Gain Deferral

Looking to get out of Real Estate? You’ve got Options!

With the ever-changing real estate landscape, joined with the tax complexities in today’s environment; managing and being active in real estate can seem daunting. However, getting out of the industry may also seem complicated and troublesome. The good news is that there are options to either vacating the real estate space, or simply reducing the day-to-day responsibilities you may have.

1031 Exchanges

The Tax Cuts and Jobs Act of 2017 modified the §1031 provisions, allowing for exchanges of real property only. As with any modifications to tax law, a period of uncertainty is present and tends to raise questions on impact. Although it is true that items such as vehicles and equipment are no longer eligible to be exchanged through the deferral provisions of §1031, the question arises as to the definition of real property as it relates to real estate and how the popular utilization of a cost segregation study to maximize depreciation benefits may come into play.

The definition of “personal property” varies between the depreciation and §1031 provisions of the Tax code – §1031 reading to be mainly items of furniture, fixtures, and equipment; the personal property that generally is not identified as part of the cost segregation study. A cost segregation study focused on the identification of personal property that is affixed to the building; namely other items of equipment or fixtures that are not identified as furniture and fixtures and are outside of the personal property definition of a §1031 exchange. As a result, it is believed that a cost segregation study may still be utilized on property exchanged through the provision of §1031.

If you are looking at a §1031 exchange, it may be worthwhile to consider cost segregation to fully maximize the benefit available to you.

Opportunity Zones

A new code section was created as a result of the Tax Cuts and Jobs Act under §1400Z or Opportunity Zones. This provision was intended to assist in spurring economic development in distressed areas throughout the country. Opportunity Zones were identified utilizing census tracts. To generate growth in these distressed areas, the investment can be made into these Zones through qualified Funds to allow the investor tax-favorable treatment. The investor can take any eligible gain and, within a specified period of time, invest within a Fund to defer tax. If the investment is held for five years; 10% of the deferred gain is permanently deferred. If held for seven years, an additional 5% of the deferred 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.

Structuring Opportunity:  If you are leveraging a §1031 exchange and trigger taxable boot or if you are looking at getting out of the real estate industry; knowing you will trigger gain but would like to defer taxes; investing within one of these Funds may be beneficial.

Delaware Statutory Trusts:

Delaware Statutory Trusts (DSTs) allows 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.