Tax Saving Strategies in Real Estate Investing
Independently or combined to increase tax savings!
There are several well-known tax deferral and mitigation strategies within real estate investing. Most popular is the long-standing Internal Revenue Code (IRC) Section 1031 Exchange that provides a vehicle for deferring capital gain taxes while disposing of investment property.
Other tax savings mechanisms allow real estate investors to potentially eliminate, instead of just defer, some or most capital gain taxes (e.g. IRC Section 170 Bargain Sales). These can be paired with strategic measures, like front loading depreciation through a Cost Segregation Study, to allow the investor to take advantage of future depreciation benefits in advance.
Cost Segregation & 1031 Exchanges can be combined to maximize the cash flow of your investments. When buying "fix-n-flip" properties with anticipated short-term capital gains, then a self-directed IRA may help mitigate capital gain taxes in future sales if an investor can tolerate the illiquidity of buying and selling within an IRA.
The point here is that you have options. And the best thing to do is work with professionals who understand those options. Our team offers a full-service approach. If you don't have a real estate or tax professional, we can connect you with one. If you do, that's great! We’ll work with them too. Schedule an appointment online now.
LOOKING FOR PASSIVE 1031 EXCHANGE REPLACEMENT PROPERTY OPTIONS?
If you're looking to exit real estate altogether but don't want to pay the capital gain taxes of a traditional sale (which can be a third or more of your proceeds!), then you can still use a 1031 Exchange and go completely passive on the replacement purchase using a Delaware Statutory Trust (DST). This option is becoming very popular among investors looking to reduce or eliminate active property management burdens while gaining the advantages of partial deed ownership in a diversified and professionally managed portfolio. The DST structure provides ownership of class "A" institutional grade real estate for those who wouldn't be able to afford it on their own.
First choice, or last resort? DSTs can actually be either. They’re a first choice for those looking to become completely passive real estate owners, potentially receive monthly revenue, and avoid the "3-T" burden of active ownership (Tenants, Turnover, and Trash). DSTs can also serve as last resort ID replacement property to ensure a full tax deferral in a 1031 Exchange because they are more likely to successfully ID and close within the strict timelines required (ID within 45 days, close within 180). This is only for certain investors. If you’re interested in more information, we’ll connect you to a licensed financial securities professional now. Schedule an appointment online.
Since all of these tax savings vehicles are separate parts of the official IRS tax code, they can be combined for additional savings. Here are a few options:
Choose an IRC Section 170 Bargain Sale and use the 1031 Exchange on the cash proceeds to defer what you cannot eliminate in capital gains and depreciation.
Set up a 1031 Exchange and purchase a property that is located in an approved Opportunity Zone (OZ). Any capital gains from eligible improvements can then be reduced or eliminated (depending on length of ownership and adherence to OZ requirements).
Buy qualifying investment property in a 1031 Exchange that is not valued highly enough to receive a full tax deferral, then purchase a DST to "soak up" the additional capital gains required. DSTs are usually purchased in increments of $100,000, but smaller amounts ($25,000-$100,000) are available.
I know we've covered a lot here. The most important take away is that finding the best strategy or combination of strategies for your particular situation is crucial! We highly recommend a team approach. We’ll work with your current tax professional (or provide one if needed) to determine the best way to proceed for your upcoming investment real estate sale.
Schedule a free consultation appointment online now