Tax-free 1031 real estate exchange

Many successful people have become wealthy from real estate investments. According to Forbes, about 10 percent of the world’s billionaires created their wealth from real estate. A significant portion of these investors were very “hands-on” over the years in the development and management of their properties.

Many real estate investors envision a retirement with ample sources of predictable income but also, hopefully, a life free from the hassles of property management.

Real estate investors face a dilemma when it comes to turning their actively managed real estate investments into a passive retirement plan. Once they sell their real estate, they will owe federal and maybe state income taxes on all realized gains. Since most real estate investors typically depreciate their properties for tax purposes, there may be little or no tax basis remaining. Secondly, if they cash out and pay taxes, it may be difficult to earn as much income with their after-tax proceeds as they were earning prior to the sale.

Fortunately, the IRS currently allows real estate investors to exchange one property for another without paying taxes on the gains. There are certain procedures that must be followed. Specifically, the owner of the old property must be the same as the owner of the replacement property. Also, a qualified intermediary must hold the sales proceeds of the liquidated property to use for the purchase of the new property.

For investors who are looking to enjoy more leisure time, swapping an actively managed property for another actively managed property doesn’t solve any problems. Therefore, the investor must find a property that can be managed passively. There are several large real estate companies currently offering turnkey 1031 exchange diversified passive real estate investments that may be attractive to investors looking for tax efficiency and predictable passive retirement income. Exchanged property will receive a full step up in tax basis at the time of the death of the owner.