At Fortitude Investment Group, we often receive referrals from attorneys, CPAs, and Qualified Intermediaries asking us to help clients with their 1031 Exchange needs. Many of these clients have large, complex cases that require creative solutions to help them maximize their tax deferral benefits, enhance investment income potential, and preserve family wealth.
A tax-deferred 1031 Exchange can be a powerful wealth-building tool that enables clients to defer capital gains tax and depreciation recapture by reinvesting the proceeds from selling an investment property into a replacement property.
A recent case study illustrates how Fortitude helped a client's family accomplish its diverse goals.
This case involved two brothers and a sister who inherited a business and commercial building in New York City. They sold the business and the building, which triggered significant capital gains on both.
The brothers wanted to reinvest and saw the value of a 1031 Exchange, while the sister was ready to cash in and did not mind paying the taxes associated with the sale.
But the situation was further complicated – both the building and business were held in S-Corporations, which can prove to be a challenging structure when the partners disagree on a crucial business decision, like the sale of an asset or company.
The Fortitude solution was two-fold:
For the business:
Fortitude provided the family a diversified portfolio of Qualified Opportunity [Zone] Funds (QOFs) that allowed for tax deferral of their capital gains and other related taxes. The QOF investments also offered the potential for future income and potential liquidity in the form of a future financing structure. Should the investments be held within the QOFs for ten years, the brothers and sister would also benefit by receiving a step-up in basis to fair market value, eliminating all investment gains within the QOFs.
For the building sale:
Using a more custom piece of real estate, Fortitude created liquidity so that the two brothers could meet their sister's wishes and buy her out of the S-Corporation before the sale, enabling them to engage in a 1031 exchange together.
For the 1031 Exchange:
Fortitude built a diversified, passive real estate investment portfolio using Delaware Statutory Trusts (DSTs) that offered the potential for tax-efficient income and capital appreciation. At the clients' request, the Fortitude team provided broad portfolio diversification by asset class with different property types and geography with assets located in landlord-friendly states.
With the completed transaction, the family members accomplished all their initial goals and more. Ultimately, the Fortitude team handled everything from beginning to end, including due diligence on the investment properties, coordination with the Qualified Intermediary, adherence to deadlines, and all related paperwork processing.
From the most straightforward 1031 exchanges to the most complex, our Fortitude team can help you meet your goals and successfully complete your exchange. Please contact us today if you would like to learn more about our capabilities or to discuss your specific objectives.
You can also schedule time with a Fortitude representative at your convenience here.
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This is for informational purposes only, does not constitute as individual investment advice, and should not be relied upon as tax or legal advice. Please consult the appropriate professional regarding your individual circumstance. Fortitude Investment Group does not offer legal or tax advice.
The case study is for illustration purposes only. Individual circumstances and results will vary.
There are material risks associated with investing in DST properties and real estate securities including liquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal. Past performance is not a guarantee of future results. Potential cash flow, returns and appreciation are not guaranteed. IRC Section 1031 is a complex tax concept; consult your legal or tax professional regarding the specifics of your particular situation. This is not a solicitation or an offer to sell any securities. DST 1031 properties are only available to accredited investors (typically have a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last three years) and accredited entities only. If you are unsure if you are an accredited investor and/or an accredited entity please verify with your CPA and Attorney.