In: Accounting
Jenny is a real estate investor who just sold an income property for a gain of $200,000. The closing took place on February 1, 2019. Jenny plans to use the proceeds from this sale to immediately purchase a new income property that reliably generates $30,000 rental income each year. Once acquired, Jenny does not intend to make any renovations and/or changes to the new income property, and she plans to dispose of it in approximately ten years.
Jenny does not want to expose herself to risk, thus she will be satisfied with the reliable cash flows of $30,000 from rental income.
(a) What investment strategy is Jenny following?
(b) If the closing for the new income property takes place on October 1, 2019, will Jenny be able to defer payment of capital gains taxes?
a)
Purchase and retention strategy:
This strategy is considered by many investors to be the best real estate investment strategy. The "Buy and Hold" strategy means that you buy real estate and rent it over a long period of time, resulting in positive monthly cash flow and long-term appreciation.
Advantages:
- The cash flow from this strategy creates wealth and helps investors pay their mortgage through monthly payments.
- Any decrease in property value will not be severe. If the value of your property decreases, you will not be greatly affected as long as you do not sell the property. Any gain or loss in value will only be noticed in the event of a sale; otherwise, you will continue to enjoy monthly income.
Disadvantages:
- Investors can mistreat. Incorrect evaluations by investors can result in buying rental properties for money that exceeds their value. This is due to a lack of research by new investors, which can also lead to miscalculations of maintenance costs, as well as choosing the wrong tenants. Use Mashvisor to easily research and learn all the important strategies and methods, to start with a solid foundation.
b)
Yes, that help jenny to reduce the tax rate. Because she can put in short term capital gain tax. A short-term capital gain tax is a tax on profits from the sale of an asset held for one year or less. The short-term capital gains tax rate equals your ordinary income tax rate-your tax bracket. That will definitely defer the payment of capital gain tax.