Avoiding capital gains

Tax, SDIRAs & Cost Segregation
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Avoiding capital gains

Kevin Tyra
Real Estate Investor · Taylor, MI · Member since 2013 · 12 posts · 2 votes

I am seeking a couple properties and looking for ways to avoid capital gains. The costs of homes are too high to roll over money through 1031 exchange. What other ways are there to avoid the capital gains

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
6y

@Kevin Tyra, In case you didn't know - You can sell one higher priced asset and use the 1031 to buy multiple smaller assets. That is generally how people avoid the "too expensive house" issue. The other way to avoid is to look to other markets or other asset classes where you can buy more NOI for your dollar. Again, this is what the 1031 allows you to do. A couple other options with the 1031

1. Buy a too expensive rental and use it for investment for a year or two and then move in.  That does not trigger the tax.  And you can sell your current primary residence and take 250/500K of profit tax free and then live in that former investment property.  

2. If your lifestyle is expanding you can sell the investments and start to purchase properties where you like to vacation - ski, beach, lake, whatever.  Rent them and use them.

3. Take the opportunity of non-recourse debt assumption and move into passive Delaware Statutory Trusts.  Debt leaves your balance sheet but tax is still deferred.

4. Move into NNN commercial if the price tag is high. Long term leases, corporate guarantees, No expenses. Value of the property is tied to the leases so inflation, and lease renewal and increases all work together to bounce appreciation.

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  • Kevin Tyra
    OP
    Real Estate Investor · Taylor, MI · Member since 2013 · 12 posts · 2 votes
    6y

    @Kevin Tyra.

    I meant selling a couple homes

    0Reply
  • Steve Morris
    Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes
    6y

    You make capital gains when you sell.  The 1031 exchange is a device to transfer your money and DEFER capital gains when you sell.

    Otherwise, am not sure what you're trying to accomplish.

    0Reply
  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    6y
    Originally posted by @Kevin Tyra:

    I am seeking a couple properties and looking for ways to avoid capital gains. The costs of homes are too high to roll over money through 1031 exchange. What other ways are there to avoid the capital gains

    1031 is used to defer CAP gain when high dollars are involved. What is your hesitation? ask @Dave Foster. 

    Also remember, its not only cap gain, its state tax plus 3.8%NIIT tax. 

    One other methods are: 

    • Installment sale
    • Investment in opportunities zones

    If you are talking about huge gain, talk to your tax pro. It might save you more money than your investment in the tax pro. 

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  • Alex Olson
    Real Estate Broker · Kansas City Metro · Member since 2015 · 2k+ posts · 1k+ votes
    6y

    @Kevin Tyra If you sell these investment properties (assuming they are investment properties) you will owe the gain in market value, depreciation, and a few other minor details as part of your capital gains which will then be paid at rate that is dependent on your total income. However, if you roll the purchase price of the properties into another property you will defar all of your gains into the new property. You can then cash out and refinance on your new property, paying no income tax. You will pay interest rate, however this is lower than the actual taxes you pay on the property...and you get to keep an investment that continues to gain in value, generate income, and cash flow. What a great way to build wealth! Hope this helps!

    4Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    6y

    @Kevin Tyra, In case you didn't know - You can sell one higher priced asset and use the 1031 to buy multiple smaller assets. That is generally how people avoid the "too expensive house" issue. The other way to avoid is to look to other markets or other asset classes where you can buy more NOI for your dollar. Again, this is what the 1031 allows you to do. A couple other options with the 1031

    1. Buy a too expensive rental and use it for investment for a year or two and then move in.  That does not trigger the tax.  And you can sell your current primary residence and take 250/500K of profit tax free and then live in that former investment property.  

    2. If your lifestyle is expanding you can sell the investments and start to purchase properties where you like to vacation - ski, beach, lake, whatever.  Rent them and use them.

    3. Take the opportunity of non-recourse debt assumption and move into passive Delaware Statutory Trusts.  Debt leaves your balance sheet but tax is still deferred.

    4. Move into NNN commercial if the price tag is high. Long term leases, corporate guarantees, No expenses. Value of the property is tied to the leases so inflation, and lease renewal and increases all work together to bounce appreciation.

    The 1031 Investor5137 Reviews
    WebsiteView Page
    8Reply
  • Andrew HoganPro Member
    Rental Property Investor · Indianapolis, IN · Member since 2016 · 559 posts · 463 votes
    6y

    I have seen a lot of folks use the paper losses generated from Cost Segregation studies done on large MF. Those losses will usually destroy or at least greatly reduce the cap gains. Just has to be done in the same calendar year. You should run this by an up to date CPA that can help you to determine if your rental income/gains is considered passive and can be offset by other passive income, or if you qualify as a Full time RE professional... hope that helps!

    1Reply
  • Linda WeygantPro Member
    Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
    6y
    Originally posted by @Andrew Hogan:

    I have seen a lot of folks use the paper losses generated from Cost Segregation studies done on large MF. Those losses will usually destroy or at least greatly reduce the cap gains. Just has to be done in the same calendar year. You should run this by an up to date CPA that can help you to determine if your rental income/gains is considered passive and can be offset by other passive income, or if you qualify as a Full time RE professional... hope that helps!

     I think you're confusing a couple of concepts on this one.  Cost Segregation is done to reduce income (passive or ordinary, depending on what's going on).  Capital Gains are completely separate from any strategy that would utilize cost segregation.  In fact, cost segregation can really ADVERSELY impact a sale due to the depreciation recapture that occurs at sale.  People who utilized cost segregation need to be very careful about the holding period of their investment so as to not convert capital transactions to ordinary income too quickly.

    Additionally, capital gains can only be offset by capital losses - RE Professional has nothing to do with that.

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  • Ujwal Velagapudi
    Investor/Agent/Entrepreneur · Dallas, TX · Member since 2016 · 464 posts · 564 votes
    6y

    How about investing into an opportunity zone, or a fund that does? This could be an alternative to a 1031, or possibly combining both. 

    0Reply
  • Taylor L.
    Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
    6y

    1031 just defers gains anyway, it doesn't wipe them out. If prices in your area are too high you could consider investing in a syndication via 1031ing into a Tenancy in Common arrangement. Or look into Deferred Sales Trusts.

    1Reply
  • Andrew HoganPro Member
    Rental Property Investor · Indianapolis, IN · Member since 2016 · 559 posts · 463 votes
    6y
    Originally posted by @Linda Weygant:
    Originally posted by @Andrew Hogan:

    I have seen a lot of folks use the paper losses generated from Cost Segregation studies done on large MF. Those losses will usually destroy or at least greatly reduce the cap gains. Just has to be done in the same calendar year. You should run this by an up to date CPA that can help you to determine if your rental income/gains is considered passive and can be offset by other passive income, or if you qualify as a Full time RE professional... hope that helps!

     I think you're confusing a couple of concepts on this one.  Cost Segregation is done to reduce income (passive or ordinary, depending on what's going on).  Capital Gains are completely separate from any strategy that would utilize cost segregation.  In fact, cost segregation can really ADVERSELY impact a sale due to the depreciation recapture that occurs at sale.  People who utilized cost segregation need to be very careful about the holding period of their investment so as to not convert capital transactions to ordinary income too quickly.

    Additionally, capital gains can only be offset by capital losses - RE Professional has nothing to do with that.

    I'm with you, I was just talking about lining up a sale with a subsequent purchase that has sufficient losses to cover over the sale's gains.

    0Reply
  • Shannon Robnett
    Developer · Boise, ID · Member since 2020 · 173 posts · 198 votes
    6y

    We are helping clients take gains and invest in Opporunity Zone syndications to mitigate the taxes paid and after a 10 year hold period avoid further cap gains on their investment dollars.   We should chat further.

    0Reply
  • Daniel McNulty
    Financial Advisor · Indianapolis, IN · Member since 2018 · 294 posts · 165 votes
    6y

    @Kevin Tyra

    If you can’t find other properties to 1031, installment sales can help lower that tax bill.

    It gives you the control of the tax bill and you can roll the proceeds into any thing you want, not just real estate.

    OZs can be great too but may require an equally large amount of capital.

    0Reply
  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    6y

    @Kevin Tyra

    I'm not sure you asked the right question. Capital gain taxes are only a piece of the story. 

    As an analogy, there're multiple ways to reduce a fever. Some of them may cause harm, depending on the whole health situation. And sometimes you may not even want to reduce it at all.

    For a good recommendation, we should have the full context. Here're just some of the questions that could matter:

    • What is your overall situation: personal, family, financial etc? 
    • What are your current financial and lifestyles goals, limitations and preferences?
    • What are you selling? Why and why now? When did you buy it and for how much? How have you been using it? What is its value? What is the market? How much equity do you have in it?
    • What would you like to do with the sale proceeds? If you plan to spend it on something, are there other ways to pay for those needs, besides selling the properties? If you plan to invest it, what kind of investments do you have in mind? Why those? Are there other ways to fund such investments? What investments would you like to avoid? Why?
    • What is the total tax impact of selling these properties right now? The answer depends on all other income and losses for the year, including potential carryover losses from past years. Since capital gains are not taxed in vacuum, it is possible that selling a property creates a relatively small increase in your overall taxes, no increase at all or even reduces your taxes for the year!
    • What could be a potential tax benefit of deferring this gain into the next year or into the next several years? This also depends on a large number of factors, many of them are just guesses since we do not know the future.

    Only having all these points (and more) considered can you decide whether you should sell, whether capital gain taxes are indeed your problem and what are the possible solutions in your specific circumstances. It's next to impossible to address in an online forum properly.

    To illustrate my point, you could be talking about a highly appreciated piece of vacant land in a desirable area or a neglected commercial property in an urban area decimated by Covid or a cash-flowing beach property etc. 

    The property may be free and clear or have negative equity requiring cash infusion to pay off the loans. It can have no prior tax losses or it can carry a huge unused loss that would be released at sale. 

    This may be the year when you lost your job and earned half of your normally high income. Or it could be the year when they sent you to an early retirement with a generous severance. This could be the year when your other investments tanked or the year when they produced a nice return. It could be the year when you got married or divorced. Or all of the above.

    You may be a young guy working full-time in real estate and rapidly expanding your business. You may be a busy executive and family man having very little to no time for hands-on involvement in real estate. You may be at a stage of your life where you want to get out of real estate completely and devote yourself and your resources to something completely different. You may be full of hope or you may be a Houston sports fan.

    I wish there was some universal game plan for life in general and real estate business in particular. Nah, on the second thought, scratch that, that would make my business obsolete.

    1Reply
  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    6y
    Originally posted by @Dave Foster:

    4. Move into NNN commercial if the price tag is high. Long term leases, corporate guarantees, No expenses. Value of the property is tied to the leases so inflation, and lease renewal and increases all work together to bounce appreciation.

    How do you feel about corporate guarantees in 2020, Dave? 

    1Reply
  • Account Closed
    Specialist · OverTheRainbow · Member since 2020 · 607 posts · 909 votes
    6y
    Originally posted by @Michael Plaks:
    Originally posted by @Dave Foster:

    4. Move into NNN commercial if the price tag is high. Long term leases, corporate guarantees, No expenses. Value of the property is tied to the leases so inflation, and lease renewal and increases all work together to bounce appreciation.

    How do you feel about corporate guarantees in 2020, Dave? 

    @Michael Plaks Can you imagine a scenario where 1031 goes away under a Biden administration? What would you do to prepare for such an event?

    0Reply
  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    6y
    Originally posted by @Account Closed:

    I can imagine almost anything under Biden, other than tax reduction. :)  But I learned to not worry about things that may or may not happen until they happen.

    I also doubt that the next administration, whether Trump or Biden, would have taxes as a priority. I would not expect any major tax changes in 2021.

    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    6y

    @Michael Plaks, funny you should mention corporate guarantees :). Was just talking to a client a few weeks ago who has 8 NNNs.  5 are corporate guarantees.  3 are individual "mom and Pop"s.  Of those 4 of the 5 corporates either stopped paying rent (but were nice enough to send pre-notice) or threatened.  The mom and pops didn't miss a month.

    But, as my client said - one letter from our attorney with some choice language and they all started paying again and made up arrears immediately!.  So I guess the take away is you can't trust corporations.  But there's no trust in business anyway.  

    And secondly I still like a corporate guarantee when it's backed by a $40 bil market capitalization.  There's plenty of money for rent.  No matter how their attorney's poor mouth it.  

    And I spose third, I won't look down my nose automatically at mom and pops.  In the right sector and circumstance their guarantee is their success and actual business.  

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  • Shannon Robnett
    Developer · Boise, ID · Member since 2020 · 173 posts · 198 votes
    6y

    @Dave Foster Its a sad state of affairs when corporate takes that approach, but I have also seen it here in Idaho.

    1Reply
  • Brian G.
    Rental Property Investor · Los Angeles, CA · Member since 2013 · 1k+ posts · 1k+ votes
    6y

    @Kevin Tyra what about a simple cash-out refi?

    0Reply
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