Let's Save on Taxes!

Wednesday, June 19, 2019 by Reuben Goldbaum

In March 2011, Kevin Daniels bought a 65 unit property in Summerville, South Carolina for $2 million. It was only 60% occupied and had a bunch of ticked-off tenants. Kevin came in and completely turned it around, got it to 97% occupancy and had tenants thrilled with the new management. The property was thriving and producing a 12% return every year on his initial investment.

In May of 2019, a massive REIT approached Kevin and offered to buy the property off of him for $6 million! He was thrilled with the offer and was getting ready to accept - but then had a conversation with his accountant Mr. Goldstein, who told him about a little problem called “capital gains taxes”. With a $4 million gain, Kevin would be liable to pay the IRS in excess of $1 million, making a tremendous dent in his proceeds. Kevin’s plans were to take the $6 million and buy a much larger property giving him a higher return, so Mr. Jones recommended doing a 1031 exchange on his sale.

Selling with a 1031 allowed Kevin to sell his property in South Carolina, and literally exchange it for any other investment property he chose to purchase. The IRS viewed this sale as a non-taxable event, and allowed the seller to trade in his original property and its entire value for the upcoming purchase. Instead of only having $4+ million to reinvest because of taxes, Kevin now had the entire $6 million to use as buying power. With added financing, Kevin could have easily bought an asset in excess of $20 million! Of course there are always some rules Kevin had to keep in mind:

  • Within 45 days of his original sale, Kevin needed to identify which property he intended to buy as the replacement
  • Within 180 days of his original sale, Kevin must close on the purchase of the replacement property
  • The proceeds from the sale can never be received by Kevin, a Qualified Intermediary(such as Riverside 1031) must be used to hold the funds in escrow during the interim period
  • The entire amount of the sale needs to be replaced - this includes the debt on the original property. The number to keep in mind is the sale price, not the cash amount

To summarize, a 1031 exchange gives a Real Estate investor tremendous upside in buying power. While it may sound like a complex legal loophole, in actuality it is a simple tool sanctioned by the IRS. It is a no brainer that when selling an investment property, investors should definitely be doing a 1031 exchange.

Let the experts at Riverside 1031 help you defer gain, and create wealth. Contact us today to get started! Call us at 718.226.0300 or email info@rs1031.com to speak to our experts.