Benjamin Franklin once said, “Nothing in the world is certain but death and taxes.” However, things have evolved in the real estate market quite a bit since Franklin's day. If you want to defer the capital gains tax on your investment portfolio—but you no longer want to manage the burden of operating it—you need a DFW UPREIT.

As a savvy investor, you're already well aware of how the capital gains tax can take up to 30% of your profits when factoring in both federal and state taxes. Thankfully, President Eisenhower gave investors some wiggle room in this department as early as the 1950s. The downside is that trying to navigate IRS provisions on your own can get tricky without the right guide. This is where a DFW UPREIT comes in!

While an UPREIT is not the only option to defer capital gains taxation, it is the option that offers you both diversity, profitability, and an easy way to leave your legacy to your heirs. To see what we mean by this, here are a few estate tax strategies to compare with the advantages of a DFW UPREIT when it comes to deferring capital gains taxation.

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A 1031 Exchange Exchanges One Workload for Another

Deemed a powerful benefit for taxpayers and real estate pros, one of the best ways to defer capital gains taxes is with a 1031 exchange of property—as long as you don't mind managing your portfolio. When using this tax-deferred method, if you sell property or assets, you rollover the profits or proceeds into an investment by purchasing “like-kind” property exchanges.

What this means for investors who are ready to offload your properties is that you are simply exchanging one property for another! Sure, you avoid the penalizing capital gains tax—but you're saddled with another property to manage. Trading one problem for another doesn't free an investor looking to escape their portfolio!

a 1031 exchange also comes saddled with special baggage:

  • You have 45-days from the close of your property to find a similar property to buy or close on it. There are no exceptions, and the 45-days includes holidays and weekends.
  • You must list in detail the property you are buying and then date and sign your 1031 exchange of property statement. 
  • You only have 180-days to close on the replacement property or by the due date on your return.
  • You will need to hire a qualified tax expert or intermediary for all documentation. They need the approval of the Internal Revenue Service. Your replacement property transfers to them and is then transferred to you (the taxpayer) when your transaction is complete.

Note: You cannot take any money from the property sold. The intermediary will hold all proceeds until closing on the property you purchase. You must also keep the paper trail accurate to avoid any problems with the IRS.

This is a great option for you if you don't mind the continued management of your property portfolio. If you happen to get a kick out of keeping meticulous records or hiring a qualified intermediary, anyone who can find a like-kind property within the specified timeframe would benefit from a 1031 exchange.

On the reverse, we recommend you avoid this option when:

  • Working with your personal property that functions as your primary residence
  • Working with fix and flip properties for short-term transactions
  • Managing your second home, winter home, vacation home, or rental home.

The other exclusions worth mentioning include land under development, resale or inventory property, a stock, bond, or note, or interest that you have in a partnership. If you're here because you need an estate tax strategy, you'll quickly see why a DFW UPREIT has more potential than this option.

Investing in a DFW UPREIT

Here's where we get to the good stuff: a DFW UPREIT is an excellent option to consider when a 1031 exchange fails to meet your needs. If you've never heard this term before, UPREIT stands for Umbrella Partnership Real Estate Investment Trust. A DFW UPREIT is also a viable alternative to the increasing complexity of a DownREIT. With this type of investment vehicle, you can convert your portfolio into hands-off shares that also defer capital gains taxation.

DFW UPREITs primarily take advantage of the benefits provided by IRS Code Section 721, Title 26. This investing structure lets individuals who own real estate defer capital gains taxes on their property by exchanging their property for operating units in the Umbrella Partnership. Until the units are converted into shares that can be sold for cash, they're not subject to the capital gains tax. That makes this method ideal for:

  • Investment property portfolio owners who need to downsize their holdings—and their stressors
  • Estate planners looking for estate tax strategies who want to leave a legacy their family can actually use
  • Real estate investors looking to tap into the benefits of passive property investing—without management hassles.
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This also happens to be a great option for investors who are house-rich but cash-poor because you increase the liquidity of your assets by converting them into operating units. It's far easier to parse operating units into small-scale conversions to cash than an entire property—or portfolio.

OPENING A TRADITIONAL OR ROTH IRA

If you want to defer capital gains taxation on investments, another option is to open a traditional or Roth Individual Retirement Account (IRA).

  • Traditional IRA and 401(k) contributions are tax-deductible in the same year they're made—but you pay income tax on withdrawals in retirement.
  • Roth IRA contributions don't provide tax deferral upfront—but retirement withdrawals are exempt.

If you've been keeping an eye on the news lately with the issues surrounding COVID-19, a Traditional IRA is probably not where you want to be right now. Unfortunately, the conversion from a Traditional IRA to a Roth IRA will trigger a taxable event

These taxes can be quite high: if you're planning to convert, taking advantage of 'lower' rates now may be in your best interest. Perhaps Benjamin Franklin should have quipped: "Nothing in the world is certain but death and an increasing federal income tax rate."

Should You Have to Handle the Hassle?

With each of these investing options, you have a means of deferring capital gains taxation. However, should you really have to settle for an increasing number of hoops to jump through just to defer the capital gains tax? The simplicity of a DFW UPREIT is partly what makes it such a great vehicle for investors.

Ultimately, finding ways to defer your capital gains taxes can be tricky. At The Peak Group, we personally don't think that investors should have to struggle through a loophole just to find tax relief on something they worked hard to build! Let us show you a better way: turn to the experts at The Peak Group! We'll guide you through how a DFW UPREIT could be the answer you've been looking for.

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Posted by The Peak Group on April 23, 2020