Quote:
Originally Posted by Dunyain
So we have a rental property we bought with a 3% interest (although we only put 10% down so we are paying extra PMI until 2026) that is operating at a small loss as an AirBnB (with the usual tax breaks) that we are thinking of selling, because the AirBnB market seems to drying up and we think the real estate market itself might be going into a major downturn. FWIW the market is Joshua Tree, CA where prices doubled during Covid but have dropped down ~20% since, and we fear it could just keep going down.
Always, we dont really want to pay capital gain taxes (who does?), but aren't interested in actively reinvesting in real estate and avoid paying taxes by doing a traditional 1031 exchange. I was researching and it seems one possibility is a type of REIT that is structured to do 1031 exchanges, like the company in the link below.
https://www.kpi1031.com
--I was wondering if anyone in this thread has any experience or insight into this strategy to re-invest and kick the can down the road as far as paying taxes? And whether this could be a better strategy than just riding things out.
You're talking about a 721 exchange, aka an UPREIT. Two major drawbacks. First, UPREITs are one time deal. If you do a 721 you can defer taxes one time. At the end of the REIT investment you have to pay the taxes. Versus a 1031, which you can do over and over to infinity, then die and pass on the assets to heirs at an adjusted basis.
Second, there are no publicly traded UPREITs. So you want to get real comfortable with the GP that will be handling your money and their business plan because they will have all the control. If you want to learn diligencing GPs there's an excellent book by Rob Beardsley available on Amazon.
A Delware Statutory Trust was also mentioned. A DST is a weird, super complex entity structure where you 1) have to raise all the capital up front, and 2) can't get your money out, and 3) the entity can't raise more capital *or debt* after the DST is put in place. It's a very very very restricted structure, and requires folks with an uber level of expertise. There's a company on the East Coast called Capital Square that has a long history of putting together DST > UPREIT deals, and I personally know some very heavy hitters that trust and respect these guys. I don't invest in REITS, so I can't vouch for them either way. But my understanding is they raise capital for a value add asset in a DST, improve the property, then sell the property to their own UPREIT to allow for refinance and return of capital.
Another option would be to invest the capital gains into an Opportunity Zone Fund. This will defer your cap gains until 2026 tax year, but if you hold the fund investment for at least 10 years you get all the cap gains earned by the fund tax free.
Another option is to do a traditional 1031 exchange, as you know, which actually affords quite a bit of flexibility. Or you can just pay the cap gains on your gain.