Looking to get out of Real Estate? You’ve got Options!
If you’re overwhelmed with the ever-changing real estate landscape, especially combined with today’s tax complexities; you’re not alone. Managing and being active in real estate can seem daunting. Historically, the never-ending cycle of §1031 exchanges seemed to be the only way to diversify a portfolio and that once you wanted to stop exchanging; the tax liability could be overbearing. The good news is that there are options to end a §1031 cycle in a tax-favorable way.
Opportunity Zones provide a way to defer taxable gain that could be generated through the escape of the §1031 cycle. The Tax Cuts and Jobs Act introduced §1400Z – Opportunity Zones as a way to encourage investment in economically distressed areas throughout the country. Census tracts were identified and declared Opportunity Zones. Investment can be made into the Zones through Opportunity Funds that allow the investor to defer gains for a specified amount of time. If an investment is held within a qualified fund for a period of five years; 10% of the gain is permanently deferred. If held for seven years, an additional 5% of the gain will be permanently deferred. If the investment is held for at least 10 years, any appreciation of the investment during the holding period is tax-free. An important item to note is that the tax on the initial deferred gain that is invested within the fund will be due in 2026 as the provision is currently written.
An important differentiator from §1031 exchanges is that with Opportunity Zone investment, only the gain is required to be reinvested. Any basis that may be trapped currently within §1031 exchange property would be yours to keep.
Delaware Statutory Trusts
Delaware Statutory Trusts (DSTs) allow for the ability to continue being involved in real estate but not being required to handle the day-to-day operations. A passive investment strategy, such as a DST, typically utilize professional property and asset management teams to make all the decisions regarding the property. However, qualified investors can access a DST directly with cash or through a §1031 exchange.
As always, please contact your Lurie LLP or Lurie Wealth advisor with questions and to discuss planning opportunities.