Apex News

June 3, 2021

Unlike other financial advisors, we have always focused on helping our clients minimize their tax liabilities through investment and tax planning strategies. You may have noticed that recently we executed a 1031 exchange when AFA Real Estate Partners ("AFA"), along with our investors, sold our BJ's Wholesale in Maple Shade, NJ, and used those proceeds to purchase Montecito Tower in Las Vegas, NV. 

So What's the Big 1031?

The 1031 Exchange, enacted 100 years ago, allows investors to take proceeds from a real estate sale and defer taxes as long as they use the funds to purchase a "like-kind" asset within 45 days. This exchange is a key tax advantage that real estate investors currently have at their disposal. I say "real estate" because it does not apply to other realized capital gains through your investment portfolio—only for profits earned through similar real estate investments. And I say "currently" because, at the time of penning this post, the Biden Administration has proposed to limit the exemption to $500,000. I don't need to state the obvious here, but deferring taxes is a win for any investor!

What is "Like-Kind?"

The IRS dictates that the property purchased with the proceeds from a sale must be of "the same nature or character." In other words, you are not allowed to roll over any gains realized on your vacation home into your stock portfolio; it must be from investment property to investment property. We all know that the tax code is never an easy read, so there is another caveat - there is a difference between an investment property and a fix-and-flip property where you purchased with the intent to sell a profit.

Other Considerations

To altogether avoid taxes with a 1031 Exchange (assuming the $500K cap isn't enacted), you need to meet the following conditions:

1. Go Big Or Go Home: The purchase price of the replacement property must be equal to or greater than the sales price.
2. To Borrow Or Not To Borrow: If you had a mortgage for the first property, you must have an equal amount on the replacement property, and
3. Time Is Of The Essence: You only have 45 days from the sale to identify potential replacements.

In summary, a 1031 Exchange can be an excellent tax strategy for savvy real estate investors, but it is not a simple process. Always be sure to consult a licensed professional on the nuances associated with effectuating a 1031 Exchange. There are additional rules about combining or making these investments with partners through an LLC (like the opportunities offered through AFA).