Tax free sale exchange

[Joe Mayol]

Is there an alternative to doing a irs 1031

Exchange. Rolling to a alternative temporary. If replacing property can not be accomplished in time?

[Kevin Sobilo]

@Joe Mayol, the alternative is that you pay capital gains taxes on the profit. I don't think there are any other ways to defer or avoid paying taxes if you don't get a replacement property close in time.

If the tax bill is substantial, then you may want to be more flexible with what you buy. It doesn't have to be a great deal. If its a so-so deal you can buy it and then 1031 out of it later on when finding a good replacement deal is easier. 

[Dave Foster]

@Joe Mayol, There are several alternatives (none quite as good).  The key to remember is there is no penalty for starting and not completing a 1031 exchange.  So the idea like you seemed to imply would be to start the 1031 and then if you can't find any replacement properties.

1. Let the exchange die and pay the same tax you would have when you normally would have.

2. let the exchange die and buy something in an opportunity zone where you still get some tax relieve 

3. Use one of your identifications for a passive thing like a delaware statutory trust.

Here's an article we wrote for the BP blog that may help - https://www.biggerpockets.com/...

[Jim Pfeifer]

You could do a "Lazy 1031". When I sold all of my active investments, I had significant capital gains and I did not do a 1031 Exchange, or a QOZ or a DST. I talked to my accountant and he recommended the Lazy 1031. I invested in real estate syndications that do cost segregation and bonus depreciation. I invested the gains and some principal in multiple syndications. Each time I invest I got a paper loss of 50-110% of my investment amount. These losses took care of the gains from the sales of my active investments. The only timing issue you have is that is all has to be done in the same tax year.

This is not eliminating the tax generally, it is deferring the tax.  Upon sale of each syndication asset, I will have depreciation recapture.  Some of that will not be recaptured as it could have depreciated to zero, these are the very short term parts for the property.  There will be capital gains and recapture from the sale of the assets - and at that time I will invest in new syndications that offer depreciation benefits and that should offset those taxes.  I am taking a ride on the Golden Hamster Wheel.  It's much easier and less restrictive than the 1031 Exchange, but performs essentially the same thing - defer and reduce your taxes for as long as you can.  I am a full time passive investor and pay almost no tax.

The 100% bonus depreciation rule is being phased out over the next few years so the benefits might be reduced, but as long as you consistently invest in new deals when old ones sell, you can ride the Golden Hamster Wheel indefinitely.

Full disclosure, I am not a tax or financial advisor - this is just my experience.

[Scott Jensen]

@Jim Pfeifer Has good points here. Note, however, that you can only use losses from syndications is you qualify as a real estate professional for tax purposes, and meet the material participation standards for your own rental real estate portfolio and make the grouping election.  So this works in the right circumstances but have a solid plan and talk it through with someone that specializes in real estate taxes. As Jim also mentioned, bonus depreciation is scheduled to phase out...so this strategy is going to lose much of its value in the coming years.

Here's a few other ideas:

Installment Sale - spreads capital gains out over a number of years, which may be helpful. Note that depreciation recapture is still due in the year of sale.

IRA/401(k)/HSA - contributions can reduce tax from the a real estate sale.

Cost Segregation - You can buy a new property, do a cost segregation study to generate a bunch of depreciation and use bonus depreciation in year one. These losses from the bonus depreciation in the new property can be used to offset gains in the old property.

Carryforward Losses - If you have suspended carryforward losses they will be released when you sell and that can offset some of the gains/taxes from the sale.

10131 Exchange - You can also list a DST as a backup if you cannot find a property you like for 1031 replacement property. Then, if your time period is about to expire you can decide whether you want to just let the 1031 lapse. As @Dave Foster mentioned, there's no penalty for doing this. Sometimes you can even use a failed 1031 to your benefit by deferring the capital gains to the next year.

Lower Capital Gains Brackets - If you have flexibility with your income such that you can minimize other income in the year of sale, you may be able to take advantage of 0% taxation in the Standard Deduction, 12% Ordinary Income Rates (which is pretty low), and 0% long term capital gains rates. It really depends on your other income and if you have much flexibility. @Joe Mayol

[Jim Pfeifer]

Quote from @Scott Jensen:

@Jim Pfeifer Has good points here. Note, however, that you can only use losses from syndications is you qualify as a real estate professional for tax purposes, and meet the material participation standards for your own rental real estate portfolio and make the grouping election.  So this works in the right circumstances but have a solid plan and talk it through with someone that specializes in real estate taxes. As Jim also mentioned, bonus depreciation is scheduled to phase out...so this strategy is going to lose much of its value in the coming years.

Here's a few other ideas:

Installment Sale - spreads capital gains out over a number of years, which may be helpful. Note that depreciation recapture is still due in the year of sale.

IRA/401(k)/HSA - contributions can reduce tax from the a real estate sale.

Cost Segregation - You can buy a new property, do a cost segregation study to generate a bunch of depreciation and use bonus depreciation in year one. These losses from the bonus depreciation in the new property can be used to offset gains in the old property.

Carryforward Losses - If you have suspended carryforward losses they will be released when you sell and that can offset some of the gains/taxes from the sale.

10131 Exchange - You can also list a DST as a backup if you cannot find a property you like for 1031 replacement property. Then, if your time period is about to expire you can decide whether you want to just let the 1031 lapse. As @Dave Foster mentioned, there's no penalty for doing this. Sometimes you can even use a failed 1031 to your benefit by deferring the capital gains to the next year.

Lower Capital Gains Brackets - If you have flexibility with your income such that you can minimize other income in the year of sale, you may be able to take advantage of 0% taxation in the Standard Deduction, 12% Ordinary Income Rates (which is pretty low), and 0% long term capital gains rates. It really depends on your other income and if you have much flexibility. @Joe Mayol

I am in no way a financial or tax advisor. However, in my experience, you can use your passive losses from real estate (including syndications) to offset any passive income (including real estate syndications).  You do NOT need to be a Real Estate Professional (REP) to use passive real estate losses. You cannot offset your W2 or Portfolio Income (cap gains from stocks, mutual funds or 1099 revenue) with passive real estate losses - for that you would need to be a REP.

Also Bonus Depreciation is phasing out but it will take a few years - it goes to 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026 and 0% in 2027.  However, depreciation is not going away - you won't be able to accelerate depreciation using bonus depreciation, but if you are consistent in your investing, you will still get the depreciation benefits, it just won't be front loaded.  I would still say the Lazy 1031 will be more efficient and less complicated that many of those other strategies over the next five years for sure and likely much longer than that.

My main point is that I like things that are not complex and I think many investors spend a lot of time setting up complex tax avoidance structures when the Lazy 1031 is easy and is something that just happens in the course of my investing.  I am not a REP, I am a full time passive investor, and I use passive losses to offset most all of my passive income and this makes my tax bill embarrassingly small!

[Michael Plaks]

@Joe Mayol

Before contemplating any tax deferral strategies mentioned in the earlier replies (and some more complex ones that were not mentioned, like monetized installment sales or private annuity trusts) - make sure to carefully calculate the real tax impact of your sale. It may not be as frightening as it seems, which is what we regularly see with our clients.

If the tax impact is significant enough to justify looking for a deferral strategy, then the next step is to explore them with a tax expert specializing in real estate. Each of the strategies discussed on this thread, including the 1031, can work well in some situations and be counter-productive in others. When someone says "I used XXX, and it worked great for me" - it's really meaningless to you , unless your financial circumstances and goals are exactly the same as that of the other person. It's like with weight loss strategies or dating strategies: what works for you can be a total disaster for me.

Case in point:  @Jim Pfeifer's "lazy 1031" strategy. It's a powerful strategy under the right circumstances. Those circumstances include the luxury of kicking this can down the road indefinitely. Because, once you start investing in syndications, you surrender control of the exit strategy and its timing, and you have to continuously find the next attractive syndication in the year your current one cashes out, and you can never touch the profits these investments generate. If you do, the taxes will be triggered immediately. 1031s cannot be used in syndication investments (save for very rare situations involving very large investments in special kinds of syndications.) Is this for you? Maybe yes, and maybe no. Case by case.

I often see investors getting obsessed with reducing or eliminating their taxes, forgetting that this goal is secondary to building your real estate business.

A minor note: both @Scott Jensen and Jim Pfeifer are correct. Generally, you cannot use syndication losses without being a real estate professional. However, when you have gains from selling passive investments, those gains can be offset by syndication losses in the same year. Which is what "lazy 1031" is built on. 
 

[Julio Gonzalez]

@Joe Mayol 

Are you familiar with 721 exchanges? It's an exchange where you investment the gain into a passive real estate investment that would allow you to defer your capital gains tax. Here's an article that I wrote on it: https://www.biggerpockets.com/...