Thanks so much for checking out the Real Estate Today podcast. Right now we’re going to discuss when it’s okay to overpay.
Featuring:
Bob Nelson, Eugene real estate investment broker
Marcia Edwards, Eugene residential real estate broker
Marcia Edwards: We’ve been talking about some of the challenges, the concerns, the mistakes people can make when purchasing a residential investment property, multi-family, and it’s a fascinating industry. There’s a lot of things to know that you just don’t have the experience with it until you’ve done a lot of units or you work with Bob and then you’re in a safe place. Bob, let’s talk a little bit about when people are willing to overpay for an investment property in order to avoid capital gains. It seems counter-intuitive. It’s an investment. Why would you overpay for an investment?
Bob Nelson: Well, there are times when that may in fact make sense. In fact, it makes sense to majority of the time, depending on how much you’re having to overpay. Okay, here’s the situation. Let’s assume that I owe $100,000 in capital gains taxation. If I sell this property I could then simply pay the $100,000 and not have any tax obligation whatsoever from that point ever on the money that came out of that investment. Now as it earns something in the future, yes I’ll pay income tax on it, but let’s put it this way. What would happen if I found another very desirable property but did in fact have to overpay $100,000? When would that in fact make sense? Well, now I own the property. The government doesn’t have my $100,000. I have it invested in the next property and let’s assume that that property’s producing a cashflow. It’s producing appreciation in value.
Bob Nelson: I have a chance of having that property earn enough additional profit in the future to pay that $100,000 tax whenever I get around to paying it because if I use a 1031, literally I’m deferring the tax consequence until I later sell the property with no interesting bearing, no penalty. I just simply have pushed the tax down the road. So now that property produces enough to pay that tax, plus a bunch more. The whole thing is I now own more property producing more benefits as opposed to the $100,000 paid in taxation which will always put me behind the 8-ball by $100,000. I mean there is logic in doing that, but would I necessarily pay $400,000 too much to save $100,000? No, I don’t think so. So I mean there comes a point where it has to be rational. It has to be logical, but you should consider a 1031 every time.
Marcia Edwards: You just wind them up and let them go on this topic. He’s good at what he does.
Bob Nelson: Can’t help it!
Join Eugene, Oregon, real estate experts: Bob Nelson, Real Estate Investment Broker with Pacwest Real Estate Investments, and Marcia Edwards, Residential Real Estate Broker with Windermere Real Estate, daily at 5:30 on KPNW for the “Real Estate Today” radio show.
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