The Trump administration’s tax overhaul (effective in tax year 2018) made some serious tweaks to the system when it comes to what you can expect from capital gains taxation as a residential real estate investor. While it introduced some new ways to defer capital gains tax that may have some long-haul, real estate investors excited, if you’re concerned about the portfolio of properties you have now—and their current gains—you should be considering the advantages of REIT investing.
This is the time to be carefully weighing your options for how you plan to address taxation on all that you’ve earned if you plan to pursue a hard sale. Under this change in legislation, the capital gains tax rates are the same as they were before. However, they now have their own bracket to call home—and investors may have to contend with an additional 3.8% heaped on top of the 15% or 20% bracket, should you not qualify for the 0% sweet spot. If you’re married and filing jointly, this means that income over $250,000 will trigger this 3.8% add-on.
It’s also worth noting that each state has its own approach to the capital gains tax as well: Oklahoma levies an additional 5% on top of what you’d already owe at the federal level. Combined, if you happen to have amassed considerable gains before now, you might be looking at losses as steep as 28.8%. Personally, at The Peak Group, we consider this number unacceptable. As investors ourselves, we know that you’ve worked hard to grow the portfolio you have. Losing a considerable amount of your portfolio’s value to taxation is just one of the many reasons why REIT investing is one of the more ideal ways to defer capital gains tax.
Why REIT Investing Is Ideal for real estate Investors
Choosing to convert your portfolio into tax-deferred units through an UPREIT is not the only way to relocate your tax burden. However, it is the method that benefits investors most when it comes to the immediate needs of a considerable portfolio.
You Don’t Live in Your Properties
For one thing, if you happen to share the overarching goals of the most successful property investors, your portfolio should be dominated by long-term, buy-and-hold properties to take advantage of lower capital gains tax rates. Additionally, the majority of these will likely be rental properties so that you can take advantage of the reliable income. However, this second point puts you at a disadvantage when it comes to tax time because none of these properties is your primary residence, and likely haven’t been for two out of the last five years of ownership.
You Don’t Plan on Managing Your Properties
You’ll also run into a dilemma when looking for ways to defer capital gains tax if you’re thinking about taking advantage of tax deferrals as part of the new “Opportunity Zones” included in the 2018 tax overhaul. Your capital gains tax bill will be 0% for new gains on investments held for ten years—but that only applies if your properties happen to be part of these specially-selected economic zones. It also means holding onto an investment far longer than you may currently be interested in as you near retirement—and all the work that entails.
If you’re working with excellent property management as part of the key to your success, some of the labor-intensive aspects of investing are managed for you—but this still doesn’t address your need for ready capital.
You Don't Want to Exchange Properties
If you’re trying to convert illiquid assets to something more fluid, a 1031 exchange isn’t the solution you’re looking for, either. A 1031 exchange simply converts one asset into another of like-kind (or greater) value. This does nothing to address the needs of an investor looking to access the inherent value of their rental property portfolio.
Additionally, a 1031 exchange comes saddled with restrictive rules for how funds are handled during the exchange process, making this “solution” less than ideal for you as an investor. Other options like a Roth IRA are a great option for the growth of your future wealth—but they don’t address the issue you’re facing right now. However, REIT investing does.
You Need the Right Guide to Move Forward
If you want to access the benefits of an UPREIT structure for your investment portfolio, you need the right guide to not only lead the way—but also to help pave the way. Thankfully, you have an ally in The Peak Group. If you bring your portfolio, we’ll bring you an excellent UPREIT opportunity to match it.
Getting started on your new path to financial freedom is easier than you think! As investors serving investors, we make it easy to learn more about how an UPREIT benefits you as a property owner. Just get in touch with us to get started!
Posted by The Peak Group on June 25, 2020