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Oh Snap! It’s Time to Sell My Investment Property

Nov 7, 2018

Having to sell a rental home or other real estate is something that most people don’t place high on their list of fun things to do. In fact, buying and selling property can be one of the most stressful things for a family to go through.  Being in this position exposes you to a variety of challenges, from establishing the correct title, using a good broker, consulting with your accountant and being enticed into a large tax liability (even though it’s at “friendlier” capital gains tax rates) by selling appreciated real estate.

Commonly Known Ways to Manage a Real Estate Capital Gain

Sellers who recognize a gain from selling real estate at a profit usually have several ways to manage it.

If you have capital losses in your investment portfolio, you may use some of these to offset the gains. This is called tax loss harvesting. This can be hard to synchronize, however, as real estate is not as liquid as stocks or bonds. You may not have the ability to sell your property when the market is where you want it to be. Remember that it can take years to close a deal.

You may also try to time the sale when your income, and hence income taxes, are low. This would essentially place you into a lower tax bracket with a lower marginal tax rate. However, by the same reasoning as with tax loss harvesting, there is no guarantee that timing will work in your favor.

People have had some success using the Section 121 exclusion to minimize capital gains. In this scenario, you can write off 250K or 500K (depending on if single or married, respectively) if the property you sold was your primary residence for two of the five years prior to the sale.

If the proper conditions are met, you may qualify for a 1031 exchange. This allows you to reinvest the proceeds of this sale in another real estate asset of the same type. You defer the gains until later – reaping more control over the timing and the tax rate that applies later.

The Lesser Known Way

While the 1031 exchange is something that many people know about, what few are aware of is that there are other ways to complete the benefits of an exchange instead of directly purchasing a replacement property. This is ideal for those who aren’t necessarily in the mood to go through the process of buying (and managing) another property. Maybe the timing isn’t right. Perhaps you just went through a similar experience and aren’t up for doing it again. Buying property is a serious endeavor and if all the right conditions aren’t in place it can lead to unfavorable outcomes.

In situations like this, if suitable, it is useful to consider a Delaware Statutory Trust, or DST.  A DST allows you to take a passive, fractional stake in a trust that holds the title to a couple, or several, properties. A DST is non-recourse debt; when you buy into it, the trust is named on the note, not you personally. Unlike when an individual holds a piece of property, a creditor for a DST cannot chase you personally for liability of the debt, should you buy into a DST that uses leverage.

DSTs are also beneficial for their diversification benefits. Most people purchase investment property in their local area. With a DST, you get access to commercial quality assets in geographic locations other than where you live.

Working with an institutionally sponsored DST has several advantages. First, the cost of professional property management is included in the deal. You get the benefit of working with a nationally recognized company…without having to hire a management company separately and pay the cost as if you held the property yourself.  The sponsor also has access to capital and the ability to leverage lending resources that are more significant than the average investor.

Creating Your Property Exit Strategy

Finding the right way to exit out of an investment property involves weighing a number of options, both traditional and nontraditional. Investors who are looking to create an exit strategy can minimize stress by working with Qualified Intermediaries including CPAs, attorneys, and financial advisors with access to several DSTs at any given moment. If you are in this position and seeking advice about what next steps to take, please contact Clear Direction Investments to discuss.


 

The information herein has been prepared for educational purposes only and does not constitute an offer to purchase or sell securitized real estate investments. DST 1031 properties are only available to accredited investors (typically have a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last three years) and accredited entities only. If you are unsure if you are an accredited investor and/or an accredited entity please verify with your CPA and Attorney. There are risks associated with investing in real estate and Delaware Statutory Trust (DST) properties including, but not limited to, loss of entire investment principal, declining market values, tenant vacancies and illiquidity. Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated. Diversification does not guarantee profits or guarantee protection against losses. Because investors situations and objectives vary this information is not intended to indicate suitability for any particular investor. This material is not to be interpreted as tax or legal advice. Please speak with your own tax and legal advisors for advice/guidance regarding your particular situation. Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services offered through Concorde Asset Management, LLC (CAM), an SEC registered investment adviser. Insurance provided through Stoltz Financial Partners, LLC and Clear Direction Investments, LLC, both of whom are independent of CIS and CAM.