Before you put up your “For Sale” sign, there are several important steps you should take that we often see investors overlook. Like many other decisions in life, it is very useful to “look before you leap” to minimize potential future regrets. Here are several important areas to consider before you sell.
1. Make sure that your decision to sell improves your situation and not worsens it.
The process of selling an investment property will typically conclude either by reinvesting in another property and/or taking some money off the table for other purposes. Before you sell, invest adequate time to think through where you end up and do enough analysis to become comfortable that the eventual outcome is preferred over doing nothing and keeping your property.
If you plan to invest in another property, make sure that you have a high likelihood of finding and acquiring the type of property that will improve your situation. Develop answers on how you will find the property, finance it, manage it, and deal with possible issues due to location, age, and condition, among others.
2. Make sure all stakeholders agree.
The sale of an investment property can impact family members and/or business partners. To minimize possible conflicts that might arise later in the sales process, it is best to get all stakeholders on the same page and resolve potential issues before they arise. Many times, we have seen sales fall apart due to disagreements between family members or business partners who cannot agree on the terms or objectives of the sale.
When it comes to selling an investment property, silence is not necessarily consent and owners are well-advised to obtain explicit up-front buy-in from those who may later voice objections or be in a position to block the sale.
3. Understand tax consequences.
It’s not what you make on the sale, it’s what you keep after taxes that counts most. Before you sell, have a very well thought out plan for how you plan to deal with potential tax liabilities. It is best to seek advice from well qualified tax specialists who understand real estate in addition to having knowledge of your overall tax and financial profile.
A comprehensive analysis of possible tax strategies should include a determination of your total potential tax liability including state and federal taxes, depreciation recapture, net investment or Obamacare taxes and also include any offsets from items such as carry loss forward balances and Qualified Business Income Deductions (IRS 199a) among others.
Our firm has worked with over 5,000 real estate investors and concluded over $3 billion in transactions thereby allowing us to gain many insights on successful tax strategies. While we cannot provide specific personal tax advice, we can help you better understand tax deferral options such as 1031 Exchanges and Opportunity Zone investments. We can also provide referrals to qualified real estate tax professionals if needed.
4. Have a back-up strategy.
While we love talking with real estate investors, the calls we dislike most are from investors who are approaching the end of their allowed 1031 Exchange 45-day identification period and either have not identified a suitable property or had their only replacement property selection go sour for some reason.
An investment property structured as Delaware Statutory Exchange (DST) can prove to be an effective insurance policy to help assure the successful completion of a 1031 Exchange tax deferral strategy. There is generally no cost to identifying one or more DSTs as back-up options – or to soak up any remaining amount of tax liability that may arise if a primary replacement property does not fully meet the requirements for a 100% tax deferral.
For more information on real estate tax deferral strategies including 1031 Exchanges and replacement property options, please feel free to contact us at firstname.lastname@example.org or you can also schedule some time on Paul Getty’s calendar for a personal consultation.
Disclosure: DSTs, like all real estate, have risks, including illiquidity, potential for loss of property value, costs and expenses that could offset the benefits associated with tax deferral, and reduction or elimination of monthly cash flow.
Disclaimer: There is no guarantee that any strategy will be successful or achieve investment objectives. All real estate investments have the potential to lose value during the life of the investments. This material does not constitute an offer to sell nor a solicitation of an offer to buy any security. Such offers can be made only by the confidential Private Placement Memorandum (the “Memorandum”). Please be aware that this material cannot and does not replace the Memorandum and is qualified in its entirety by the Memorandum.
This material is not intended as tax or legal advice so please do speak with your attorney and CPA prior to considering an investment. This material contains information that has been obtained from sources believed to be reliable. However, FGG1031, First Guardian Group, LightPath Capital, Inc., and their representatives do not guarantee the accuracy and validity of the information herein. Investors should perform their own investigations before considering any investment. There are material risks associated with investing in real estate, Delaware Statutory Trust (DST) and 1031 Exchange properties. These include, but are not limited to, tenant vacancies, declining market values, potential loss of entire investment principal.
Past performance is not a guarantee of future results: potential cash flow, potential returns, and potential appreciation are not guaranteed in any way and adverse tax consequences can take effect. The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities. All financed real estate investments have a potential for foreclosure. Delaware Statutory Trust (DST) investments are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments. Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions. Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits.
IRC Section 1031, IRC Section 1033, and IRC Section 721 are complex tax codes; therefore, you should consult your tax and legal professional for details regarding your situation.