What types of investments qualify for Section 1031 tax-deferred exchanges?
1031 exchanges can make a substantial financial difference for NYC property investors. There are certain rules to follow in order to take advantage of them, but they may offer more flexibility than most realize. So what types of assets can you acquire and exchange while retaining the best tax benefits?
The key to enjoying 1031 protections is all about exchanging ‘like-kind’ property. Unfortunately many NYC property investors have forgone the potential savings by not being aware of how broad this term and application can be.
‘Like-kind’ generally does not describe the aesthetics or features of a property. That means you don’t have to trade one townhome for another, or one 10 unit multifamily apartment building for another 10 unit building. In fact, some attorneys would go so broad as saying that one piece of investment property is like-kind to virtually all others due to its nature. So you may change single family homes for condos, condos for lots for development, vacant land for industrial warehouses, office buildings for mixed use properties, a duplex for a 10 story building, and so on.
You may even be able to trade leaseholds, equipment, furnishings, and art as ‘like-kind’ investments.
Forbes argues that under certain conditions you may also benefit from a 1031 exchange on vacation homes and retirement homes providing certain rules are met.
So what can’t you do?
According to theIRS these types of investments specifically cannot qualify for 1031 exchange benefits:
The best formula for a truly successful series of exchanges which fully optimize the available tax breaks is to consult with a 1031 expert who can work with you to customize a sound long term strategy, as well as finding assistance in lining up investment properties to acquire in advance.
Are 1031 real estate exchanges the tool you’ve been seeking to accomplish your philanthropic goals?
There are a number of reasons to use 1031 like-kind exchanges in real estate investment. One of the most powerful, yet commonly overlooked might be to supercharge and guarantee your charitable aspirations are taken care of.
For many of us one of the highest purposes we can achieve is to give and help others. That certainly includes family and those closest to us. For many it also includes helping the community, others in more desperate need across the country, or even abroad.
While we might do this in many ways on a daily basis, most want to do more. That doesn’t always make it easy. There is a lot to take care of, and we want to ensure we maximize our impact. This makes tools like the 1031 an ideal vehicle for achieving this.
Investing in real estate is a great strategy for preserving wealth, generating passive income, and building long term capital. Yet, often so much of the potential financial rewards produced are wasted in taxes. That’s often high double digit percentages. When compounded over the years it becomes seven figure sums very quickly. The government certainly provides the structure for many needed services. Though most would argue that it is rarely the most efficient in funneling support to those in need.
1031 exchanges, self-directed IRAs, and other tax saving tools help investors retain their gains, and grow them tax free. They can often also help facilitate smoother and more profitable transitions of wealth later in life, and after you pass on.
These tax saving tools can then also provide better protection for philanthropic capital, help preserve and generate additional double digit gains to provide for family and other charitable goals during our lifetimes, and then leave a far larger nest egg to fund those things for many years after we are gone. They maximize our capacity in size, and often help put that capital in the hands of the right people at a time when they can best manage and use them well.
How are you maximizing your philanthropic potential?
Awareness of the benefits of using tax saving 1031 exchanges are gaining great visibility again. Still, the big question most have may be “is a 1031 exchange really for me?”
Who are 1031 exchanges for?
Wealthy individuals and families certainly have a lot to gain from using 1031 exchanges. Whether your family already owns a substantial amount of NYC or global real estate, you recently struck it rich with a hot tech startup, or you won the lottery; investing in real estate and leveraging 1031 exchanges are definitely a smart move. They’ll help preserve that wealth, and maximize its growth, while legally keeping the tax man at bay.
Active Real Estate Investors
Serious and active real estate investors really shouldn’t be rushing into the game without some form of tax saving vehicle. That may be a variation of a self-directed IRA or 1031 exchanges. Just don’t keep throwing away double digits to the IRS each year in overpayments. If you don’t need the money, then you could at least be working less and netting the same. And there are plenty of great causes to support directly.
Millennials Just Starting Out
1031 exchanges are not just for real estate pros and wealthy families. In fact, many of those individuals wouldn’t be where they are now in the NYC real estate world if it wasn’t for using 1031 exchanges in their earlier days.
So whether you are fresh out of school, still working on a degree, are building a tech startup you are passionate about, or are working hard to move up the career ladder, but want your money working harder so you don’t have to – definitely investigate the benefits of exchanges in order to grow your passive income and wealth faster.
Overcoming the Objections
Just knowing the benefits of like-kind exchanges isn’t enough for everyone. Many still have doubts and questions.
Some of the most common are:
One of the great provisions of this tool is that investors can also buy and improve properties or build new properties with 1031 funds. This again broadens what can be invested in. Don’t forget; NYC is full of mixed-use properties, commercial buildings, and redevelopment opportunities, which can give investors multiple tenants in different industries; providing incredible diversification without sacrificing the benefit or having hard assets.
So is a 1031 exchange for you?
1031 exchanges can supercharge real estate investment, but don’t make this mistake…
Tax saving 1031 exchanges can give real estate investors incredible momentum and help them snowball returns to grow wealth and cash flow far faster. Unless you make a big blunder. The most common of these is absolutely timing.
Check out key dates, timelines, and 1031 terms in this post from The Ratner Team
The National Association of Realtors believes that the importance of 1031 exchanges is so critical to individual investors and capital flows which support the market in general that it has named them as one of their top items to protect in the 2016 NAR Legislative and Regulatory Agenda.
Early Planning is Vital
Deciding to try and use a 1031 exchange the week before your property sale goes to the closing table can make things really difficult. It makes it hard for those organizing the closing, the exchange, and for you.
What you should know well in advance includes:
The Need to Multiple Investment Property Options
Any experienced commercial real estate investor knows that it can take time to close a deal, multiple issues can arise in the process, and that due diligence can change everything.
This makes it critical for investors using 1031 exchanges to identify new acquisitions early, and if they are wise to name several backup property options as well. Note the several rules for naming backup properties, and what qualifies as ‘like-kind’ exchanges, and what does not.
If you are coming up short in your New York property search there is a good chance that is because the best properties are now frequently held and marketed privately off-market. You’ll need connections to dig up and get introduced to these deals.
The Big Fix!
What if you are already late into a deal, or have even contracted to close on a new acquisition without selling a previous one yet?
There is a massive power tweak few are aware of. That is reverse 1031 exchanges. These allow you to buy with confidence, then sell and get the tax break on the proceeds of another property. Stay tuned and we’ll let you know how to do these deals next week…