As a general rule our investing business focuses on buying distressed real estate properties, rehabing them and renting them to good long term tenants. Over the past year we've been able to generate on average a 20% annual return for each single family house we've purchased using this model.

From time to time we need to generate capital to finance new acquisitions. Flipping retail homes is one way to raise relatively quick capital albeit it can take up to 6 months to get cashed out. Flipping is generally frowned upon by sophisticated investors and I for one generally agree. But there are times when waiting 5 to 10 years before cashing out of a rental property is just too long to wait to unlock your equity in an investment.

We found a good deal on a 4 bedroom 2.5 bath 2800 sq ft home in a strategic area of Michigan for about $57,000. We intend on investing another $35,000 into repairs and improvements. Comparable homes in the area are selling between $130,000 to $150,000 in under 6 months. This would give a net profit of between $38,000 to $58,000 before closing costs are factored in.

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Investors who own properties that have appreciated significantly and investors who have written off a portion of an investment that has depreciated, both face a similar problem when considering making a sale: capital gains taxes. Those with properties that has increased in value may face large capital gains taxes on the property's increased value, and others will be faced with a depreciation recapture tax on the funds that were written off each year.

Both kinds of investors can benefit from a 1031 tax deferred exchange. Under section 1031 of the IRS tax code, investors can defer taxes on gains in business or investment properties by rolling gains over into another similar ("like kind") property.

The IRS created the tax-deferred exchange to encourage continuous investment. The folks in our government knew that imposing capital gain taxes when people sold an investment property would make people want to hold onto those properties. In addition to discouraging those people from selling, those capital gains taxes would make investors think twice before buying more property. With the 1031 exchange, the IRS encourages the continuation of real estate investments.

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First, you must understand what kind of transaction qualifies under Section 1031 of the IRS code. The key here is the term "like kind." This doesn't mean that land can only be exchanged for land or that an apartment building can only be exchanged for another apartment building. What it does mean is that the investment or commercial property must be exchanged for another property that will be held for use in a productive business or investment capacity. In fact, you can use the proceeds from several property sales to buy a single property. Or you can exchange your current property for multiple new properties. Just make sure the fair market value of the new properties doesn't go above 200 percent of the value of your old property. For more information on what kind of property swap will qualify, search the term "section 1031" at the IRS's website (http://www.irs.gov/index.html).

Once you've done this, it's time to list the property you own with a real estate broker. You should make sure that the listing agreement specifically states that you intend to use the property to complete a 1031 exchange. If you do a FSBO (for sale by owner) transaction, make sure the sales contract contains the required legal terms.

The next step is a typical real estate transaction. Once an interested buyer makes an offer, you can accept it or counter it. When you're talking or bargaining with the potential buyer, make sure everyone involved is clear that you will be doing a section 1031 property exchange.

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The more you make does not necessarily mean the more you you keep (from the IRS). Reason? Taxes, of course. The more you earn, the more the government takes away from you. It is a crazy equation but there it is. More and more people are realizing that it makes sense to invest in real estate. The reason is excellent tax breaks.

Also, reflect on another fact. Capital gains' is taxed maximum at 15 percent and wage income at 35 percent. Of course, the tax benefit accrues to you providing you've held the property for twelve months or so by renting it out or living in it. Do you now wonder that an increasing number of people are turning towards real estate as a lucrative investment opportunity?

To be sure, there are definite tax benefits that accrue to you to if you are selling your home. Be mindful of the fact, though, that the residence would have had to be used in a ‘productive' capacity as in having lived there yourself or having rented it out. For sure, the real estate sector is on a downward trend but because it has enjoyed an unprecedented boom for so long, long-term home-owners need not worry. The longer time you own your home for, the higher the tax benefit. The tax applied would be a version of capital gains. The initial $25,000 is exempted from capital gains on the sale of your house. And if you are married, so much the better, your tax exemption goes up to $500, 000.

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