You must understand your 5 Choices to Avoid the most Common Mistakes of Real Estate Sellers
Whether you are a new investor or a seasoned veteran to the world of commercial real estate, Selling your property can often become a confusing and daunting task. Added to that stress of Selling are the time constraints of identifying a property within the allotted 1031 timelines which sometimes can turn a confusing task into an overwhelming challenge.
In order to make an intelligent and informed decision you MUST consider each of your 5 Options BEFORE you pull the trigger on selling. If you remember but one thing from this exercise, You Must Know Your Numbers! Your 5 Options are:
- Do Nothing. That’s right, just keep your property. PRO- By doing this you avoid having to deal with Capital Gains Taxes and finding a
Replacement Property. CON- If Cap Rates increase while you continue to own your property, you’ll see a decline in your principle value.
- Pay the Tax. Just like ripping off a band-aid, you get the inevitable over in one fell swoop. PRO- you can sit on the sidelines until a more attractive investment opportunity comes along, not necessarily in the Real Estate arena. CON- By paying the taxes you are sitting on the sidelines with a much smaller pile of cash to re-invest.
- Do an Installment Sale. This allows you to spread your Tax bite over the period of the installments. PRO- You avoid paying the Piper all at once. CON- You don’t get your money all at once to redeploy.
- Do a Traditional 1031 Real Estate Exchange. Here you defer all your Taxes thereby keeping “all your marbles” to be able to buy your Replacement Property. PRO- under current law, a 1031 allows you to continue to buy & sell real estate and DEFER all Capital Gains Taxes. You have the option of continuing to “swap ‘til you drop”. In other words, you continue to Buy & Sell Properties and defer all Capital Gains taxes by using 1031 Exchanges until the point when you eventually pass away, at which time there is a Step Up in Basis and nobody pays the Capital Gains Taxes. CON- You don’t have the luxury of waiting until CAP Rates rise before committing. With the time constraints of 1031, you may very well be buying today at the “top of the market” if Cap Rates begin to rise.
- Do a Zero Cash Flow 1031- This allows the 1031 investor to satisfy all of the requirements of their 1031 Exchange and then take out up to 85% of their equity completely tax free though a re-finance. This strategy only works with high creditworthy tenants (CVS, Walgreens, US Gov, etc.) and after the refinance all of the cash flow from the rents are used to service the debt (hence the name Zero Cash Flow). Here’s where “knowing your numbers” comes into play: are the taxes you would pay on an outright sale greater than the 15% of equity remaining in the deal? PRO- allows continued tax deferral through 1031 while freeing up cash for other opportunities not confined to real estate or simply sit on the sidelines and wait for better opportunities. CON- The nature of the transaction is fairly complex and usually requires a bit of a learning curve.
Here’s what we do: Carnegie Wealth Management, Inc has been assisting investors in securing Institutional Quality Real Estate for 30 years. Over the course of that time, we’ve developed relationships with Real Estate Professionals, Qualified Intermediaries, Developers & Real Estate Syndicators from all around the country that allow use to have a “national reach” when searching for properties for our clients. Simply put, what this means to you is that you tell us what you’re looking for & we go out and find it.