Wondering how to transition into multifamily? While you may know that 1031 Exchanges let you defer capital gains taxes and depreciation recapture when you move from one property to another – did you know that you can use this same strategy to consolidate multiple smaller property sales into one larger one without paying taxes?
Owning quite a few smaller properties can leave you spread over a large area trying to maintain multiple locations. What if you could exchange all of those properties for one large multifamily unit without sacrificing any of your gain to Uncle Sam? The good news is, with consolidation 1031 exchanges, you can!
What is a Consolidation 1031 Exchange?
To put it simply, a consolidation 1031 exchange starts with the sale of investment real estate and ends with the purchase of investment real estate. As long as the property valuations work out, consolidation 1031 exchanges allow you to sell multiple units and combine their value into a larger purchase.
For example, if you have four single-family homes selling for $250,000 each, they could be sold and combined to purchase a property worth $1 million. This does require additional planning as the timing of your sales and replacement purchase must fall within the IRS mandated time frames. Coordinating extended and/or rapid closings with your purchasers and entering into a contract on your replacement property may require extra effort and negotiation.
Why do I need a Consolidation Exchange?
One of the main benefits of using a consolidation 1031 exchange is the deferment of taxes. Typically, when you sell your investment property, any gain is subject to taxation. Also, whether or not you took advantage of the available depreciation deductions while you owned the property, you will still be subject to “depreciation recapture” taxes. However, this is not the case when using a 1031 exchange.
Consolidation 1031 Exchange Example
Some clients of mine recently completed a consolidation 1031 exchange. They sold three properties in the Midwest and replaced them with one higher value vacation rental property in California. First, they identified both their replacement property. Then, they found a purchaser for all three of their original rentals. Then they sold the three original rentals over the course of three weeks. They purchased their replacement property just three weeks later. Not all transactions will happen as neatly or swiftly as theirs, but it is an indication of what advance planning can accomplish.
Consolidation Can Add Up
When you use a consolidation 1031 exchange, you can sell your investment real estate and purchase replacement investment real estate while indefinitely deferring payment of the tax that would normally be due on the sale. This can significantly increase your buying power as well as your opportunities for compound growth and reinvestment.