Paying capital gains taxes on investment or business real estate can be a financial hit, which is one reason 1031 exchanges have made a comeback.
1031 exchanges, also known as “like kind” exchanges, were discussed at a seminar recently organized in Miami by Real Estate Communications Corp., which had SFBW as its media sponsor. The 1031 name comes from a section of IRS code that says no gain will be realized when two like kind properties are exchanged.
“It’s a great long term strategy to minimize current taxes and defer payments out to the future. Couple with the right estate planning you can push the tax obligation off to several generations,” said Jeremy Larkin, owner of NAI Commercial Real Estate Services, who was one of the attendees.
Although the term “like kind” is used, all sorts of different types of property can be exchanged.
Swaps can involve rentals, land, offices, retail, shopping, marinas, golf courses, leases of at least 30 years, parking lots, farms, factories, trailer parks, storage facilities and interest in a co-tenancy, said speaker Dave Owens of 1031 Tax Free Strategies LLC.
Some people use 1031s to also avoid potential state estate taxes on property by selling in a place like New York and buying in Florida, which doesn’t have an estate tax.
Owens talked about a condo owner in New York, who faced a potential $1.6 million gain after buying a unit for $1.9 million and selling it for $3.5 million. Instead, the buyer did a 1031 exchange for multiple properties in the Naples area. Zero tax due.
An elderly couple that bought land for $10,000 in the Sebring area was facing a taxable gain of $1.89 million and taxes of $449,000, including an extra $71,820 because of the new 3.8 percent health care tax. An exchange cut that to zero. Another owner was tired of dealing with multiple tenants on the Section 8 government assistance program, so he consolidated into one triple net commercial property.
Some clients use Owen’s Advanta IRA service, which has real estate as its No. 1 holding. Any type of IRA or 401k can be rolled into a self-directed IRA, he says.
So what are some good types of properties to look for? Robert Bhat, Vice President at NorthMarq Capital, said irreplaceable properties in areas such as Miami Beach or Manhattan and industrial space are some of the strongest and safest categories.
“A lot of people are buying real estate now because the interest rates are so low,” he says.
Speaker Joe Nugent, President and CEO of Effective 1031 Planning, specializes in helping find replacement properties quickly when someone wants to swap – deals for the new 1031 property have to close within 180 days of selling the old one.
Nugent uses Delaware Statutory Trusts that holds interest in the properties. Deals that typically close in 45 days can be closed in as little as 2 days.
Most trusts last five to seven years, he says. “Our motto is keep changing and keep deferring taxes.”
Miss the seminar?
Here are links for two upcoming 1031 seminars
Palm Beach Gardens, May 6:
https://goo.gl/5fKeKl
Fort Lauderdale, May 7:
https://goo.gl/GzasV9
