There are few things more professionally satisfying than building a successful business or selling one.
When building your business, you will likely reach a point where your current space no longer serves your needs or where you want to expand your presence in a more prominent location. Or, after reaching success from growing your business over the years, you may now have decided it is time to sell.
In either scenario, you’ll need to determine the best approach to selling your investment property. Many entrepreneurs have found a tax-efficient way to sell a business property is by using a 1031 exchange.
A 1031 exchange is a provision in the Internal Revenue Code that allows investment property owners to defer taxes on a property sale by reinvesting their proceeds in a “like-kind” property or properties of equal or greater value.
Like-kind means “property held for productive use in a trade or business or for investment.” Many different types of real estate meet that standard, including office buildings, self-storage facilities, student housing, vacation rental homes, industrial warehouses, retail centers, and more, for example.
So, if you sell your office building using a 1031 exchange, you don’t need to replace that property with another office building. You may find owning an apartment complex or industrial building is a more attractive option.
As mentioned above, the ability to defer taxes when selling your property is a reason why 1031 exchanges are so popular among investment property owners.
Exchange rules allow you to defer taxation on capital gains (either short-term or long-term gains) and depreciation recapture taxes. The long-term capital gains tax rate can be as high as 20%, depending on your filing status and taxable income. And the depreciation recapture tax rate can be up to 25%. Combined, these taxes can take quite a bite out of the proceeds you would receive on a sale.
With a 1031 exchange, however, you can put your entire proceeds to work in another investment property and defer your taxes until you sell.
Business owners considering a property sale might have heard of the 1031 exchange but may have misconceptions about it. For example, business owners often tell us they have heard the 1031 exchange is too complex or that only the wealthiest investors only use it. The truth is business owners large and small can take advantage of an exchange when selling investment property.
If you are considering a 1031 exchange, one of the most important things you can do is surround yourself with a team of professionals who can guide you through the process. These professionals include attorneys, tax advisors, and Qualified Intermediaries, who are well-versed in the details of how to complete an exchange. And, if you would like to explore whether a 1031 exchange may be a good option for you, our team at Fortitude Investment Group is here to help.
Contact us today to schedule a consultation.
Because investor situations and objectives vary this information is not intended to indicate suitability for any individual investor.
Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.
There are material risks associated with investing in 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.
IRC Section 1031, IRC Section 1033 and IRC Section 721 are complex tax concepts; therefore, you should consult your legal or tax professional regarding the specifics of your particular situation.