If you’re considering selling property and want to defer or even eliminate the capital gains that may arise from the sale of the property, a 1031 exchange may be an appropriate solution. You don’t necessarily have to find a replacement property, either; in addition to active management options, there are are passive ownership solutions as well. Nathan Kuhn of Kuhn Wealth Management offers his insight on how to assess your situation and options.
The sale of investment real estate can trigger recognition of ordinary income, capital gain, depreciation recapture and even Medicare surcharge (Obamacare) tax liabilities. Completing a 1031 exchange can defer and possibly eliminate taxes while also allowing the opportunity to accomplish a variety of financial goals, including estate planning, diversification, and cash flow management. In addition, an exchange can provide an opportunity for owners to transition from actively managing property and place it in a passive ownership structure.
A 1031 exchange may allow you to defer your taxes and it is a strategy can be used throughout your lifetime. By continuing to exchange proceeds and defer gains, rather than losing a portion of your equity to taxes, the equity will continue to work for you. After exchanging for a lifetime, heirs will inherit property and receive a step up in basis equal to the fair market value at the time of your death.
Kuhn Wealth Management has guided many individuals through the 1031 exchange process. We find that by involving the right professionals and answering questions well ahead of a potential sale, we can eliminate most of the stress and uncertainty of the process. We start by encouraging our clients to evaluate what is motivating them to sell their property and then consider what they want to accomplish by completing the sale. We also involve a tax expert like Bronswick Benjamin that can help evaluate the tax implications of the sale as well as the potential tax advantages to completing an exchange.
If you decide to complete an exchange, you may want to keep managing property yourself and work with a realtor to help identify and purchase replacement property. However, if you decide you want to complete an exchange but prefer a more passive investment approach, our firm can help. We have access to replacement properties structured as DSTs (Delaware Statuary Trusts) where, as an investor, you have a fractional ownership in an investment. The types of investments we typically have available are triple net, multi family, office, retail, and medical properties, among others.
Most DST 1031 investment properties have distributions paid to investors, generally on a monthly or quarterly basis. Investors are able to diversify their portfolio both geographically and by property type. It is important to remember there are risks with these investments. The actual amount and timing of distributions is not guaranteed and may vary. Investors’ capital is not guaranteed. In addition, investments are not liquid, may have declining market values and tenant vacancies, so investors must carefully consider their overall financial situation prior to investing.
The rules and timelines that must be followed for a 1031 exchange are complex and may feel overwhelming. Together with your team at Bronswick Benjamin, we help make sense of the process and guide you through the exchange so you can walk away feeling confident you’ve made the right decision.
Whether you’re thinking about selling a property and want to better understand the 1031 exchange process and investment choices, or if you already sold your property and have the proceeds deposited at a qualified intermediary, we can help. To learn more about 1031 exchanges please start by reaching out to your contact at Bronswick Benjamin.
DST investments are available to accredited investors only (generally described as having a net worth of over $1 million dollars exclusive of primary residence or income of over $200,000 ($300,000 with spouse if married) for each of the last two years) and accredited entities only.
This is not tax advice. Kuhn Wealth Management is an independent firm from BB.