Owning investment real estate can be an effective way to build wealth and create financial security. Done properly, it can even generate stable, predictable income without significant management responsibility. However, often property owners need to rebalance their investments to achieve their objectives.
Selling investment real estate to acquire different properties better suited to meet an investor’s objectives sounds like a great idea until the taxes due upon the sale are considered. Unfortunately, the tax rate applied to sales proceeds can be as high as 42.1% at the Federal level, plus state income tax if applicable. However, one way to reposition real estate investments without taking a hefty haircut due to taxes is the strategic use of a 1031 Exchange. By performing a 1031 Exchange, property owners can sell investment property without paying capital gains tax or depreciation recapture tax, provided the sales proceeds are reinvested into “like-kind” investment real estate of equal or greater value and the conditions of the IRS tax code are followed.
As with any investment strategy, it is important to understand the potential risks involved. Real estate is an inherently illiquid asset class, and ensuring it is suitable for an investor’s financial position, and objectives is important. One key consideration is liquidity – investors must have enough liquid assets to cover significant expenses, such as medical bills. However, there are ways to address this, such as refinancing a property or purchasing insurance.
Another potential disadvantage of a 1031 Exchange is the complexity of the process. If not executed properly, it can be costly. Therefore, working with a reputable 1031 Exchange company, a qualified intermediary, knowledgeable tax counsel, and a financial advisor and estate planning attorney is essential. At Real Estate Transition Solutions, we work with our clients and their advisors to ensure that all parties are familiar with the rules surrounding exchanges, all relevant risks are discussed, and the transaction is executed correctly.
Selling investment property with a 1031 Exchange has become a widely utilized tax strategy among investors. According to data from the IRS, during the ten years between 2004 and 2013, approximately $1.3 trillion of property was exchanged in over 2.9 million transactions. The popularity of 1031 Exchanges often increases during a strong economy as owners take advantage of an appreciated real estate market.
Tax-deferred exchanges offer a flexible solution for real estate investors seeking to align their investments with their financial and lifestyle objectives. For investment property owners looking to reduce active management, increase income, or eliminate tax for beneficiaries, the versatility of a 1031 Exchange can be a valuable tool for maximizing real estate investments.
Understanding the strengths and risks of 1031 Exchange options, locations, market conditions, and how they can be combined to achieve investment goals is a key focus of our firm. If you plan to sell your investment property and are interested in learning more about 1031 Exchange options, contact Real Estate Transition Solutions (RETS) to speak with a licensed 1031 Exchange Advisor. We offer complimentary consultations that can be done over the phone, via video conference, or in person at one of our offices. To schedule your consultation, call 888-755-8595 or visit us at re-transition.com.
Real Estate Transition Solutions (RETS) is a consulting firm specializing in tax-deferred 1031 Exchange strategies and Delaware Statutory Trust investment property. For over 26 years, we have helped investment property owners perform successful 1031 Exchanges by developing and implementing well-planned, tax-efficient transition plans carefully designed to meet their objectives. Our team of licensed 1031 Exchange Advisors will guide you through the entire process, including help selecting and acquiring passive management replacement properties best suited to meet your objectives. To learn more about 1031 Exchanges and Real Estate Transition Solutions, visit re-transition.com or call us at 888-755-8595.
The information herein has been prepared for educational purposes only and does not constitute an offer to purchase or sell securitized real estate investments. Such offers are only made through the sponsors Private Placement Memorandum (PPM) which is solely available to accredited investors and accredited entities. DST 1031 properties are only available to accredited investors (generally described as having a net worth of over $1 million dollars exclusive of primary residence) and accredited entities only. If you are unsure if you are an accredited investor and/or an accredited entity please verify with your CPA and Attorney. There are risks associated with investing in real estate and Delaware Statutory Trust (DST) properties including, but not limited to, loss of entire investment principal, declining market values, tenant vacancies and illiquidity. Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated. Diversification does not guarantee profits or guarantee protection against losses. Because investors situations and objectives vary this information is not intended to indicate suitability for any particular investor. This material is not to be interpreted as tax or legal advice. Please speak with your own tax and legal advisors for advice/guidance regarding your particular situation. Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services through Concorde Asset Management, LLC (CAM), an SEC registered investment adviser. Real Estate Transition Solutions is independent of CIS and CAM.