RENT Magazine Q3 '23

WHEN IT COMES TO TAXES, TIMING IS EVERYTHING!

Here is some insight into a common conversation that I have with clients about taxes.

Client: I would like to set up a 1031 EXCHANGE. Me: When do you plan to close the sale of the property? Client: I closed it last week. Me: I'm so sorry. It's too late to set up a 1031 Exchange. Client: But I haven't touched the funds yet. Me: I understand. However, because you did not sign a 1031 Exchange agreement before closing, you now have constructive receipt and the closer is waiting to release your funds to you per your instructions.

That happens on a semi-regular basis. Investors know that there are strategies to help them defer capital gains taxes, but they often don't know that timing is critical. And quite often, their real estate agents don't know this either. There are many capital gains tax strategies available. I teach 12 different strategies as part of my webinars. And there are likely more out there that I will learn about over time. The first thing to understand with all these strategies is that timing is a critical component because tax strategies usually deal with contracts and ownership.

What do I mean by that? 1031 Exchanges, structured installment sales, and tax deferred cash outs (to name a few) require a contract in advance of the close that allows an organization acting as an intermediary to receive the sales proceeds and allow for the tax deferral. Other strategies require a change of ownership because it is a trust or a business structure that has to sell the asset to get the tax mitigation. That means that the asset needs to be under new ownership so that the particular trust or specialized LLC structure can utilize the tax code that an investor cannot utilize in their own name or their LLC/S Corp name.

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