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  • A Tale of Two Brothers: Fix-and-Flip versus Fix, Rent, and Exchange

    THE SITUATION
    Greg and Peter are brothers who have each inherited some money. After the relevant estate and/or inheritance taxes, they each received $160,000. They each want to invest in real estate, but they disagree on the strategy. They both have full-time careers, so their strategies need to account for those obligations as well. Greg plans to buy something to fix and then flip, hopefully for a profit. Peter would like to buy something to rehab and then rent. Working together, they find two homes in the same neighborhood, and complete their acquisitions approximately 3 months after receiving their inherited funds, each spending $160,000. They immediately commence making repairs and upgrades in the spare time. After about 10 weeks, they have both completed their rehab work, and have each spent $45,000 in the process. Both Greg and Peter now have $205,000 invested into their respective properties. This number constitutes their basis in the property for determining taxation at a time of future sale of the property.
    Greg believes that he can sell his property for $225,000, earning him a $20,000 profit ($12,150 after brokerage commissions and transfer taxes). To compound his tax burdens, because Greg has owned the property for less than one year, he will be subject to short-term capital gains taxes, which are equal to his highest marginal income tax rate. Peter plans to hold his property and is confident that he can rent his property for $1,600 per month, or $19,200 for the first year.
    THE PROBLEM
    From the date Greg purchased his property until the date he sold it was a grand total of six months. When Greg sold his fix-and-flip property, he was introduced to the buyer by the buyer’s real estate agent. Thus, he will be paying a 3% fee to the broker, as well as state and federal taxes on his profits:

    Brokerage Commission
    ($225,000 x 3%)
    $6,750

    State R/E Transfer Taxes
    (estimated)
    $1,000

    Federal Short-term Capital Gain Tax
    ($12,150 x 35%)
    $4,252

    State Short-term Capital Gains Tax
    (estimated 6%)
    $729

     
     
     

    Net cash after taxes and expenses
     
    $212,168

     
    (Total Tax & Expense Loss 5.7%)
     

    Net profit after taxes and expenses
    ($212,168 – $205,000)
    $7,168

    Return on Investment
    ($7,168/$205,000)
    3.5%

    THE SOLUTION
    Peter listed his property for rent, and the new tenant moved in on the same day that Greg sold his property. Peter’s tenant will be paying $1,900 month, or $22,800 for the year. Peter’s tax situation at the end of the year is a little different:

    Federal Income Tax
    ($19,200 x 35%)
    $6,720

    State Income Tax
    (estimated 6%)
    $1,152

    Total Taxes
     
    $7,872

    Total estimated tax owed
    ($19,200 – $7,872)
    $11,238

    Return on Investment
    ($11,328/$205,000)
    5.5%

    In our current example, it took Greg three months to find and buy the first property. It then took him six months to make the repairs and sell it, for a total investment cycle of 9 months. If Greg is aggressive, he can accomplish four of these fix-and-and flip transactions in three years:

    Transaction 1:
     

    Invested
    $205,000

    Sold
    $225,000

    Net after commission/taxes
    $212,168

    Cash profit
    $7,168

     
     

    Transaction 2:
     

    Invested
    $212,168

    Sold
    $233,000

    Net after commission/taxes
    $219,719

    Cash profit
    $7,551

     
     

    Transaction 3:
     

    Invested
    $219,719

    Sold
    $241,000

    Net after commission/taxes
    $227,263

    Cash profit
    $7,544

     
     

    Transaction 4:
     

    Invested
    $227,263

    Sold
    $249,000

    Net after commission/taxes
    $234,807

    Cash profit
    $7,544

    3-year total profits
    $29,807

    In three years of fixing and flipping houses, Greg has netted a total of $29,807 in income. In this same time period, Peter has rented his property for $19,200 per year for the three years, netting $11,328 per year or $33,984, about 14% more than Greg netted.

    Peter is now considering selling his property as part of a Section 1031 Exchange. Historically, the national average for real estate appreciation is about 3.8% per year. Thus, Peter expects to sell his original investment property for about $250,000 (which is comparable to the value of Greg’s last sale at $249,000). If Peter sells his property outright, he can expect to pay taxes as follows:

    Federal Capital Gain Tax
    ($45,000 x 20%)
    $9,000

    Affordable Care Act Surcharge
    ($45,000 x 3.8%)
    $1,710

    State Capital Gains Tax
    ($45,000×6%)
    $2,700

    Total Taxes
     
    $13,410

     
    Peter’s tax advisor has explained the value of an IRC Section 1031 tax-deferred exchange. Peter now knows that he can effectively defer recognition of $13,410 in state and federal taxes by structuring his transaction as part of a 1031 exchange. Accordingly, upon the sale of the property, the exchange proceeds will be sent directly to Peter’s qualified intermediary (“QI”) to be held until the purchase of his replacement property.

    Within 45 days after the closing on the sale, Peter properly identified his replacement property. (More information about identification and receipt of replacement properties can be found at

  • A Tale of Two Brothers: Fix-and-Flip versus Fix, Rent, and Exchange

    THE SITUATION
    Greg and Peter are brothers who have each inherited some money. After the relevant estate and/or inheritance taxes, they each received $160,000. They each want to invest in real estate, but they disagree on the strategy. They both have full-time careers, so their strategies need to account for those obligations as well. Greg plans to buy something to fix and then flip, hopefully for a profit. Peter would like to buy something to rehab and then rent. Working together, they find two homes in the same neighborhood, and complete their acquisitions approximately 3 months after receiving their inherited funds, each spending $160,000. They immediately commence making repairs and upgrades in the spare time. After about 10 weeks, they have both completed their rehab work, and have each spent $45,000 in the process. Both Greg and Peter now have $205,000 invested into their respective properties. This number constitutes their basis in the property for determining taxation at a time of future sale of the property.
    Greg believes that he can sell his property for $225,000, earning him a $20,000 profit ($12,150 after brokerage commissions and transfer taxes). To compound his tax burdens, because Greg has owned the property for less than one year, he will be subject to short-term capital gains taxes, which are equal to his highest marginal income tax rate. Peter plans to hold his property and is confident that he can rent his property for $1,600 per month, or $19,200 for the first year.
    THE PROBLEM
    From the date Greg purchased his property until the date he sold it was a grand total of six months. When Greg sold his fix-and-flip property, he was introduced to the buyer by the buyer’s real estate agent. Thus, he will be paying a 3% fee to the broker, as well as state and federal taxes on his profits:

    Brokerage Commission
    ($225,000 x 3%)
    $6,750

    State R/E Transfer Taxes
    (estimated)
    $1,000

    Federal Short-term Capital Gain Tax
    ($12,150 x 35%)
    $4,252

    State Short-term Capital Gains Tax
    (estimated 6%)
    $729

     
     
     

    Net cash after taxes and expenses
     
    $212,168

     
    (Total Tax & Expense Loss 5.7%)
     

    Net profit after taxes and expenses
    ($212,168 – $205,000)
    $7,168

    Return on Investment
    ($7,168/$205,000)
    3.5%

    THE SOLUTION
    Peter listed his property for rent, and the new tenant moved in on the same day that Greg sold his property. Peter’s tenant will be paying $1,900 month, or $22,800 for the year. Peter’s tax situation at the end of the year is a little different:

    Federal Income Tax
    ($19,200 x 35%)
    $6,720

    State Income Tax
    (estimated 6%)
    $1,152

    Total Taxes
     
    $7,872

    Total estimated tax owed
    ($19,200 – $7,872)
    $11,238

    Return on Investment
    ($11,328/$205,000)
    5.5%

    In our current example, it took Greg three months to find and buy the first property. It then took him six months to make the repairs and sell it, for a total investment cycle of 9 months. If Greg is aggressive, he can accomplish four of these fix-and-and flip transactions in three years:

    Transaction 1:
     

    Invested
    $205,000

    Sold
    $225,000

    Net after commission/taxes
    $212,168

    Cash profit
    $7,168

     
     

    Transaction 2:
     

    Invested
    $212,168

    Sold
    $233,000

    Net after commission/taxes
    $219,719

    Cash profit
    $7,551

     
     

    Transaction 3:
     

    Invested
    $219,719

    Sold
    $241,000

    Net after commission/taxes
    $227,263

    Cash profit
    $7,544

     
     

    Transaction 4:
     

    Invested
    $227,263

    Sold
    $249,000

    Net after commission/taxes
    $234,807

    Cash profit
    $7,544

    3-year total profits
    $29,807

    In three years of fixing and flipping houses, Greg has netted a total of $29,807 in income. In this same time period, Peter has rented his property for $19,200 per year for the three years, netting $11,328 per year or $33,984, about 14% more than Greg netted.

    Peter is now considering selling his property as part of a Section 1031 Exchange. Historically, the national average for real estate appreciation is about 3.8% per year. Thus, Peter expects to sell his original investment property for about $250,000 (which is comparable to the value of Greg’s last sale at $249,000). If Peter sells his property outright, he can expect to pay taxes as follows:

    Federal Capital Gain Tax
    ($45,000 x 20%)
    $9,000

    Affordable Care Act Surcharge
    ($45,000 x 3.8%)
    $1,710

    State Capital Gains Tax
    ($45,000×6%)
    $2,700

    Total Taxes
     
    $13,410

     
    Peter’s tax advisor has explained the value of an IRC Section 1031 tax-deferred exchange. Peter now knows that he can effectively defer recognition of $13,410 in state and federal taxes by structuring his transaction as part of a 1031 exchange. Accordingly, upon the sale of the property, the exchange proceeds will be sent directly to Peter’s qualified intermediary (“QI”) to be held until the purchase of his replacement property.

    Within 45 days after the closing on the sale, Peter properly identified his replacement property. (More information about identification and receipt of replacement properties can be found at

  • A Tale of Two Brothers: Fix-and-Flip versus Fix, Rent, and Exchange

    THE SITUATION
    Greg and Peter are brothers who have each inherited some money. After the relevant estate and/or inheritance taxes, they each received $160,000. They each want to invest in real estate, but they disagree on the strategy. They both have full-time careers, so their strategies need to account for those obligations as well. Greg plans to buy something to fix and then flip, hopefully for a profit. Peter would like to buy something to rehab and then rent. Working together, they find two homes in the same neighborhood, and complete their acquisitions approximately 3 months after receiving their inherited funds, each spending $160,000. They immediately commence making repairs and upgrades in the spare time. After about 10 weeks, they have both completed their rehab work, and have each spent $45,000 in the process. Both Greg and Peter now have $205,000 invested into their respective properties. This number constitutes their basis in the property for determining taxation at a time of future sale of the property.
    Greg believes that he can sell his property for $225,000, earning him a $20,000 profit ($12,150 after brokerage commissions and transfer taxes). To compound his tax burdens, because Greg has owned the property for less than one year, he will be subject to short-term capital gains taxes, which are equal to his highest marginal income tax rate. Peter plans to hold his property and is confident that he can rent his property for $1,600 per month, or $19,200 for the first year.
    THE PROBLEM
    From the date Greg purchased his property until the date he sold it was a grand total of six months. When Greg sold his fix-and-flip property, he was introduced to the buyer by the buyer’s real estate agent. Thus, he will be paying a 3% fee to the broker, as well as state and federal taxes on his profits:

    Brokerage Commission
    ($225,000 x 3%)
    $6,750

    State R/E Transfer Taxes
    (estimated)
    $1,000

    Federal Short-term Capital Gain Tax
    ($12,150 x 35%)
    $4,252

    State Short-term Capital Gains Tax
    (estimated 6%)
    $729

     
     
     

    Net cash after taxes and expenses
     
    $212,168

     
    (Total Tax & Expense Loss 5.7%)
     

    Net profit after taxes and expenses
    ($212,168 – $205,000)
    $7,168

    Return on Investment
    ($7,168/$205,000)
    3.5%

    THE SOLUTION
    Peter listed his property for rent, and the new tenant moved in on the same day that Greg sold his property. Peter’s tenant will be paying $1,900 month, or $22,800 for the year. Peter’s tax situation at the end of the year is a little different:

    Federal Income Tax
    ($19,200 x 35%)
    $6,720

    State Income Tax
    (estimated 6%)
    $1,152

    Total Taxes
     
    $7,872

    Total estimated tax owed
    ($19,200 – $7,872)
    $11,238

    Return on Investment
    ($11,328/$205,000)
    5.5%

    In our current example, it took Greg three months to find and buy the first property. It then took him six months to make the repairs and sell it, for a total investment cycle of 9 months. If Greg is aggressive, he can accomplish four of these fix-and-and flip transactions in three years:

    Transaction 1:
     

    Invested
    $205,000

    Sold
    $225,000

    Net after commission/taxes
    $212,168

    Cash profit
    $7,168

     
     

    Transaction 2:
     

    Invested
    $212,168

    Sold
    $233,000

    Net after commission/taxes
    $219,719

    Cash profit
    $7,551

     
     

    Transaction 3:
     

    Invested
    $219,719

    Sold
    $241,000

    Net after commission/taxes
    $227,263

    Cash profit
    $7,544

     
     

    Transaction 4:
     

    Invested
    $227,263

    Sold
    $249,000

    Net after commission/taxes
    $234,807

    Cash profit
    $7,544

    3-year total profits
    $29,807

    In three years of fixing and flipping houses, Greg has netted a total of $29,807 in income. In this same time period, Peter has rented his property for $19,200 per year for the three years, netting $11,328 per year or $33,984, about 14% more than Greg netted.

    Peter is now considering selling his property as part of a Section 1031 Exchange. Historically, the national average for real estate appreciation is about 3.8% per year. Thus, Peter expects to sell his original investment property for about $250,000 (which is comparable to the value of Greg’s last sale at $249,000). If Peter sells his property outright, he can expect to pay taxes as follows:

    Federal Capital Gain Tax
    ($45,000 x 20%)
    $9,000

    Affordable Care Act Surcharge
    ($45,000 x 3.8%)
    $1,710

    State Capital Gains Tax
    ($45,000×6%)
    $2,700

    Total Taxes
     
    $13,410

     
    Peter’s tax advisor has explained the value of an IRC Section 1031 tax-deferred exchange. Peter now knows that he can effectively defer recognition of $13,410 in state and federal taxes by structuring his transaction as part of a 1031 exchange. Accordingly, upon the sale of the property, the exchange proceeds will be sent directly to Peter’s qualified intermediary (“QI”) to be held until the purchase of his replacement property.

    Within 45 days after the closing on the sale, Peter properly identified his replacement property. (More information about identification and receipt of replacement properties can be found at

  • Turning a Sale-Leaseback Into a 1031 Exchange

    Many investors are aware of 1031 exchanges, and their usefulness in their real estate portfolios. These investors use 1031 exchange to reposition their investments to other neighborhoods or other states, or to redistribute their investments to different asset classes. In today’s blog post, we explore how to benefit from a 1031 exchange in a sale-leaseback transaction.
    The Situation
    Fred owns an auto repair shop in a busy downtown neighborhood. Fred purchased his shop 20 years ago for $200,000 when it was considered an up-and-coming portion of the city. Today the street where his shop sits is a busy downtown area with mixed-use properties driving the economy. Property values in and around the neighborhood have increased steadily during the past 20 years leaving Fred with a building worth $1,000,000. Business is good and Fred wants to expand into 2 additional shops in the suburbs that each of his children can run.
    The Problem
    Neither Fred nor his children have the capital to invest into two new shops without taking on additional debt or investors. The current building holds a lot of embedded value, but Fred cannot access the cash from this embedded value without selling the property. The real estate in the suburbs is affordable now, but they believe prices will continue to rise making future expansions even more difficult. Selling the property without completing a 1031 exchange would result in the following taxes for Fred’s business:

    Capital gains on the appreciation
    ($800,000 x 20%)
    $160,000

    Affordable Care Act tax
    ($800,000 x 3.8%)
    $30,400

    Estimated state capital gains tax
    ($800,000×4.63%)
    $37,040

    Depreciation recapture
    ($102,564 x 25%)
    $25,641

     
     
     

    Total estimated tax owed
     
    $253,081

     
     
    The Solution: Sale-Leaseback, Coupled with a 1031 Exchange
    A sale-leaseback transaction occurs when an owner of a real estate asset sells the property and immediately signs a long-term lease agreement with the new owner to pay rent to occupy that same property. By completing a sale-leaseback, the seller/lessee can tap into capital otherwise locked inside an asset. The seller/lessee can sign a long-term triple-net (“NNN”) lease to control expenses. To maximize the funds to reinvest, the seller/lessee can complete a 1031 exchange on the sale-leaseback transaction.
    Fred can enter into a sale-leaseback transaction on his original shop. This means Fred will continue to use the property for his auto-repair business by entering a long-term lease to pay monthly rent payments to the new owner. Fred can structure the lease as an NNN, so he pays all utilities and keeps everything in his business’ name for continuity purposes. Fred can trade equal or up in value of the $1,000,000 price from his original shop by either purchasing existing structures or completing a parking Improvement exchange to trade into new property within 180 days of closing on the sale-leaseback transaction.
    The Result
    Fred has successfully completed a 1031 exchange from one original asset to two new shops while continuing to keep his original business running. Fred acquired two properties in the suburbs to expand his business without taking on additional debt or losing majority control of his business to equity partners. By completing a 1031 exchange Fred is able to tap into his original property’s capital, defer the long-term capital gains, and grow his auto shop’s income stream.

  • Turning a Sale-Leaseback Into a 1031 Exchange

    Many investors are aware of 1031 exchanges, and their usefulness in their real estate portfolios. These investors use 1031 exchange to reposition their investments to other neighborhoods or other states, or to redistribute their investments to different asset classes. In today’s blog post, we explore how to benefit from a 1031 exchange in a sale-leaseback transaction.
    The Situation
    Fred owns an auto repair shop in a busy downtown neighborhood. Fred purchased his shop 20 years ago for $200,000 when it was considered an up-and-coming portion of the city. Today the street where his shop sits is a busy downtown area with mixed-use properties driving the economy. Property values in and around the neighborhood have increased steadily during the past 20 years leaving Fred with a building worth $1,000,000. Business is good and Fred wants to expand into 2 additional shops in the suburbs that each of his children can run.
    The Problem
    Neither Fred nor his children have the capital to invest into two new shops without taking on additional debt or investors. The current building holds a lot of embedded value, but Fred cannot access the cash from this embedded value without selling the property. The real estate in the suburbs is affordable now, but they believe prices will continue to rise making future expansions even more difficult. Selling the property without completing a 1031 exchange would result in the following taxes for Fred’s business:

    Capital gains on the appreciation
    ($800,000 x 20%)
    $160,000

    Affordable Care Act tax
    ($800,000 x 3.8%)
    $30,400

    Estimated state capital gains tax
    ($800,000×4.63%)
    $37,040

    Depreciation recapture
    ($102,564 x 25%)
    $25,641

     
     
     

    Total estimated tax owed
     
    $253,081

     
     
    The Solution: Sale-Leaseback, Coupled with a 1031 Exchange
    A sale-leaseback transaction occurs when an owner of a real estate asset sells the property and immediately signs a long-term lease agreement with the new owner to pay rent to occupy that same property. By completing a sale-leaseback, the seller/lessee can tap into capital otherwise locked inside an asset. The seller/lessee can sign a long-term triple-net (“NNN”) lease to control expenses. To maximize the funds to reinvest, the seller/lessee can complete a 1031 exchange on the sale-leaseback transaction.
    Fred can enter into a sale-leaseback transaction on his original shop. This means Fred will continue to use the property for his auto-repair business by entering a long-term lease to pay monthly rent payments to the new owner. Fred can structure the lease as an NNN, so he pays all utilities and keeps everything in his business’ name for continuity purposes. Fred can trade equal or up in value of the $1,000,000 price from his original shop by either purchasing existing structures or completing a parking Improvement exchange to trade into new property within 180 days of closing on the sale-leaseback transaction.
    The Result
    Fred has successfully completed a 1031 exchange from one original asset to two new shops while continuing to keep his original business running. Fred acquired two properties in the suburbs to expand his business without taking on additional debt or losing majority control of his business to equity partners. By completing a 1031 exchange Fred is able to tap into his original property’s capital, defer the long-term capital gains, and grow his auto shop’s income stream.

  • Turning a Sale-Leaseback Into a 1031 Exchange

    Many investors are aware of 1031 exchanges, and their usefulness in their real estate portfolios. These investors use 1031 exchange to reposition their investments to other neighborhoods or other states, or to redistribute their investments to different asset classes. In today’s blog post, we explore how to benefit from a 1031 exchange in a sale-leaseback transaction.
    The Situation
    Fred owns an auto repair shop in a busy downtown neighborhood. Fred purchased his shop 20 years ago for $200,000 when it was considered an up-and-coming portion of the city. Today the street where his shop sits is a busy downtown area with mixed-use properties driving the economy. Property values in and around the neighborhood have increased steadily during the past 20 years leaving Fred with a building worth $1,000,000. Business is good and Fred wants to expand into 2 additional shops in the suburbs that each of his children can run.
    The Problem
    Neither Fred nor his children have the capital to invest into two new shops without taking on additional debt or investors. The current building holds a lot of embedded value, but Fred cannot access the cash from this embedded value without selling the property. The real estate in the suburbs is affordable now, but they believe prices will continue to rise making future expansions even more difficult. Selling the property without completing a 1031 exchange would result in the following taxes for Fred’s business:

    Capital gains on the appreciation
    ($800,000 x 20%)
    $160,000

    Affordable Care Act tax
    ($800,000 x 3.8%)
    $30,400

    Estimated state capital gains tax
    ($800,000×4.63%)
    $37,040

    Depreciation recapture
    ($102,564 x 25%)
    $25,641

     
     
     

    Total estimated tax owed
     
    $253,081

     
     
    The Solution: Sale-Leaseback, Coupled with a 1031 Exchange
    A sale-leaseback transaction occurs when an owner of a real estate asset sells the property and immediately signs a long-term lease agreement with the new owner to pay rent to occupy that same property. By completing a sale-leaseback, the seller/lessee can tap into capital otherwise locked inside an asset. The seller/lessee can sign a long-term triple-net (“NNN”) lease to control expenses. To maximize the funds to reinvest, the seller/lessee can complete a 1031 exchange on the sale-leaseback transaction.
    Fred can enter into a sale-leaseback transaction on his original shop. This means Fred will continue to use the property for his auto-repair business by entering a long-term lease to pay monthly rent payments to the new owner. Fred can structure the lease as an NNN, so he pays all utilities and keeps everything in his business’ name for continuity purposes. Fred can trade equal or up in value of the $1,000,000 price from his original shop by either purchasing existing structures or completing a parking Improvement exchange to trade into new property within 180 days of closing on the sale-leaseback transaction.
    The Result
    Fred has successfully completed a 1031 exchange from one original asset to two new shops while continuing to keep his original business running. Fred acquired two properties in the suburbs to expand his business without taking on additional debt or losing majority control of his business to equity partners. By completing a 1031 exchange Fred is able to tap into his original property’s capital, defer the long-term capital gains, and grow his auto shop’s income stream.

  • From One Mixed-Use Property into Multiple Short-Term Rentals, using Section 1031

    Many investors are aware of the value of Section 1031 exchanges in their real estate portfolios. These investors use 1031 exchange to reposition their investments to other neighborhoods or other states, or to reallocate their investments to different asset classes.
    The Situation
    Andrea currently owns a mixed-use building with 5 residential units above a retail storefront. The property also has ample off-street parking on a 1½ acre lot and is situated near a busy commuter road. Nonetheless, her income from the property is limited due to the market rate for this type of property in her community. Andrea acquired the property about ten years ago for $500,000. A developer is interested in the converting the property into a convenience store and gas station, and has offered Andrea $700,000, which she is considering accepting.
    The Problem
    Andrea has grown disillusioned with the property because her state imposes stricter regulations on properties with five units or more, as well as the limited cash flow potential. She had been considering selling the property anyway, but her accountant has just told her that she will have a sizeable tax bill if she sells outright. In round numbers, Andrea can expect to pay taxes as follows:

    Depreciation recapture tax
    ($128,000 x 25%)
    $32,000

    Capital gains tax
    ($200,000 x 20%)
    $40,000

    Estimated state capital gains tax
     
    $26,240

    Affordable Care Act tax
    ($328,000 x 3.8%)
    $12,464

     
     
     

    Total estimated tax owed
     
    $110,704

     
     
    Selling the property outright would net Andrea approximately $589,000 after the taxes. While Andrea wants to get away from the burdensome restrictions imposed on her by the state, and the developer’s offer is tempting, the prospect of losing nearly 16% of the sale price to taxes is less palatable than dealing with the state rules and regulations and limited cash flow.
    The Solution: A 1031 Exchange into Multiple Short-term Rental Properties
    Andrea will structure the sale of the building as part of a Section 1031 Like-Kind Exchange. After consulting with her attorney and a Qualified Intermediary (“QI”) like Accruit, Andrea now understands that “like-kind” does not require her to replace the old property with a multi-family or mixed-use property.
    Upon the sale of the mixed-use property, the exchange proceeds were sent directly to Andrea’s QI to be held on her behalf until the purchase of her replacement property. This is necessary because a person doing an exchange cannot come in actual or constructive receipt of the net sale proceeds while the exchange is pending.
    Within 45 days after the closing on the sale, Andrea properly identified five furnished rental condos for approximately $150,000, for a total investment of $750,000. (Learn more about basics of Forward Exchange, which you may review with your tax and legal advisors.

  • From One Mixed-Use Property into Multiple Short-Term Rentals, using Section 1031

    Many investors are aware of the value of Section 1031 exchanges in their real estate portfolios. These investors use 1031 exchange to reposition their investments to other neighborhoods or other states, or to reallocate their investments to different asset classes.
    The Situation
    Andrea currently owns a mixed-use building with 5 residential units above a retail storefront. The property also has ample off-street parking on a 1½ acre lot and is situated near a busy commuter road. Nonetheless, her income from the property is limited due to the market rate for this type of property in her community. Andrea acquired the property about ten years ago for $500,000. A developer is interested in the converting the property into a convenience store and gas station, and has offered Andrea $700,000, which she is considering accepting.
    The Problem
    Andrea has grown disillusioned with the property because her state imposes stricter regulations on properties with five units or more, as well as the limited cash flow potential. She had been considering selling the property anyway, but her accountant has just told her that she will have a sizeable tax bill if she sells outright. In round numbers, Andrea can expect to pay taxes as follows:

    Depreciation recapture tax
    ($128,000 x 25%)
    $32,000

    Capital gains tax
    ($200,000 x 20%)
    $40,000

    Estimated state capital gains tax
     
    $26,240

    Affordable Care Act tax
    ($328,000 x 3.8%)
    $12,464

     
     
     

    Total estimated tax owed
     
    $110,704

     
     
    Selling the property outright would net Andrea approximately $589,000 after the taxes. While Andrea wants to get away from the burdensome restrictions imposed on her by the state, and the developer’s offer is tempting, the prospect of losing nearly 16% of the sale price to taxes is less palatable than dealing with the state rules and regulations and limited cash flow.
    The Solution: A 1031 Exchange into Multiple Short-term Rental Properties
    Andrea will structure the sale of the building as part of a Section 1031 Like-Kind Exchange. After consulting with her attorney and a Qualified Intermediary (“QI”) like Accruit, Andrea now understands that “like-kind” does not require her to replace the old property with a multi-family or mixed-use property.
    Upon the sale of the mixed-use property, the exchange proceeds were sent directly to Andrea’s QI to be held on her behalf until the purchase of her replacement property. This is necessary because a person doing an exchange cannot come in actual or constructive receipt of the net sale proceeds while the exchange is pending.
    Within 45 days after the closing on the sale, Andrea properly identified five furnished rental condos for approximately $150,000, for a total investment of $750,000. (Learn more about basics of Forward Exchange, which you may review with your tax and legal advisors.

  • From One Mixed-Use Property into Multiple Short-Term Rentals, using Section 1031

    Many investors are aware of the value of Section 1031 exchanges in their real estate portfolios. These investors use 1031 exchange to reposition their investments to other neighborhoods or other states, or to reallocate their investments to different asset classes.
    The Situation
    Andrea currently owns a mixed-use building with 5 residential units above a retail storefront. The property also has ample off-street parking on a 1½ acre lot and is situated near a busy commuter road. Nonetheless, her income from the property is limited due to the market rate for this type of property in her community. Andrea acquired the property about ten years ago for $500,000. A developer is interested in the converting the property into a convenience store and gas station, and has offered Andrea $700,000, which she is considering accepting.
    The Problem
    Andrea has grown disillusioned with the property because her state imposes stricter regulations on properties with five units or more, as well as the limited cash flow potential. She had been considering selling the property anyway, but her accountant has just told her that she will have a sizeable tax bill if she sells outright. In round numbers, Andrea can expect to pay taxes as follows:

    Depreciation recapture tax
    ($128,000 x 25%)
    $32,000

    Capital gains tax
    ($200,000 x 20%)
    $40,000

    Estimated state capital gains tax
     
    $26,240

    Affordable Care Act tax
    ($328,000 x 3.8%)
    $12,464

     
     
     

    Total estimated tax owed
     
    $110,704

     
     
    Selling the property outright would net Andrea approximately $589,000 after the taxes. While Andrea wants to get away from the burdensome restrictions imposed on her by the state, and the developer’s offer is tempting, the prospect of losing nearly 16% of the sale price to taxes is less palatable than dealing with the state rules and regulations and limited cash flow.
    The Solution: A 1031 Exchange into Multiple Short-term Rental Properties
    Andrea will structure the sale of the building as part of a Section 1031 Like-Kind Exchange. After consulting with her attorney and a Qualified Intermediary (“QI”) like Accruit, Andrea now understands that “like-kind” does not require her to replace the old property with a multi-family or mixed-use property.
    Upon the sale of the mixed-use property, the exchange proceeds were sent directly to Andrea’s QI to be held on her behalf until the purchase of her replacement property. This is necessary because a person doing an exchange cannot come in actual or constructive receipt of the net sale proceeds while the exchange is pending.
    Within 45 days after the closing on the sale, Andrea properly identified five furnished rental condos for approximately $150,000, for a total investment of $750,000. (Learn more about basics of Forward Exchange, which you may review with your tax and legal advisors.

  • Future Trends in the Commercial Real Estate Industry and the Importance of 1031 Like-Kind Exchanges

    Before the COVID-19 pandemic, the $16 trillion US commercial real estate (CRE) market was enjoying over a decade of positive growth when examining CRE prices, transaction volume, CRE equity markets and mortgage originations. With the onset of COVID-19 in Q1 2020, not only did the CRE markets freeze, they also remained in limbo for most of the summer of 2020. CRE landlords were immediately faced with the realization that tenants perhaps would not be returning in the coming months, if not at all in the future.
    CRE investments are typically long-term holds balanced by occupancy rates, economic conditions, capitalization rates, liquidity opportunities,and effective operational environments. But that was then,and this is now.
    The Post-Pandemic Shift in Commercial Real Estate
    To retain optimal use of CRE in our nation, the ability to repurpose effectively is a must. It is critical to both the stability of markets and our overall economy. In a study by the Bureau of Economic Analysis presented by Deloitte in July 2019, it was estimated that the finance, insurance, and real estate markets make up the largest portion of the US GDP, holding just over 20%. The largest sector of real estate includes multi-family housing, office building, hotels, retail, and dining, all of which are suffering in this new era, while the other contributors to CRE—industrial, data centers and technology supporting properties—are all flourishing.
    A significant amount of CRE is held in large investor funds, REITS, DST (Delaware Statutory Trusts) or other passive investment vehicles. These investors not only demand a return on invested dollars, but also, they must ensure their investments are being efficiently deployed. Absent a long-term strategy to effectively repurpose non-producing real estate investments, economic recovery will lag. So,to ensure that any unnecessary friction during a recession does not impede growth, investment goals, and overall job expansion, our Congress must balance short-term gain against sustained economic growth as we cautiously move into 2021.
    1031 Exchange is an Asset
    Like-kind exchanges, or Section 1031 as referenced in our tax code, promote the free movement of real estate investments without burdening the investor with untimely taxes if the intent is simply repurposing unproductive properties. Think about moving real estate investments from a retail mall or shopping center to a state-of-the-art industrial warehouse facility. Since 1921, Section 1031 of the Internal Revenue Code has continued to remove unnecessary friction to support efficient deployment of capital invested in the largest sector of our GDP. Under Section 1031, 100% of qualifying exchange proceeds must be deployed in other qualifying real estate. Additionally, the economic impact of reducing friction encouraged by 1031 exchanges provides revenue opportunities to real estate brokers and dealers, title agents, attorneys, moving companies, interior designers, landscape firms, remodeling professionals to name just a few.
    Over the next five plus years, our CRE markets will migrate to support a hybrid of then and now. More warehouses, less retail. Individual workspaces over small cubicles. Work from home being the norm, not the exception. Redefining the restaurant experienceby allowing for expanded dining spaces and larger prepping areas for online ordering. The CRE market will change as we know it today so long as the right incentives are maintained and those growing the economy are not penalized by contributing to its growth.
    Even with a vaccine in our sights, the CRE markets are poised to be reinvented. Like-kind exchanges play an important role to accelerate the CRE transformation and provide the right tool to not only recover, but also stimulate our economy.
    Discuss your 1031 exchange options with one of our subject matter experts.