Some Tax Saving "Vehicles" within Real Estate Investing
Some can be used in combination potentially providing tremendous tax savings!
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There are several well-known tax deferral and mitigation strategies within real estate investing. Most investors are aware of the tax deferral benefit of the long-standing Internal Revenue Code (IRC) Section 1031 Exchange that provides a vehicle for deferring capital gain taxes while disposing of investment property.
There are other tax savings vehicles available that allow real estate investors to potentially eliminate, rather than only defer, some or most capital gain taxes (e.g. Section 170 Bargain Sales) Additionally, strategic measures of front loading depreciation through utilizing a process of increased depreciation schedule timeline value assessment using a Cost Segregation Study process can also be deployed to provide additional benefits prior to the disposition of assets. This type of strategy allows 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. If you aren't selling any investment property at the moment and only buying, then using a self-directed IRA could be a good option for you to consider to help with mitigating capital gain tax burdens in future disposition sales. The point here is that you have options but it is very important for you to work with professionals who understand these options. If you don't currently have a real estate professional or CPA hired, we can connect you as our team provides a comprehensive full-service approach. Already have a real estate professional or CPA? That's great! We can work with them as a team. Schedule an appointment online now
LOOKING FOR PASSIVE 1031 EXCHANGE REPLACEMENT PROPERTY OPTIONS?
If you're looking to exit real estate altogether and not interested in using a Section 170 Bargain Sale, but you don't want to pay the required capital gain taxes of a traditional sale (sometimes a third or more of your proceeds) you can still do a 1031 Exchange and go completely passive with the replacement purchase. A increasingly popular option for passive replacement holdings as of recent is a Delaware Statutory Trust (DST). This option is becoming very popular among investors looking to reduce or eliminate active property management burdens and allows the advantage of partial deed ownership (with several other investors) in professionally managed portfolio of diversified classes of real estate instead of one property option in one location. Moreover, the DST structure provides for ownership of class "A" grade real estate ownership for those who wouldn't be able to afford that type of property purchase on their own. First choice, or last resort? These DSTs can serve as either, actually... a "first choice" option for those looking to become completely passive in real estate ownership and receive automated "mail box" money and not have the "3-T" burdens of active ownership (Tenants, Turnover, and Trash). Conversely, if not an investor' first choice, DSTs can serve as a "parachute" (backup strategy) ID replacement property to ensure a full tax deferral in a 1031 Exchange. DSTs can be ID'd as a "fail-safe" as they are more likely to be available to successfully ID and close on within the strict timelines required of a 1031 Exchange (ID within the required 45 calendar days, close within 180). The DST options do qualify for 1031 Exchange treatment, but only for certain investors. Let us connect you to a licensed financial securities professional to explain further.Schedule an appointment online now
Since all of these "tax savings vehicles" are separate parts of the official IRS tax code regulations, they can either be used by themselves, or in combination with each other. For instance, you can choose a Section 170 Bargain Sale and 1031 Exchange the cash proceeds of the sale and defer what you cannot eliminate in capital gains and depreciation recapture tax burdens, or you may want to set up a 1031 exchange and purchase a property that is located in an approved Opportunity Zone (OZ) area. Once the exchange is complete, an OZ fund could be created and any capital gains from eligible improvements made could potentially be reduced or eliminated (depending on length of ownership and adherence to OZ requirements). Another option would be to buy some qualifying investment property in a 1031 Exchange that is not valued enough to receive full tax deferral, then purchase a DST to "soak up" the additional capital gains required in an exchange to give you full tax deferral. Normally DSTs can be purchased in increments of $100,000, but smaller options such as $25,000-$100,000 could be possible.
I know we've covered a lot here right? The most important take away is that determining the best one or more combined strategies for your particular situation is imperative! Moreover, we highly recommend a team approach where we work with your current tax professional (or provide you one if needed) to determine the best overall approach for your upcoming investment real estate sale.
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Disclaimer: The tax-related information contained on this site should not be construed as tax or legal advice specific to your situation, and should not be relied upon in making any business, legal or tax-related decision. Please consult your tax or legal adviser for further information. We welcome the inclusion of your tax adviser to further determine what type of capital gains tax strategy works best for your unique set of tax circumstances.