Did you know that real estate is the only asset that qualifies for a 1031 transaction? In essence, an investor can only defer the capital gains tax payments on the profit from the sale of a property if they purchase another piece of like kind real estate. Although like kind is a broad term, it basically means that the replacement purchase must be of similar value and purchased for reinvestment purpose. In addition, any mortgage related debt, related to the sold property, must be replaced at equal or greater levels on the replacement property or properties.
Although this debt can be replaced with cash, all net equity must be reinvested in the new replacement property. Any equity that is retained after 180 days will be fully taxed as capital gains, which defies the entire purpose of the 1031 exchange to begin with.
That means you need a 1031 alternative to buying property if you would like to invest in something other than real estate, and still avoid paying the capital gains tax in California. Alternative strategies built around tax deferral can rescue 1031 exchanges from limbo. An installment sale of the 1031 transaction account is a viable solution for failing exchanges.
Truth be told, a great deal of investors fall into this category. In its most basic form, investing should be about striking when the opportunity presents itself. The current economic shutdown has made scouting properties and performing due diligence almost impossible. Failing 1031 exchanges are at crisis levels for commercial property owners. Deals in progress on the sale of CRE assets are at risk of failing with no options for re-investment. Again, an installment sale of the 1031 transaction account is a viable solution for failing exchanges.
An an installment sale of a failing 1031 transaction can provide liquidity of equity. Generally speaking, it is always a good idea to have some available cash on hand from the profits of a real estate investment sale without having to pay capital gains tax on that profit.
You just never know when a financial related disaster may strike, or unexpected expenses happen to arise. You may even need a bit of the proceeds of the investment property sale to pay for items such as college tuition, a new automobile, or even home improvements. A 1031 transaction may be a viable option for real estate investors that are looking to defer capital gains tax payments on an indefinite basis. However, a 1031 alternative to buying property such as an installment sale of the 1031 account balance strategy provides investors with a way to not only defer but to reduce capital gains tax liabilities for both real estate and non-real estate investments for a finite period of time.
Installment Sales can both rescue a failing 1031 exchange and serve as an alternative to a 1031 exchange.
In conclusion, Installment Sales can both rescue a failing 1031 exchange and serve as an alternative to a 1031 exchange. You do not need to take part in a 1031 transaction in order to defer capital gains tax when selling real estate for profit. There is an alternative solution that provides far more flexibility. This holds especially true for investors that do not wish to re-invest the proceeds from the investment property sale in another piece of real estate. The bottom line is that you may very well decide to invest in something else.
Please contact Tax Deferred Sales today. TDS has specifically developed a proprietary tax expertise Installment Sale structure that is far more effective than a complicated 1031 transaction. Our team of experts specializes in providing customized strategies that delay tax impact. TDS takes great pride in assisting sellers of appreciated assets in deferring the capital gains tax that greatly enhances the ability to grow your net worth. Our company was founded by a LLM tax attorney with over 20 years tax deferral experience and expertise with a singular focus on assuring sellers delay of taxation.