Many real estate investors buy property as a long-term wealth-building strategy. They start investing small, then reinvest to grow their portfolio. Investment property provides passive income and may create legacy wealth for investor and their family. Investors buy property as a vehicle to create wealth from cash flow and appreciation, but taxes are also a big piece of the puzzle especially when one sells their property.
Real estate has a number of built-in potential tax advantages that are unavailable in most other investments, such as the ability to depreciate the building portion of the property, which can effectively reduce your annual income tax while you are in operation mode. And, when you sell you may be able to use other tax strategies to defer capital gains taxes resulting from the sale.
Defer your Capital Gains Taxes at the Time of Sale
The IRC §1031 exchange allows the investor to defer taxes on the capital gain to a more opportune time. A 1031 exchange allows the investor to keep more money in their pocket and use it as additional purchasing power on their next transaction. It’s like a gift from the government. The 1031 exchange can be a vehicle that can continue to grow your wealth.
Get Out of Management (Retire) With Turnkey DST Properties
In this time of unknown economic factors, diversification may provide more stability. And, “like-kind” for a 1031 exchange has a broad interpretation that may allow investors to exchange a warehouse for an interest in an office building, a shopping center, or an energy production property, as well as a different geographical area than your current property. Such diverse properties are often available as Delaware Statutory Trusts “DST”, or DST properties, in which you own a fractional interest with others.
If you are ready to hang up your management duties, using a 1031 exchange allows you to move from management into a professionally managed, institutional quality DST properties that provides passive income.
1031 Exchange Rules
Requirements to qualify for a 1031 exchange.
Sell and buy the right type of assets; the property is held for business or investment.
- The Investor must acquire title to the replacement property in the same manner as title was held in the relinquished property.
Requirements to fully defer 100% of capital gains tax.
- Investor must reinvest all proceeds from the sale of the relinquished property(ies).
- Investor must acquire debt equal or greater to debt paid off from the relinquished property (or replace the debt with additional cash)
Time frames to complete exchange
- Replacement property(ies) must be identified within 45 days calendar days of the relinquished property sale date.
- The exchange must be completed by the earlier of:
- 180 calendar days from the date of the relinquished property closing; or
- The due date of the investor’s federal income tax return, together with all extensions.
Identification rules for replacement properties:
- 3-Property Rule—up to three (3) properties can be identified without regard to their fair market value.
- 200% Rule—any number of properties can be identified, as long as their combined fair marketing value does not exceed 200% of the fair market value of all relinquished property.
- 95% Rule – any number of properties may be identified, as long as the investor closes on 95% of the fair market value of the identified properties.
Tax-deferred exchanges allow investors to defer capital gain taxes as well as potentially facilitate portfolio growth and return on investment.
* Income and net worth restrictions apply.
- Except where noted, the client must be an Accredited Investor as defined in Regulation D under the 1933 Act (i.e., $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly two of the last three years).
- IRS tax code is subject to change and the IRS could disallow some or all of the benefits discussed above. The above numbers are for specific cases. Past performance is not guaranteed.
IREXA® Financial Services / Wealth Strategies collaborates with CPAs, attorneys, and other tax planning professionals to assist clients with tax mitigation strategies. IREXA® and Great Point Capital, LLC are not tax professionals or attorneys. IREXA® only provides client tax mitigation strategies through, and with the approval of, the client’s professional counsel. You should review any planned financial transaction that may have tax or legal implications with your personal tax or legal representatives or advisors.
Securities offered through Great Point Capital, LLC, Member FINRA/SIPC, 200 W Jackson Blvd #1000, Chicago, IL 60606, telephone (312) 356-4872. IREXA® Financial Services / Wealth Strategies is not affiliated with Great Point Capital, LLC