WHAT IS "DEAD EQUITY"?
“I bought a four-plex a few years ago that is now worth 850K. I am being told that my 850K of equity is “dead”, just sitting there doing nothing for me. How can I make my equity work for me? I don’t want to do anything stupid.”
Here’s how it works. Dead Equity is, “any equity that could be earning you more.” I am the slayer of Dead Equity. Nothing gets under my skin more. For example, one client owned a four-plex outright. He’d stopped benefitting from the depreciation expense which meant his income was no longer shielded from taxes. If all of that sounds like mumbo jumbo, that’s fine, it makes sense to me and that’s why you need a guy like me on your team. What I was able to help him see is that, if he left things the way they were, he would have an income at a set rate, that was reduced by growing taxes. However, if he sold the property using a 1031 Exchange, he could take the $850,000 from the four-plex and get into a 24-unit building worth $2.8 Million. Now, his equity is alive again. He’s got equity in a much larger asset, plus his income is shielded from taxes again. Do you see my point? If you can vanquish dead equity and revive your equity to multiples of it’s former self, why not?
Some Particulars
After a period of time, owning a property has diminishing returns. Depreciation Expense allows investors to shield most, if not all, their income from taxes in the earlier years of owning a property. But over time, as the value of the property goes up and the rental income increases, the depreciation expense stays constant. After 27.5 years, an investor loses that depreciation altogether. We show investors how to re-activate their equity by either refinancing and pulling cash out to invest in a new property with a new depreciation schedule, or to complete a 1031 Tax Deferred exchange by selling that property and re-investing into a new property with a new depreciation schedule and defer all capital gains taxes in the process. See it now?