Real Estate investors/Seller of appreciated, primary residences, second homes and investment real estate in the state of California should always review their options when it comes to paying capital gains taxes and recapture/depreciation taxes with a professional tax advisor before selling any piece of investment property. This is due to the fact that when real estate appreciates in value, it will trigger the capital gains tax when sold to another party. In addition to the capital gains tax, selling the asset for profit may also trigger depreciation recapture taxes in the year that the investment property is sold as well an NIIT taxation.
These taxes are based on a high percentage of the profit gained, which means you are losing a significant amount of your profit margin. That is the exact reason why real estate investors need to take part in income tax planning techniques that provide you with the ability to structure a deferment that significantly delays paying the capital gains, recapture taxes, and NIIT taxes. Researching all of the available and legal tax exclusion strategies can be confusing to say the least. Perhaps that is why so many real estate investors default to the 1031 exchange which only applies to investment real estate and not to primary residence and second homes which have not been rented?
That being stated, a great deal of 1031 transactions end up failing. This is due to the fact the 1031 tax deferred exchange does require that the real estate investor to purchase one or more replacement properties in order to defer the capital gains tax payment upon sales of the real estate. To make matters worse, there are strict specific time frames for both finding and closing on the replacement property that can be difficult to meet to say the least. In addition, many real estate investors would rather cash out their real estate investments instead of reinvesting the funds into a management intensive replacement investment real estate property.
One such tax deferment strategy that can save failing 1031 transactions or be an alternative to a 1031 exchange which has become favored to be used to cash out on real estate investments is the installment sale. This method is based around selling the investment property via an installment sale legally enforceable contract where the Seller is agreeing to take numerous payment income streams over numerous years, selected by the Seller. The Seller does not receive a lump sum payment that would trigger a capital gains tax payment. Instead, the original seller receives the proceeds spread out over a specified period of time that they establish.
For example, Seller sells his building for $4,000,000 with a $3,000,000 capital gain profit, which is subject to taxation if not legally deferred by Seller. If Seller successfully completes a Section 453 Installment Sale with an installment sale purchaser Tax Deferred Sales, LLC there will be large tax deferral results from Seller selling via an installment sale. Under the Installment Sale method Seller Instead of receiving the $4,000,000 in one lump sum, and paying the associated capital gains tax on the $3 million dollar profit, Seller sells via an installment sale plan that will provide him with ten (10) annual payments of $400,000. That means Bob is only taxed on the $400,000 per year as opposed to the entire $3,000,000 profit in one tax liability payment. Thus, Seller will delay his taxation on the $3 million in profit and will only pay taxes as he receives his payments, which may also reduce his overall tax impact, and Seller advantageously also get to receive back his original cost basis plus costs of improvements income tax free.
In conclusion, it is particularly imperative that real estate investors always review any transaction and the various tax deferred and tax exclusion strategies and structures available with their tax and legal advisors prior to proceeding with the sale of real estate investment property. If you have any questions, please contact Tax Deferred Sales today. TDS has specifically developed a proprietary tax expertise Installment Sale transaction structure to save failing 1031 exchange transactions or to be an alternative to a better alternative to a 1031 exchange.
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.