The Transition Process
Real estate can possess many attributes that make it a desirable investment including regular cash flow, opportunity for appreciation, a lack of direct correlation to the stock markets, tax benefits and more. Unfortunately, the characteristics of one’s real estate holdings rarely keep up with the changing needs of the owners. Eventually, there comes a time when one must adjust their real estate portfolio to meet their current and future needs – shifting the focus to reducing or eliminating active management, increasing monthly cash flow, incorporating estate planning, and risk reduction strategies. Real Estate Transition Solutions provides a comprehensive approach to help clients navigate the transition of their real estate holdings so that they are consistent with their current and future objectives.
Identify Financial & Lifestyle Objectives -
At Real Estate Transition Solutions, client engagement begins with understanding where our clients currently are in life and what is important to them, what their financial and lifestyle goals are, and what key issues must be considered. Mapping out objectives over the next 1, 3, 5 and 10+ years serves to build criteria for determining which properties are positioned to help an owner realize their identified objectives and which ought to be transitioned. Common considerations we address with clients are:
- Elimination or reduction of active management
- Income stability
- Increasing cash flow
- Reduction of risk, including regulatory and concentration risk
- Tax deferral and reduction
- Access to capital and liquidity
- Estate planning
- Hedging inflation
Understanding & Optimizing Current Real Estate Holdings -
Once objectives have been determined, evaluation of the current real estate holdings begins. Throughout this process we identify the strengths and weaknesses of the properties and gather relevant financial information to compare the income production between current holdings and alternative options. When a property transition becomes necessary, we work alongside the owner to maximize the proceeds received from the sale of their asset. In some situations, this is as simple as addressing any deferred maintenance issues, selecting the right broker to represent our client, and identifying the appropriate time to sell. In other situations, it requires drawing upon our network of industry specialists to determine the highest and best use of the asset and implementing a plan to realize it. Furthermore, we employ IRC 1031 tax-deferred exchanges to preserve the investment from a costly reduction in value due to taxes. Exchanges enable the proceeds to be repositioned into real estate holdings more suited for the client’s needs.
Staging Property & Preparing For A Successful 1031 Exchange -
Thanks to IRC Section 1031, a properly structured 1031 exchange allows an investor to sell a property, reinvest the proceeds in a new real estate holding(s) and to defer all capital gains (Federal and state), depreciation capture, and net investment income tax. IRC Section 1031 (a)(1) states:
“No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment, if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment.”
Internal Revenue Code (IRC) 1031 exchanges allow our clients to defer taxes as well while repositioning their equity to seek better real estate opportunities for growth and income. In order to access the full potential of these benefits, it is crucial to be familiar with the exchange process and timeline. Our extensive experience with exchanges, existing working relationships with all parties involved in the process and access to reinvestment opportunities not typically available to traditional real estate owners allow us to facilitate a smooth transition for our clients into an enhanced investment position.
The 1031 exchange follows a fixed criteria and rigid timeline that is notorious for tripping up ill-prepared or uninformed investors. To qualify for an exchange, property must be held for “investment or business purposes.” While the definition of investment purposes is broad, we work closely with tax advisors and real estate attorneys to support our client’s classification of their property as such. Furthermore, as stated in the IRC language, the property to be sold must be exchanged for that which is “like-kind.” Over the past 30 years, the definition of “like-kind” has expanded through case precedent to encompass all real estate held for investment purposes. Lastly, the exchange must be executed within a rigid timeline consisting of the following dates after the sale of the original investment property:
- Within 45 calendar days of the transfer (i.e. sale) of the first relinquished property, the exchanger must identify the replacement property to be acquired.
- The investor must close on the replacement property within the earlier of 180 calendar days after the date on which the exchanger transferred the first relinquished property, or the due date (including extensions) for the exchanger’s tax return for the tax year in which the transfer of the first relinquished property occurs.
We are very familiar with the potential pitfalls surrounding the exchange process and work together with our clients to ensure that both the exchange criteria is met and the timeline adhered to.
Execution of a successful exchange requires the use of specialists including Qualified Intermediaries, tax advisors and attorneys depending on the nature of the exchange. We have built a robust network of specialists who are committed to delivering exceptional service to all our clients.
Replacement Property Options – Realign Investment Holdings -
The primary focus of a real estate transition plan is realigning our clients’ investment real estate holdings with their financial and lifestyle goals. We present a wide variety of investment options to our clients so that a customized solution can be structured with the proceeds. For example, through our network within the commercial real estate industry, we assist clients in identifying direct ownership properties to be exchanged into, including triple-net lease properties, passive diversified portfolios of investment-grade real estate, and "value-add" properties with some of the nation’s most highly regarded real estate firm. If you are interested in learning more about investment opportunities that are consistent with your investment objectives, please do not hesitate to contact us. For further detail regarding reinvestment opportunities that may be available to you, please visit: Exit Opportunities