If you’re looking for solutions for how to defer capital gains tax on Dallas rental property, you’re probably getting ready to make a move to offload your portfolio. However, in the wake of COVID-19, you’re also probably relieved that you put so much of your investment power into residential real estate holdings. The pandemic certainly has done a number on commercial real estate investments after nation-wide shutdowns effectively halted the need for commercial spaces.
Even as people return to work as several states begin to slowly reopen, the work-from-home movement has prompted companies to consider whether they need as much overhead in the form of devoted office space. Technology has enabled modern businesses to slash costs and size while remaining functional. This new way of working does not appear to be a one-off moment—and is likely here to stay.
That’s not to say COVID-19 hasn’t sparked change in the residential sector, either: research is finding that there has been a dramatic shift away from multi-family units in urban settings towards single-family residentials in suburban and rural areas. Whether this trend will hold or is just a form of backlash from social distancing remains to be seen.
Either way, another consequence of the COVID-19 crisis is that more people are putting off homeownership and continuing to rent. When you own rental property in Dallas, this spells out continuity for you.
If you’re working with a skilled property management company, they probably found ways to keep your income stabilized if some of your renters struggled as a result of the novel Coronavirus. Your renters also appreciated the stability: they’re likely to keep renting in the wake of market uncertainty. Plus, nobody wants to move in the middle of a pandemic: having roots provides your residents with a sense of security right now.
When You're Ready to Downsize
That said, even with a profitable portfolio, you know how to read the market: it might be time to offload your rental properties while the getting is good and move on to greener pastures. The downside is that you can expect to lose a considerable chunk of what you’ve earned to Uncle Sam.
That’s probably how you ended up here on our blog: you want to know how to defer capital gains tax on Dallas rental property. The capital gains tax can take up to 30% of your profits when factoring in both federal and state taxes. This makes knowing techniques for deferring capital gains taxation in Dallas crucial to maintaining the financial freedom you’ve worked so hard to achieve.
While there are multiple techniques you can use as an investor to defer capital gains taxation, there is one we favor at The Peak Group. This option offers investors continued access to the income they’ve come to enjoy from owning rental property while being far easier to parse.
To see what we mean by this, here are a few strategies to compare when it comes time to defer capital gains tax on Dallas rental property.
A 1031 Exchange
One of the best ways to defer capital gains tax on Dallas rental property is with a 1031 exchange—but that doesn’t make it the best way for investors looking to offload property. Under this method, if you sell property or assets, you rollover the resulting gains into an investment by purchasing “like-kind” or higher-value properties.
What this means for you is that you are simply exchanging one property for another! Sure, you defer the capital gains tax, but you haven’t really "escaped" your portfolio. Trading one property for another just adds a delay between the need for a hard sale down the road.
This can be beneficial if you are trying to “relocate” your assets to another market, but a 1031 exchange also comes with provisional language that can be hard to navigate during a pandemic:
- You have 45-days from the close of your property to find your like-kind or higher-value property. There are no exceptions. While the market for sales is excellent right now, buyers are having trouble finding properties. This could quickly become an issue for you with this method.
- You only have 180-days to close on the replacement property or by the due date on your return. With reduced showings available during COVID-19, this may pose a challenge.
- You have to work with a qualified tax expert or intermediary to manage the exchange and documentation. They need the approval of the Internal Revenue Service.
- You are barred from handling the funds of the sold property. The intermediary will hold all proceeds until closing on the property you purchase.
Unless you happen to enjoy paperwork, this is not an option we typically recommend for investors looking for information on how to defer capital gains tax on Dallas rental property. This option quickly makes the benefits of our favorite offloading method apparent.
A DFW UPREIT
An UPREIT is the right move for investors looking to downsize their portfolio while retaining the income benefits that property provides. If you’re not familiar with the term, it stands for Umbrella Partnership Real Estate Investment Trust. With this type of investment vehicle, you convert your portfolio into hands-off operating units that defer capital gains tax on Dallas rental property.
UPREITs operate largely under the benefits provided by IRS Code Section 721, Title 26. This allows investors who own real estate to defer capital gains taxation on their properties by exchanging their property for operating units in the Umbrella Partnership. Until the units are converted into shares, they're not subject to the capital gains tax. That makes this method ideal for investment property portfolio owners who need to downsize while retaining the benefits of passive income.
- Increase the liquidity of your assets by converting them into operating units while still enjoying passive income.
- Parsing operating units into small-scale cash conversions or an inheritance is far easier than navigating a hard sale.
- Enjoy the benefits of deferred capital gains tax until your operating units are converted into share units.
Continued, Passive Income Made Easy in Dallas
With each of these options, you have a means of deferring capital gains taxation. However, one is the clear winner for investors when it comes time to defer capital gains tax on Dallas rental property. A DFW UPREIT provides the simple exit strategy investors need during these uncertain times to maintain their income and offload their portfolio.
At The Peak Group, we know that the complicated market stage set by COVID-19 is no time for investors to have to struggle with a lack of clarity in their options. We’re happy to guide investors towards the right solutions for their portfolio when it comes to deferring capital gains tax and maintaining the level of income you’ve come to appreciate from your properties. Get in touch with us to see if a DFW UPREIT is the right option for you!
Posted by The Peak Group on May 14, 2020