I was recently asked by successful local real estate agent and mortgage brokers to deliver a talk to their clients about how to avoid capital gains taxes while selling their investment real estate. In many hot real estate markets around the country real estate investors are finding that the value of their real estate has gone up dramatically while the income they are receiving via rents are simply not keeping pace with the increased value.
This can be very frustrating for investors who seek to raise rents and maintain a level of income that keeps pace with inflation. It is also an important exercise in order to ensure their investment is performing well versus appropriate benchmarks and other investing opportunities they may have for the capital invested in the real estate. Real estate investing, beyond one’s personal residence, is not just about appreciation of the investment, but the income derived from the investment. It’s about total return not just capital appreciation.
Most investors understand the basics of a 1031 exchange. I’ve written other articles about exchanges and there is information readily available on the internet.
I would like to spend some time in this article to expand on a replacement property alternative I’m finding most people are not aware exists. Doing a 1031 exchange only makes sense if the investor is improving their situation. There are several ways to improve the current situation – higher yield as a % of value, diversification amongst property types, better location, updated physical property, more stable property type or tenants, switch to passive ownership, etc.