There are a lot of things to consider when investing in real estate, especially when investing in rental properties. Taxes are a major factor in those considerations, and there’s no applicable tax more severe than the capital gains tax. If you’re not careful, capital gains taxes can cost you a significant portion of your investment and can limit your options when you go to invest in a new property. To help you better understand the basics of capital gains taxes, and what you can do about them, this post will discuss what they are, and how to defer them. Armed with this knowledge, you’ll be prepared to make smarter investing decisions—decisions like the ones that have saved some investors millions.
What Is the Capital Gains Tax?
The capital gains tax is, quite simply, a tax on “capital gains.” In other words, when you sell an investment, the proceeds are considered a “capital gain,” and thus count as a form of taxable income. The problem lies in the fact that capital gains are taxed at a different (and potentially much higher) rate than normal income.
Combined Capital gains can see tax rates as high as 450% including between the capital gains tax, depreciation recapture tax, net investment or Obamacare tax, and state taxes, depending on the state you live in. This severely limits (and reduces) the number of funds mounts your options when you go to reinvest in a new property, and similarly affects the amount of operating income you can expect to receive for a new investment.
Do I Have to Pay It?
The most important thing to remember about capital gain taxes is that you don’t necessarily have to pay them. At least, not yet. You can defer paying on the capital gains tax by availing yourself of the provision in section 1031 of the Internal Revenue Code. Colloquially called a “1031 Exchange,” this involves reinvesting your proceeds into a new property of equal or greater value.
1031 Exchanges are very common and simple to execute. You identify a qualifying replacement property within 45 days of relinquishing the previous property and then reinvest the money in the new property. Then, when the time comes to sell the new property, you do it again. By doing this, you can continue to defer your capital gains tax.
How Long Can I Defer It?
You might be wondering “But I’ll have to pay the tax eventually, right?” The answer, surprisingly, is no. In contrast to the adage, death may be a sure thing, but this tax is not, largely because of the former. If you continue deferring your capital gains tax up until you pass away, you never have to pay it, and the property (whether bequeathed intact or sold upon your death) doesn’t incur the capital gains tax when your posterity inherits it.
What Are My 1031 Exchange Options?
You have a variety of options to choose from when identifying a replacement property under a 1031 exchange, though some options are more hands-on than others. A traditional rental or even an NNN (triple net) property will require a certain amount of legwork on your part.
If you’re looking for something truly hands-off, a Delaware Statutory Trust (DST) is probably your best bet. These fractional ownership properties allow you to be part of a high-value property, without having to take overall financial or managerial obligations yourself.
Let First Guardian Group Help
If you’re ready to learn more about how you can defer your capital gains tax and what your options are to do so, contact us here at First Guardian Group. We have extensive experience handling 1031 Exchanges, and we can help you with every step of the process, from answering questions to assisting you in finding a new investment. We even have a selection of DST properties you may be interested in investing in.
It’s time to leave the stress of capital gain taxes behind, and let your whole investment continue working for you. You can do this, and First Guardian Group can help.
BIO : Paul Getty
Paul Getty is a licensed real estate broker in the state of California and Texas and has been directly involved in commercial transactions totaling over $2 billion on assets throughout the United States. His experience spans all major asset classes including retail, office, multifamily, and student and senior housing.Paul Getty’s transaction experience includes buy and sell side representation, sourcing and structuring of debt and equity, work-outs, and asset and property management. He has worked closely with nationally prominent real estate brokerage and investment organizations including Marcus Millichap, CB Richard Ellis, JP Morgan, and Morgan Stanley among others on the firm’s numerous transactions.Paul Getty also maintains a broad network of active buyers and sellers of commercial real estate including lenders, institutions, family office managers, and high net worth individuals.
Prior to founding First Guardian Group/FGG1031,Paul Getty was a founder and CEO of Venture Navigation, a boutique investment banking firm specializing in structuring equity investments made by institutions and high net worth individuals. He possesses over 25 years of comprehensive worldwide business management experience in environments ranging from early phase start-ups to multi-billion dollar corporations. His track record includes participation in IPOs and successful M&A activity that has resulted in investor returns of over $700M.
Paul Getty holds an MBA in Finance from the University of Michigan, graduating with honors, and a Bachelor’s Degree in Chemistry from Wayne State University. He is a member of Institute of Real Estate Management (IREM), a Certified Property Manager Candidate (CPM), and a member of the US Green Building Council.Paul Getty holds Series 22, 62, and 63 securities licenses and is a registered representative with LightPath Capital Inc, member FINRA /SIPC .
Paul Getty is a noted speaker, author, and actively lectures on investments and sales and management related topics. He is author of The 12 Magic Slides ,Regulation A+: How the JOBS Act Creates Opportunities for Entrepreneurs and Investors , and Tax Deferral Strategies Utilizing the Delaware Statutory Trust (DST), available on Amazon and other retail outlets.
This material is not intended as tax or legal advice so please do speak with your attorney and CPA prior to considering an investment. This material contains information that has been obtained from sources believed to be reliable. However, FGG1031, First Guardian Group, LightPath Capital, Inc., and their representatives do not guarantee the accuracy and validity of the information herein. Investors should perform their own investigations before considering any investment. There are material risks associated with investing in real estate, Delaware Statutory Trust (DST) and 1031 Exchange properties. These include, but are not limited to, tenant vacancies, declining market values, potential loss of entire investment principal.
Past performance is not a guarantee of future results: potential cash flow, potential returns, and potential appreciation are not guaranteed in any way and adverse tax consequences can take effect. The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities. All financed real estate investments have a potential for foreclosure. Delaware Statutory Trust (DST) investments are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments. Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions. Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits.
IRC Section 1031, IRC Section 1033, and IRC Section 721 are complex tax codes; therefore, you should consult your tax and legal professional for details regarding your situation. Securities offered through registered representatives of LightPath Capital, Inc. Member FINRA / SIPC. FGG1031, First Guardian Group, and LightPath Capital, Inc. are separate entities.
DST 1031 properties are only available to accredited investors (generally described as having a net worth of over one million dollars exclusive of primary residence) and accredited entities only (generally described as an entity owned entirely by accredited individuals and/or an entity with gross assets of greater than five million dollars). If you are unsure if you are an accredited investor and/or an accredited entity, please verify with your CPA and Attorney prior to considering an investment. You may be required to verify your status as an accredited investor. Member of LightPath Capital, Inc.