3 Ways To Save When You Sell Commercial Property

Even if you don’t have plans to sell your commercial property in 2020, the beginning of the year is a good time to review all your options and update your disposition strategy to fit changes in market conditions. Being in the know can only help you make more informed decisions. After all, your decision to hold your property this year may be as impactful as selling it. In this post, we take a look at three ways you can go.

Since most investors are tax averse and most sales these days are generating huge capital gains, the IRS 1031 tax-deferred exchange is the most popular disposition strategy. A 1031 exchange, executed properly, allows you as a seller to defer all or a designated portion of your gain. You may have a lot of unrealized equity that you would like to lever into a bigger property to increase cash flow and grow the value of your portfolio. Or you may just be tired of the hassles of managing a multi-tenant property and opt to exchange into a single-tenant-net-lease deal with a credit tenant. You might be facing functional obsolescence or deferred maintenance issues with your current property and decide to upgrade to a higher quality asset. There are many advantages to utilizing a 1031 exchange but it doesn’t come without associated risk. The IRS gives you just 45 days from the closing of your property (the down-leg), to identify your new property (the up-leg), which you must then close within 180-days from the close of the down-leg. Failure to follow the code to the letter could disqualify the exchange, making the down-leg sale a taxable event. 

Another option is a Delaware Statutory Trust (DST).  Investors who utilize the DST pool their 1031 exchange proceeds with other investors and acquire property through a third party that handles the acquisition. If you go this route, you may be able to invest in a higher echelon property that you couldn’t buy on your own. DST assets are managed by professional real estate investors. So, if you prefer a more passive approach to managing your portfolio, the DST might be the way to go. However, DST’s are more expensive in terms of property and asset management fees, which could significantly impact your yield.

If you are an investor who is satisfied with your assets and have a clearly defined estate plan, you may decide to hold the property and pass along to heirs at a “step-up in basis”. Upon your death, the value of the property will be determined by appraisal and your heirs would get a “step up” to the appraised value, which would allow them to sell the property at that price, free of capital gains and depreciation recapture taxes. Many investors prefer this strategy, as they take comfort in knowing that their hard-earned capital will stay in the hands of those closest to them once they’re gone.  

To determine if these or other tax deferral strategies are right for you, it’s best to consult with your financial advisors. As a real estate professional, I have the tools and resources to evaluate your current assets and other investment opportunities. To learn more, please call me directly at (858)458-3361 or email me at ajize@voitco.com. It never hurts to be in the know. I look forward to hearing from you.