How to Defer Gains Without a 1031 Exchange!
Updated: May 8, 2019
What strategies have you explored to defer your capital gains when selling commercial property?
1031 Is Not the Only Option
Real estate investors are some of the best at applying lesser known sections of the Internal Revenue Code. Historically, 1031 exchanges have allowed them to defer liabilities created through depreciation and gains – as long as the net proceeds from the sale were used to purchase like-kind replacement propert(ies). Despite its challenges, this strategy continues to work in building wealth. If you are looking to exit or will have trouble following the strict rules for a 1031 exchange, other sections of the tax code might better align with your plans. Enter the Deferred Sales Trust….Investors nationwide use this strategy to achieve the same outcomes of a 1031 exchange – deferring gains and deprecation recapture while removing many of the strict requirements.
Removing the Timeline
Many of my clients have struggled to identify the property they want in the 45-day timeline in a 1031 exchange. Low inventories have created some off-market transactions yet convincing a seller that was not planning on selling is never a guarantee. As a buyer needing to close by day 180, the seller has a stronger hand when negotiating the transaction. A Deferred Sales Trust removes any timeline, allowing you to find the replacement property (at the right price) on your timeline.
If selling because you want to lock-in gains at a market high, wouldn’t you also be buying in the same appreciated market? Real estate is a cyclical event; some savvy real investors understand market cycles and maximize their capital by creating transactions at peaks and troughs. Instead of completing a 1031 exchange to sell and buy in the same market, others explore the Deferred Sales Trust as a safe-harbor until greater buying opportunities are present. Instead of selling and paying taxes today, then repurchasing Want to add a caption to this image? Click the Settings icon. during a dip, this strategy allows you to lock-in your gains today, defer the taxes, and have more money to work with during the next trough in the cycle.
Demographics are also playing a role in decision making as 10,000 baby boomers reach retirement age each day. Many of those baby boomers have been landlords, property managers, and investors. After decades of being in the real estate, they are ready to retire. The Deferred Sales Trust provides you cash flow through a tax efficient structure while removing the liabilities of property ownership. This strategy could even allow you to use proceeds to invest in other businesses, while deferring the taxes from the investment real estate.
This is not a new concept; the Deferred Sales Trust has been used since the 1990’s. Over the last few decades thousands of transactions (reflecting billions of dollars in appreciated assets sold) have used this strategy. Not exclusive to investment real estate, investors have also sold businesses, intellectual property, personal use real estate, and collectibles.
Current market valuations provide an attractive opportunity for you to lock-in gains today. Exploring other exit strategies allows you to reinvest the proceeds on your timeline, not the IRS’s. As you are exploring options to find liquidity but are unsure of the next move, the Deferred Sales Trust might be the right strategy for you.
Matt Bacon and Cassie Farley with Masiello Commercial are experience professionals who know about the Deferred Sales Trust. Please reach out to them, or Kyle Kadish with Advantage Wealth Solutions, to discuss how you can structure your tax liabilities, and allow your capital to keep working for you.
Get more from Kyle at: 877-866-1031 https://advantagewealthsolutions.com