As an investor with multiple properties in your portfolio, you should always be aware of solutions for how to defer capital gains tax on a DFW rental property that you own. If you’re researching solutions for how to approach this issue, you have likely reached a point in your portfolio where you’re ready to offload your properties.
At the same time, with increasing market volatility concerning commercial real estate, you’re also probably relieved that your wealth rests on residential real estate holdings! Still, the pandemic has certainly hit solo investors and landlords hard on rent-collection day: only 85% of renters were able to pay their rent in April.
That number rose slightly in May according to some reports (87%). However, with no new confirmed stimulus support in sight, many investors are concerned that June will yield another wave of renters unable to meet the requirements of their lease.
COVID-19 has also had a dramatic impact on the rental market in ways beyond rent collection: more and more renters are considering a move outside of the urban jungle to the suburbs or rural areas, with a preference for single-family or smaller multi-family rentals over large apartment complexes.
As an investor looking to downsize, this gives you an edge: as more renters are putting off homeownership and continuing to rent, your properties will only retain their value. You also know that the DFW market is unique in that the majority of the jobs we add are high-paying positions; in the event of a crisis, employees can transition to work-from-home far easier than in areas reliant on tourism and hospitality.
When seeking solutions for how to defer capital gains tax on a DFW rental property, you may be ready to let go of your investments—but not the income they provide. That’s why you need a DFW UPREIT.
Your Best Exit Strategy
As you’ve developed your portfolio, you learned how to read the market around you: if you see signs that it’s time to offload your rental properties, you shouldn’t ignore the wisdom of your combined experiences.
The issue comes to a head however when you arrive at the actual point of converting your assets from tangible property into cash: If you decide to go with a hard sale, you can expect to lose a significant percentage of what you’ve worked so hard to acquire to the capital gains tax.
Your research led you to this point in an effort to discover the best ways of how to defer capital gains tax on a DFW rental property because you know that taxation can put a serious dent in your profits. Knowing techniques for deferring capital gains taxation becomes crucial when preserving what you've worked so hard to build.
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: a DFW UPREIT structure. This option frees investors to tap into the income they’ve come to enjoy from owning rental property while removing the demands of a burdensome portfolio.
Why a DFW UPREIT Is Your Best Option
An UPREIT quickly becomes the right move for investors looking to liquidate their holdings while retaining the income benefits that properties provide long term. With this type of investment vehicle, you convert your self-managed portfolio into hands-off operating units.
- Portfolio owners can downsize their holdings—and their stressors—while enjoying continued income from their property units.
- Once your holdings become operating units, you can still tap into the benefits of passive property investing—without the work of self-management.
- Tax-deferred operating units preserve your wealth, help you liquefy your assets, and make you wish you had invested in a DFW UPREIT sooner!
While you wait to convert your units into shares that can then be translated directly into cash, you defer the capital gains tax on any of your DFW rental holdings. This makes working with an UPREIT ideal for investment property portfolio owners who need to downsize while reserving their access to investment income into retirement.
Now that you’ve seen some of the benefits that make working with an UPREIT structure ideal, let’s compare this to another popular method for tax deferral: the 1031 exchange.
Exchanging Properties—and Problems
It is absolutely possible to defer capital gains tax on a DFW rental property using a 1031 exchange—but that doesn’t make it the best way for investors looking to reduce their workload. Under this method, if you sell property or assets, you convert the resulting gains into another investment property by purchasing a “like-kind” or higher-value property.
Ultimately, investors are simply exchanging one property for another: while the exchange will allow you to defer the capital gains tax, you haven’t really "escaped" the demands of your portfolio. Trading one property for another simply delays the inevitable—and adds extra work into a process that doesn’t need any further complication.
You shouldn’t have to jump through hoops to offload your properties while deferring the capital gains tax. However, with a 1031 exchange, that’s exactly what you’ll do.
- You have 45 days from the close of your property without exception (including holidays) to find your like-kind or higher-value property.
- You have 180 days to close on any replacement property or by the due date on your return.
- You may only work with a qualified tax expert or intermediary to manage the exchange of your property and any associated documentation.
- You are not allowed to personally handle the funds from any property sold. This is why your intermediary must be approved by the Internal Revenue Service.
What About a Traditional or Roth IRA?
Another option when seeking solutions for tax deferral is to open a traditional or Roth Individual Retirement Account (IRA). However, this is still a route that requires some conversions that can quickly get complicated tax-wise.
Roth IRA contributions don't provide tax deferral advantages upfront like their traditional counterparts do—but retirement withdrawals are exempt. Additionally, if you've been keeping an eye on the news, a Traditional IRA is not a smart financial move for investors right now.
This ultimately complicates things for you if you're seeking to defer taxes, as the conversion from a Traditional IRA to a Roth IRA that we mentioned earlier will trigger a taxable event—even with historic rates.
DFW Investors: Make the Smart Move
You can probably see why, when it comes time to defer capital gains tax on a DFW rental property, we recommend that investors turn to an UPREIT. Still, without the right guide, finding the right UPREIT for your financial goals can be challenging.
At The Peak Group, we know you shouldn't have to brave a post-COVID-19 market alone; this is no time to have to find the right vehicle for your financial freedom solo. We’re happy to guide investors towards the right solutions for their portfolio when it comes to deferring taxes on their DFW investments while maintaining the level of income they've come to rely on from real estate holdings.
Reach out to us to put our knowledge as investors to work for you! We’re here to be your guide and partner as you transition out of your portfolio and into truly passive income.
Posted by The Peak Group on May 21, 2020