For further
information, contact:
Robert R. Tweed:
President
Tweed
Financial Services, Inc.
(626) 588-1520
Trading Residential Real Estate for Commercial
By Robert R. Tweed
Tweed
Financial Services, Inc.
Many individuals end up real estate investors by deciding to hold onto an
existing property for future appreciation when purchasing a new home. A typical scenario is: two recent clients,
Don and Diane, were definitely in that situation. Before getting married ten
years ago, both owned their own separate homes.
They kept the properties for rentals when they purchased a new home
together. Although their first homes have appreciated substantially, when Don
and Diane came to Tweed Financial, they were tired of managing rentals and concerned
that the value of the properties could drop further. Selling outright, however,
would mean incurring 15% federal capital gains taxes, 25% depreciation
recapture taxes and 9.3% California
capital gains taxes. Given the length of time they had owned the properties,
the tax impact would be substantial
1031 Exchange Advantages
“Like kind” or 1031 exchanges allow the complete and indefinite deferral
of capital gains taxes and recapture of depreciation taxes. This gives real
estate investors the opportunity to keep invested assets that would otherwise
be lost to taxes when they restructure their real estate portfolio.
By using a “Tenants-in-Common” 1031 Exchange, Don and Diane were able
trade up into a fractional interest in a commercial building in Dallas, a retail center in Chicago
and multi-family complex in Atlanta.
Along with geographical diversification, the larger properties offered
increased cash flow potential and professional management.
They could also have used a 1031 exchange to invest in a single property
with different use characteristics, or to purchase a new rental in an area
where they might envision retiring. 1031 exchanges also offer investors an
opportunity to enhance the income potential of their investment property by trading
nonproductive property for real estate investments that produce income or using
an exchange to push up their basis, restart their depreciation and shelter a
significant portion of their rental income from taxes
In addition to solving their immediate headaches, the TIC 1031 exchange
also offers Don and Diane estate planning benefits. Because their children may be entitled to
receive a “stepped up” basis on real estate properties when they inherit, the
family could escape forever taxes on investment real estate capital gains
deferred throughout Don and Diane’s lifetime.
A “stepped up” basis sets the value of your properties to market value
when they are inherited to avoid double taxation. Your heirs might owe estate taxes on the
property if your estate is in excess of the current exemption level, but
capital gains taxes may be due only on appreciation that occurs during the
period that the heirs held the real estate.
Just keep in mind all investments offer the potential for loss as well as
gain. As with any real estate investment there are various risks, including but
not limited to: illiquidity, limited transferability, limits on management
control of the property, variation in occupancy which may negatively impact
cash flow, and loss of principal. Real
estate values may fluctuate based on economic and environmental factors. When using 1031 exchanges and investing in
commercial real estate make certain you are working with a financial advisor
who understands the asset class and exchange requirements, and read all
disclosure documents thoroughly.
Robert “Rusty” Tweed
is president of Tweed Financial Services, Inc is an independent, comprehensive
financial planning and investment management firm. Tweed
has educated thousands of investors on real estate investment and estate and
trust issues through his popular seminar series since 1997. A Certified Estate Advisor, he is a member of
the Tenants-in-Common Association and the National Association of Financial and
Estate Planners.
Tweed Financial
Services offices are located at 2060 Huntington Drive, Suite 1, San Marino, CA
91108. 626-588-1520. www.tweedfinancial.com.
Securities Offered Through CapWest Securities, Inc.
Member FINRA/SIPC/MSRB.
Tweed Financial Services, Inc. and CapWest Securities,
Inc. are non-affiliated