David Moore CEO of Equity Advantage and Rene Nelson of Pacwest Commercial Real Estate take on the topic of tax-saving tactics in real estate investment. They explore the different angles of 1031 Exchanges, Section 121 exclusions, and Delaware Statutory Trusts (DSTs). It doesn’t really matter if you are an experienced investor or a novice; these strategies will definitely help you defer taxes, maximize profits, and expand your real estate portfolio.
The Importance of Planning
Rene highlights that for many individuals, especially those in the fourth quarter of life, the stakes are high. They often find themselves in large homes—sometimes worth millions—after losing a spouse, and they need to make critical decisions about their real estate assets. Selling a home can lead to a significant capital gains tax unless you understand the strategies available to mitigate that impact.
Understanding Section 121 Exclusions
The Internal Revenue Code’s section 121 provides that homeowners may use $250,000 gain from the sale of the primary residence, or couples who are married and filing jointly may use $500,000, as long as they have used the house as their residence for two of the last five years. For all people, this could be a very potential exemption during the process of moving to a smaller house or changing the residence because of an important life event.
What to Consider When Selling
If you are thinking of the sale of your home, take into consideration the following:
- The stepped-up basis: If a spouse passes away, the surviving spouse may benefit from a stepped-up basis on half of the property, which can reduce taxable gains.
- Market conditions: Understanding your local real estate market is crucial. If you plan to sell, timing can impact your profit margins.
- Future plans: Consider how the sale fits into your long-term financial strategy. Are you looking to reinvest or downsize?
Leveraging 1031 Exchanges
A 1031 Exchange enables investors to bypass the payment of capital gains tax on the sale of an investment property by purchasing a “like-kind” property with the proceeds. It acts as an important weapon by deferring taxes and bringing in more positive return on capital.
Key Points of 1031 Exchanges
- Qualified Intermediary: You must use a qualified intermediary to handle the Exchange, ensuring that you don’t take direct possession of the funds.
- Time Constraints: You have 45 days to identify a replacement property and 180 days to close on it after selling the original property.
- Like-Kind Property: The property you are acquiring must be of the same nature or character, though it doesn’t have to be of equal value.
Delaware Statutory Trusts (DSTs): A Passive Investment Option
A DST can be a truly great option for anyone who wants to retreat from active management of the property. With a DST instrument, a group of investors comes together and acquires a property which generates operating income for investors without the need for them to deal with property management issues directly.
Benefits of DSTs
- No Management Hassles: Investors can enjoy a steady income without the headaches of property management.
- Tax Advantages: Like 1031 Exchanges, DSTs can also facilitate tax deferral on capital gains.
- Diversification: Investing in a DST can offer exposure to multiple properties, reducing risk.
Finding the Right Strategy for You
Every investor’s situation is unique, and it is crucial to engage with tax advisors and real estate authorities to devise methodologies that suit your requirements. You could be looking at a 1031 Exchange, checking out the Section 121 exclusions, or researching the DSTs, understanding the rules and implications is key.
In the world of real estate, knowledge is power. By leveraging tools like 1031 Exchanges, Section 121 exclusions, and DSTs, you can effectively manage your wealth, reduce tax liabilities, and secure a prosperous future. Remember, the best time to start planning is now—don’t wait until you’re in the middle of a transaction to seek advice!
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Whether looking for information on simple to complex 1031 issues, Cost Segregation, Life Insurance Contract Sales, DSTs or even Qualified Opportunity Zones you will find information on our channel.
The Guys With All The Answers…
David and Thomas Moore, the co-founders of Equity Advantage & IRA Advantage
Whether working through a 1031 Exchange with Equity Advantage, acquiring real estate with an IRA through IRA Advantage or listing investment property through our Post 1031 property listing site, we are here to help Investors get where they want to be. Call them today! 503-635-1031.
