All Forum Posts by: Sean Ross

Just a quick follow up to @Christie Gahan's comment:

** Yes, Long term capital gains are taxed at lower rates, but it isn't as simple as the first $500K of gains are taxed at 15% -- rather, the 15% bracket will account for your total income from all sources.  If you have $250K of W-2 or 1099 income, for example, then only the first $250K of your LTCG will get the 15% rate.  Once your total income (including LTGC) crosses the $500K threshold (which is really about $519K in 2024), then it flips to 20%. 

  ** Remember @Ran Fridman that you are also likely facing recaptured depreciation taxes (25%) and possibly NIIT taxes (+3.8%) on sale, plus state taxes on income (+4.95% for IL).  Your total tax % on long term capital gain income is very unlikely to be as low as 15% -- but it's still almost certainly lower than ordinary income. 

  ** Christie makes a good and important point that just paying the tax up front will give you greater flexibility in terms of reinvestment options.  You just lose out on the efficiency created by the 1031 structure. 
  

@Jonathan Stone yes, I do think so.  Or, at least the American Families Plan as a whole might. 

The increase in gains taxes on those earning high incomes means that anyone selling a highly priced asset -- whether investment or otherwise -- could find themselves loaded into a significantly larger tax bill.  

The AFP also appears to expand the application of the NIIT tax. 

Combined with the elimination of high-gains 1031s, this could convince a lot of taxpayers to start and complete new exchanges or move into new homes this year.

@Jonathan Stone my understanding is that the limit proposed is per asset.  That is, you can sell two different properties with $450,000 in gains each across two different exchanges, but not a single asset with $550,000 in gains. 

Of course, all we have is the White House summary sheet to work from.  

When this was telegraphed last year, the working paper suggested a $400,000 income limit for executing exchanges.  It's interesting that they've changed the criteria. 

Of course, the FEA and its allies across the country will be working diligently to preserve 1031s in their entirety. 

@John Rubino as @Dena Puliatti mentioned, this does appear to be capped for gains that are $500,001+ for any given asset sale; now, this could capture a lot of deals, particularly those that are the result of chain 1031s.  But it leaves plenty of room for some exchanges. 

Of course, new administrations swipe at 1031 exchanges with some regularity.  The Trump Administration tried to axe them entirely in 2017; the industry managed to push back and preserve real property exchanges. 

There are a lot of good, smart, hardworking folks trying to tell legislators that 1031s mean a great deal to the economy.  

 If you want to send a message to your legislator, you can do so easily through the Federation of Exchange Accommodators

Yes @Sherry Byrne I think being skeptical with any investment is a pre-requisite. We've all read the horror stories of folks losing their shirt when someone shady/incompetent leads them down a bad road. 

The red flags you highlight would be flags for me as well.  

Any good DST sponsor would be able to tell you right away what assets they still open for capital investment, they'd give you a PPM so you can review the facts and figures yourself, etc.  In no time at all you'd be able to say "Oh, here is an Amazon Warehouse that I can invest in at an estimated 5% return," or "this is a lovely office building in Austin that was able to collect 98% of rents during COVID"...etc.  

Without these details I think I would listen to that internal voice you have going there. 

@Alex S.

You will pay taxes, roughly speaking, whenever you receive the principal as @Marco Bario indicates. 

If you do look into a 1031 exchange you must be careful.  It is not straightforward to do a 1031 exchange when you are also carrying a note from the sale of your property. This is because the promissory note that you receive is not considered "like-kind" to the real estate you sell (speaking technically) and it could leave you cash-poor when you try to reinvest in a replacement asset (speaking practically). 

I wanted to back up what @Ashish Acharya said for and concisely summarize for @Nick Frey and anyone dropping by this chain:

1. Yes, you can still do a 1031 exchange on a property held less than 12 months provided that you had/can show the proper intent. This happens all the time.
2. Property can qualify for Section 121 exemption and Section 1031 deferral simultaneously; the facts here matter a great deal and should be worked out carefully with an intermediary/CPA.
3. Unrecaptured depreciation cannot be exempted with Section 121 but can be deferred along with all other taxes in a 1031 exchange.
4. I do not believe that OZones can easily be used as a "break glass in case of emergency" when a 1031 fails.  There is some debate here, but typically the gains from the sale of the investment asset must be reinvested into the OZone Fund within 180 calendar days, but you cannot get funds back from a failed 1031 exchange until day 181 after sale in many/most cases. 

I hope this helps,

@Sherry Byrne a lot of people are in your shoes right now (moving from active to passive, that is) and DSTs have been a popular choice since their inception. 

It's a legitimate investment option.  It's not a panacea of course. If you're working with a 1031 company, enlist their help to make sure you're considering the important variables..

Many of our past and current clients have/are invested in Delaware Statutory Trusts.  Here are a few observations and notes:

• 9% to 14% seems rich to me. You're much more likely to get a passive cash-on-cash yield closer to 4-7%
• similar in some respects to a REIT (real estate investment trust), except that you as beneficiary of the DST are not receiving ownership shares like a REIT investor.
• There are many good DST sponsors; there are some not-so-good sponsors. You should consider their track record, particularly whether they've actually taken an investment "full-cycle" and proven they can exit and take care of their investors. Fees can also be steep here.
• DSTs tend to be illiquid
• DSTs tend to rely on leverage to create their returns.  This isn't bad in any ex ante sense, but it's a risk to consider. 
• You have no management responsibilities and you receive passive income.
• Unlike TIC investments, you don't have the risk of relying on multiple borrowers when there is debt involved.
• There are other passive options of course.

I hope this helps.  You can DM me if you have specific questions and I'm happy to help out. 

@Jeff Quinlan the time constraints of a 1031 exchange are most pronounced in a hot / low-inventory market like many today.  Of course, this also means that you might get top dollar for the SFRs that you are debating selling...

@Brad Hammond raises some very good questions here.  How much capital do you need?  What is your timeline?  How many properties do you want to manage at once?

@Brent Cheney @Christopher Smithand @Wayne Brooks are spot on here.  Personal residences (or 2nd/vacation homes) are ineligible for 1031 consideration.  The way the IRS defines this is "properties held for investment or use in trade or business". 

In Brent's case, he could either stay in there until Oct 2021 to receive his Section 121 exemption for capital gains or he could rent it out for a year (or so) and then do a 1031 exchange thereafter.