I’ve been in discussions with a few of you regarding 1031 Exchange options and how you can transfer out of non-performing or headache-inducing residential properties into one or more of our stable multifamily investments.
I’m guessing there are even more within our community that I haven’t spoken with directly that also want to know how this works.
This post outlines the key considerations for using a 1031 Exchange as a means to invest with 37th Parallel Properties.
What is a 1031 Exchange?
You can read an overview post here or there is an excellent infographic on the process created by a 1031 Exchange intermediary company (i.e., they don’t offer investments, they just help you ensure the exchange stays compliant).
In general, a 1031 Exchange allows you to sell a property and then defer the capital gains by re-investing from one project into another “like-kind” project.
It is a very powerful wealth amplification tool.
Your returns can be magnified by 20% (typical long-term capital gains rate) or more depending on your situation. If you have a $500,000 gain on a property you’ve held for 10 years that’s $100,000 of tax (at a minimum) deferred and fully reinvestable in the next asset and providing even more current income and equity growth into the future.
Again, you can read more about the specifics of a 1031 Exchange via the two resources noted above.
Do you qualify?
There are several conditions you need to consider when evaluating a 1031 Exchange, but here are the first three as a guide.
1. Do you have like-kind property that you have not sold yet?
To exchange into commercial multifamily investments (income-producing real estate) you will need other income-producing property to sell. This could be a 1-4 unit rental property, rental condo, strip retail center, small medical office building, etc. Generally, it just needs to be an income-producing real estate asset.
2. If you have sold like-kind property, did you setup a 1031 Exchange and are you still within your 45-day next investment identification window?
This is the most time-compressed scenario, but it still may be worth evaluating if you would like additional exchange options.
3. Is the capital gain you want to defer worth it?
Now, I am a major proponent of minimizing your taxes as much as possible, but sometimes it just doesn’t make sense. In our experience, any capital gain of less than $50,000 is – in all likelihood – too small to worry about a) setting up the exchange and b) dealing with the downstream restrictions and considerations on your 1031 investment.
Should we talk?
As our investor family grows and we move into larger and more frequent acquisitions and refinance events every year, we will have more and more opportunities for investors to use 1031 Exchanges to transition into stable-growth income-producing apartment assets.
If you have lazy real estate assets that are not generating the economic results you want or are just too much headache, I would highly encourage you to chat with us to see if we can help you.
If you are not an accredited investor then I would strongly encourage you to schedule an introductory call to get direct access to the best risk-adjusted return asset class available – commercial multifamily apartments.