Sell Your Appreciated Investment Property Tax-Free
by Marco Capaldi, big1031.com
With the astounding appreciation in all things real estate over the past five years, many investors are sitting on significant amounts of equity in their investment property. The downside to having all of this "unrealized appreciation" is that you may not be fully exploiting your investment opportunities or alternatives. In the financial planning business, I call this "opportunity cost". You must base your investment decisions on your current market value and not what you paid for your property. Is your money or investment real estate yielding the maximum possible return at any given point in time?
Let’s review an example to help clarify the dilemma many real estate investors face with appreciated property. If you purchased a multi-family property, commercial property, or land over the past ten years or more, you probably have a low cost basis in your investment. In addition, the valuation has likely risen dramatically at the same time. Here is the quandary you are facing. The IRS requires that you depreciate investment property over a twenty seven year cycle and thirty nine years for industrial. This lowers your "cost-basis" in your property each year. The problem therefore is now two-fold. You bought investment property cheaply, and the cost basis for tax purposes is declining each year. The valuation of the property is rising and your considering whether you should sell at these high levels. However, with a declining cost basis and an appreciating valuation, your taxation on the sale of property can easily run to 20-25% of the proceeds of sale.
There has been a long-standing solution called a "1031 like-kind exchange" approved by the IRS. For years now investors have sold investment property and exchanged into another property and avoided taxation on the sale. But what about real estate investors who are tired of tenants, taxes, and trash? What if those investors don’t want to exchange into yet another property to manage and maintain? In the past few years there has been a dramatic surge in what is called "1031 tenant in common exchanges". In order to participate, you must be an "accredited investor" with a net worth of one million or annual income of $200,000 on average. If done correctly with an exchange accommodator and a financial advisor, you can sell your appreciated property and exchange or "roll-over" the proceeds into a REIT like investment in a commercial property. You can avoid all of the headaches of managing a property and go straight to "mailbox landlord" status. These "TIC" properties are professionally managed and normally have commercial or governmental tenants in the building in which you now own a piece of. You collect the net cash flow from the rents after expenses and defer all taxes on the sale of your investment property. The advantage is you now own a deeded piece of a commercial building, a shopping mall, or even a single tenant store like a Walgreens. You collect your check monthly at your mailbox and also participate in any upside of valuation growth in the property you own a piece of with up to thirty five other investors.
Finally there is a solution for investment real estate investors who are tired of managing buildings and tenants, but like the concept of owning real estate and collecting cash flows. This 1031 solution is one of the fastest growing areas in real estate transactions over the past three to four years. If you would like to explore this opportunity further, feel free to contact my office at 866-239-2939 or via e-mail at mcapaldi@investorscapital.com at anytime. Make sure you read a full prospectus carefully and consult a qualified advisor before proceeding. Consult our website for more in depth resources.
Marco Capaldi is a registered representative of Investors Capital Corporation, 230 Broadway East, Lynnfield MA 01940. 800-949-1422. Member NASD, SIPC.
