The virus is affecting everything in our lives. Stay at home. Eat your own cooking. Home school your kids. Do not get your haircut. If only John Wayne was here to come to the rescue. Well, he is not coming to save the day but maybe I can when wanting to buy/sell real estate. That is correct. Do not let the virus be an obstacle in the real estate market.
Many property owners, when appropriate, want to transact a 1031 Exchange. However, because of the virus, have decided not to sell until the virus has passed. This is in large part due to the 45- and 180-day periods. Fortunately, the Treasury Department has extended the 45-day period until July 15 but is that the answer? What if sellers have not listed their properties yet so there is still no supply of properties to identify? The larger question is why sellers are even dealing with the 45-day period in order to defer taxes when there may be a better option.
That is right. A proprietary trust based on Section 453 may be a better option than a 1031, especially in the current environment. Here are some of the reasons why you should consider 453 rather than 1031. Our proprietary trust has none of the 1031 requirements. No dealing with a 45-day period, 180-day period, loan to value ratios, like-kind properties, or holding periods, and you do not have to get locked into a Delaware Statutory Trust (DST) as an emergency replacement property. Sell today, defer the capital gains tax, state tax, and depreciation recapture, and have an unlimited time to buy another property.
Consider the current situation with the virus. Let’s say that a seller has a buyer but will not sell because he is concerned about transacting a 1031. Using Section 453, the virus is no longer an issue to defer taxes. They can sell today, defer taxes today, and wait for the virus to end to buy another property. Also, consider this: If many sellers are waiting until the virus is basically over to bring their property to market, there could become an oversupply of properties and now you have a buyers’ market. That is great if you sold your property using Section 453 but not so good if you waited to sell.
In a virus-free world, that is also an opportunity. Sell today in a sellers’ market, defer taxes, and wait until market conditions become more favorable to buying. If you must wait 6 months or 2 years that is not a problem. Sell high and buy low. Even Einstein thinks that is smart – thanks, Al!
In addition, there are numerous other opportunities using Section 453. Quite often, depreciation plays a key role when owning a property. When you transact a 1031, you may not get a new depreciation schedule on the replacement property so even though a cost segregation study may be beneficial, it won’t be as beneficial as if you were to use Section 453 where you do get a complete new depreciation schedule. Using cost segregation and 453 has the potential to generate more real estate wealth than using a 1031.
Quite often, at some point, a property owner may want to sell and retire and does not want more real estate. He would like to find a 1031 exit strategy. A Delaware Statutory Trust is not a 1031 exit strategy but rather a 1031 continuation strategy and, at some point, taxes will have to be paid. If someone is in the wealth accumulation stage, a DST may make sense but it is not an appropriate retirement vehicle unless it’s a small part of someone’s estate. Again, at some point the Delaware Statutory Trust will no longer be an option and all the previous exchanges will become a taxable event and the basis will be the basis of the first original property. A DST only delays paying taxes.
The bottom line is, especially with the cloud of the virus hanging over the economy, Section 453 may be the real estate vaccine needed to keep the real estate market alive and well. If you can sell today, do so knowing that you can still defer your taxes today and either wait to buy another great property or to retire and go move closer to the grandkids and spoil them to get even with your kids for making you miserable when they were growing up. Maybe we do not need John Wayne because 453 may come to our rescue - seems only fair. Happy selling and be safe.
About the Author: David Fisher is the managing partner for Creative Real Estate Strategies, a national firm that can defer taxes on highly appreciated real estate when a 1031 isn’t appropriate or can’t be completed. He has been an RLI sponsor since 2006 and has sponsored over various RLI events nationwide. He can be reached at 713-702-6401 or david@cresknowsrealestate.com.