The Taxman Cometh (But Need Not Take Your Capital)
I’m sure you’ve heard the saying before: “There are only two things certain in this life: Death, and Taxes.
Not a very cheery way to start my letter, I know… Each spring we have the dubious tax of computing our earnings from the prior year, deducting applicable expenses, calculating AMT, HSA, IRA, and a few dozen other alphabet soup metrics – before writing that final check to Uncle Sam. Suffice it to say this is not my favorite time of year.
While I’m sure we are all thankful to live in this country of opportunity, and more than willing to shoulder our share of the costs – the current environment has me even more careful when computing my tax liability. The federal budget has more red ink than at any time in history, and with all of the stimulus and bailout projects underway – taxes have nowhere to go but up!
From a financial planning perspective, one of the most important issues in creating and sustaining personal wealth is to minimize and/or defer tax liabilities whenever possible. Of course, real estate investments can be some of the most tax efficient opportunities around because of the opportunity to defer taxes for years (if not decades!)
What many people unfortunately do NOT realize is that taxes can be deferred even if you decide to switch the physical properties that you are invested in. So even if you hold a piece of property that is not in a particularly strong growth location, you can still exit that position and put the capital in a better – higher growth opportunity that allows your wealth to compound more quickly.
Ashford Capital and YOUR 1031 Exchange
Under Section 1031 of the United States Internal Revenue Code, certain types of property exchanges can be made, and the investor is allowed to “defer recognition of capital gains or losses due upon sale.”
What this means in plain English is that you can sell a piece of property, and put the capital into another similar investment without having to pay costly capital gains tax. This is perfect for investors who are currently sitting on rental property or other real estate investments that are not performing well.
All too often, I speak with frustrated property owners who would love to participate in the attractive offerings we have at Ashford Capital, but they have their own capital tied up in another investment that just isn’t showing the kinds of returns they had expected.
Many of these investors don’t realize that they really DO have options. If the value of the existing property is expected to grow at an attractive rate, then it makes total sense to hang on to this investment until the market allows you to sell and realize substantial gains.
But if you’re not sure that your investment property will appreciate over the next year, why not sell the property now (even at a lower price) and put the capital to work in an Ashford deal that has been hand selected for an incredible return over the next 12 to 36 months.
Since a 1031 exchange would allow you to sell and reinvest the proceeds without incurring any tax penalties, why would you NOT take advantage of this opportunity to see your capital compound more quickly.
Flexibility On Both Sides of the Transaction
In case you are wondering, the 1031 exchange applies not only when you are moving capital into an Ashford Capital investment, but also when we realize our gains and sell the property in question.
Let’s say you take an interest in a development we buy from the FDIC at a fire-sale price, and over the next 12 months that investment grows by 40%. When Ashford Capital sells the location to a homebuilder, you have the option of rolling your earnings into another Ashford deal – or even placing that capital in a completely separate real estate transaction – without ever having to pay a dime in capital gains tax.
Try asking your broker what happens when you sell a stock and reinvest the proceeds in a different company… You won’t be too happy with the answer.
For each 1031 transaction, it’s important to have proper planning and make sure that all of the documentation is in order. This is a fairly simple process and one that most tax preparers are capable of handling with the assistance of a 1031 exchange counselor.
So let me propose a quick meeting. I’d like to take you and your accountant or tax lawyer out to lunch and discuss the opportunity for a 1031 exchange. If you currently have an investment property, we can probably help you get a better return for your money. If you don’t have an investment property – WHY NOT? Ashford Capital can help you participate in the most vibrant rebound opportunities in the Southeast.
For you investment professionals out there, the offer stands as well. Why not have lunch with me and we can discuss the best ways to help your clients maximize their wealth and achieve their goals.
Wishing you every success,
Matt