Here in California people are wanting to sell their investment real estate because the prices are so high. But they don’t want to pay Capital Gains taxes. An interesting vehicle is the 1031 Exchange, which allows the taxes to be deferred until the final property is sold or the owner dies, which, according to current tax laws, allows for a step-up in basis to the value at the date of death. However it’s then part of the Estate but that’s another matter entirely. I’m not an attorney, just a real estate Broker…

  • 1031 Exchange: There are basically four types of Exchanges:
    1. Simultaneous Exchange: when the replacement property and relinquished property close on the same day.
    2. Delayed Exchange: original property is relinquished aka sold before a replacement property is acquired. Proceeds can be held for maximum of 180 days. Also there is a 45 day maximum time period allowed to identify the replacement property.
    3. Reverse Exchange aka forward exchange: replacement property is acquired before the replacement property is identified and the title held by an Accommodator  These are particularly tricky because they require all cash for the purchase.
    4. Construction/Improvement Exchange: this type allows taxpayer to make improvements on the replacement property by using exchange equity while the 180 day period runs.
  • Despite the 1031 Exchange option, investors are finding it very difficult to find a suitable replacement property, especially if they stay in California. As one client put it, “you’re selling one investment at an inflated price and having to replace it with another investment at an inflated price”.
  • So some clients look at buying replacement properties in other States. Important things to note:
    1. You need an Accomodator licensed in both States.
    2.  If you buy a replacement property in another state you need to file a tax return in California for that exchanged property until the taxes are eventually paid. Yes, California will follow you to make sure they get their money!
  • For investors wanting to diversify their investment, the Delaware Statutory Trust (DST) offers another option:These are trusts created by investment companies that allow you to buy a piece of a larger investment. This tool can be a catch basin for un-invested funds from a 1031 Exchange or a way to diversify into different property types (retail, manufacturing, office, multi-residential) and areas. Some offer investments in many different locations.
  • Call me if you have investment properties and let’s chat!!