest return for your investment dollars, you now have $100,000(1.2166)compounded 5 years = $121665

Concept 2:
Take 100,000 and buy a rental (commercial or residential) property,
80% mortgaged. Value of property, $500,000

You have income from the property of 5% after expenses, $25,000, taxable as passive income at 25%, after tax considerations, maybe $20,000 (added bonus...no social security taxes since you're not an employee)

So after 5 years of operating this wonderful property and collecting all those rents, you now have:
a building that is worth about 500,000(1.2166) = $608,326 (4% annualized)
a mortgage balance(20 yr. 9.5%) =  $357,000
Property Equity = $251,266

Plus Your $20,000 after tax passive income per year (5) = $100,000
Your actual 5 year return on the $100,000 investment = $351,266

So, the simple question is, which is the better investment?

Next question is, what do we do with this property now?

Sell it!
Selling Price = $608,326
Selling Expenses @ 8% = $48,640
Mortgage Balance = $357,000
Net from Sale, pre tax = $202,686

Long term capital gains taxes would also include the depreciation recapture from previous years and would be about 30% total taxes, or after taxes = $141,880
Plus your passive income over 5 years of $100,000
Your total investment return, approx 20% per anum after tax = $241,880

Concept 3: Sell it with a 1031 Exchange

Exchanging is not as complicated as it may sound. Like any business, know the rules and the IRS can be your partner.

1.The properties must be like kind and qualify
 Investment Property or Business Property
2. There must be an actual exchange, do not take use of the sale money.
 An Intermediary must receive the proceeds from the Relinquished Property sale
3. Watch Timing Elements Carefully
 Designate Replacement property 45 days before or after sale of Relinquished Property
 Close on Replacement property within 180 days of sale of Relinquished Property
4. Always trade up in value

Why do this? The IRS allows TAX DEFERRED 1031 EXCHANGES of LIKE KIND PROPERTIES,
so, using our previous sale example, let's "EXCHANGE IT"

Selling Price = $608,326
Selling Expenses @ 8% = $48,640
Mortgage Balance = $357,000
Net from Sale, pre tax = $202,686
ALL OF THIS GAIN on the sale IS TAX DEFERRED UNTIL A NON EXCHANGE SALE OCCURS

Purchase Exchanged Property
Down payment $202,686
Mortgage $810,744
Purchase Price $1,013,430

Now you have a bigger property with the same original $100,000 investment, 5 years later,
passive income 5% pre tax  =  $50,671
Property Appreciation of 4% = $40,347
Total gain per year $91,018
also the mortgage is decreasing every year, increasing your equity.

What's next?

WAIT A FEW YEARS AND DO IT AGAIN, TAX DEFERRED!

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