When you own a piece of highly appreciated investment real estate that you’d like to dispose of, you normally face paying substantial capital gains tax on the sale. However, one way to defer those taxes is to do a 1031 exchange for another like-kind property instead of an outright sale.
If you’re thinking about doing a 1031 exchange of investment real estate or a business, or have already started the process, you know that the stringent time frames required by a 1031 exchange can be challenging at best and impossible to meet at worst. You have only 45 days from the sale of your property to identify “like kind” property to buy. You have only 180 days from the sale of your property to close on the purchase of the “like kind” property.
If you have invested in real estate in the past, you likely have also done a 1031 exchange. As you undoubtedly learned, however, 1031s have numerous risks and disadvantages. While they defer your capital gains tax liability when you sell a piece of appreciated real estate, the rules and regulations that apply to them can make them unappealing at best and downright dangerous at worst. Why? Because they often fail, leaving you with an enormous capital gains tax to pay.
As an astute investor, you know that long-term capital gains taxes can quickly eat away at the profits you make on your investments. Consequently, avoiding or at least deferring payment of these taxes for as long as possible is likely one of your main objectives.
In Part 1 of this series, we explained how you can use a bifurcated 1031 exchange and Deferred Sales Trust (DST) to meet your investment and financial goals. In Part 2, we now offer you an alternative to the bifurcation approach.