Tax Saving Strategies

Real Estate Investing

Independently or combined to increase tax savings!

There are several well-known tax deferral and mitigation strategies within real estate investing. Most popular is the long-standing Internal Revenue Code (IRC) Section 1031 Exchange that provides a vehicle for deferring capital gain taxes while disposing of investment property.

Other tax savings mechanisms allow real estate investors to potentially eliminate, instead of just defer, some or most capital gain taxes (e.g. IRC Section 170 Bargain Sales). These can be paired with strategic measures, like front loading depreciation through a Cost Segregation Study, to allow the investor to take advantage of future depreciation benefits in advance.

Cost Segregation & 1031 Exchanges can be combined to maximize the cash flow of your investments. When buying “fix-n-flip” properties with anticipated short-term capital gains, then a self-directed IRA may help mitigate capital gain taxes in future sales if an investor can tolerate the illiquidity of buying and selling within an IRA.

Looking For Passive 1031 Exchange Replacement Property Options?

If you’re looking to exit real estate altogether but don’t want to pay the capital gain taxes of a traditional sale (which can be a third or more of your proceeds!), then you can still use a 1031 Exchange and go completely passive on the replacement purchase using a Delaware Statutory Trust (DST). This option is becoming very popular among investors looking to reduce or eliminate active property management burdens while gaining the advantages of partial deed ownership in a diversified and professionally managed portfolio. The DST structure provides ownership of class “A” institutional grade real estate for those who wouldn’t be able to afford it on their own.

First choice, or last resort? DSTs can actually be either. They’re a first choice for those looking to become completely passive real estate owners, potentially receive monthly revenue, and avoid the “3-T” burden of active ownership (Tenants, Turnover, and Trash). DSTs can also serve as last resort ID replacement property to ensure a full tax deferral in a 1031 Exchange because they are more likely to successfully ID and close within the strict timelines required (ID within 45 days, close within 180). This is only for certain investors. If you’re interested in more information, we’ll connect you to a licensed financial securities professional now. Schedule an appointment online.

Since all of these tax savings vehicles are separate parts of the official IRS tax code, they can be combined for additional savings. Here are a few options:

Choose an IRC Section 170 Bargain Sale and use the 1031 Exchange on the cash proceeds to defer what you cannot eliminate in capital gains and depreciation.
Set up a 1031 Exchange and purchase a property that is located in an approved Opportunity Zone (OZ). Any capital gains from eligible improvements can then be reduced or eliminated (depending on length of ownership and adherence to OZ requirements).
Buy qualifying investment property in a 1031 Exchange that is not valued highly enough to receive a full tax deferral, then purchase a DST to "soak up" the additional capital gains required. DSTs are usually purchased in increments of $100,000, but smaller amounts ($25,000-$100,000) are available.

I know we’ve covered a lot here. The most important take away is that finding the best strategy or combination of strategies for your particular situation is crucial! We highly recommend a team approach. We’ll work with your current tax professional (or provide one if needed) to determine the best way to proceed for your upcoming investment real estate sale.

The primary benefit of tax incentive programs to real estate investors is to allow investors to put their capital to work (re-deploying and leveraging it) that would otherwise be locked up to work due to the asset holder’s unwillingness to trigger a capital gains tax by selling traditionally (which can be a third or more of your proceeds) without tax incentives. There are several well-known tax deferral and mitigation strategies within real estate investing. Most popular is the long-standing Internal Revenue Code (IRC) Section 1031 Exchange that provides a vehicle for deferring capital gain taxes while disposing of investment property. (which can be a third or more of your proceeds)

The point here is that you have options. And the best thing to do is work with professionals who understand those options. Our team offers a full-service approach. If you don’t have a real estate or tax professional, we can connect you with one. If you do, that’s great! We’ll work with them as a team. If you’re interested in more information, let us connect you to Mr. Biggs #The1031ExchangeGuy, who is a 1031 Training Expert, holding both professional licenses in financial securities and real estate sales.

Mr. Biggs and his team specializes in tax advantaged strategies.

The 1031 Exchange

Internal Revenue Code (IRC) Section 1031

If you’re looking to exit real estate altogether but don’t want to pay the capital gain taxes of a traditional sale (which can be a third or more of your proceeds), then it is possible for you to use a IRC Section 1031 Tax-deferred Exchange (1031 Exchange) but go completely passive on the replacement purchase side of the exchange. This option can allow for either full or partial tax deferral after the disposition sale of investment real estate, and can give investors a welcomed reprieve from the normally strict deadlines of performing a traditional property to property exchange, beholden to finding quality properties in a very short timeline (45 calendar days from closing on the relinquishing property sale).

The important thing to remember is that performing a 1031 Exchange is a long-term decision! If you ever make a traditional sale on your 1031 replacement property in the future, the deferred capital gains rolled in compounds with the current capital gains due on the sale potentially creating an even larger tax bill than before! That might be acceptable if you intend to play through until death so the heirs can get a step-up in tax basis. But if that’s not the plan, or if the potential of finding an acceptable replacement property isn’t promising, then you should consider either the Delaware Statutory Trust (DST) option (See “Popular Replacements” tab for more specific information on DSTs) or the option below, depending on your specific tax scenario and set of circumstances leading up to this sale.

Whether this is your first upcoming 1031 Exchange sale, or you’ve done several in the past leading up to this one (now looking to exit), you can potentially eliminate a good portion of the capital gains from this upcoming sale by performing a Section 170 “Bargain Sale”. An Internal Revenue Code (IRC) Section 170 Bargain Sale is not a tax deferral savings vehicle like a 1031 Exchange. In fact, the IRC Section 170, introduced in 1917, predates IRC Section 1031 which was introduced in 1921. The IRC Section 170 Bargain Sale is for owners of real estate who have a philanthropic desire to contribute to a qualified non-profit entity. Although a 1031 Exchange Services is not required, as with a 1031 Exchange, and neither are specific mandated timelines, it is best to use a reputable and experienced real estate firm that specializes in this type of sale to ensure it is performed correctly. If you’re interested in more information, let us connect you to a licensed real estate professional who specializes in these type of sales now.

If you’re looking to exit real estate altogether but don’t want to pay the capital gain taxes of a traditional sale (which can be a third or more of your proceeds), then you can still use a 1031 Exchange and go completely passive on the replacement purchase using a Delaware Statutory Trust (DST) option if you qualify as an accredited investor.

This option is becoming very popular among investors looking to reduce or eliminate active property management burdens while gaining the advantages of potential partial deed ownership in a diversified and professionally managed portfolio. The DST structure provides a creative solution to real estate investors to potentially diversify some of their risk of owning real estate, and for those investors wouldn’t be able to afford class “A” institutional grade on their own. Diversification is accomplished between numerous sectors, asset classes, and geographical locations. Flexibility of utilizing these as a stand alone full tax deferral replacement option, or a partial tax deferral option to limit the tax exposure of an upcoming disposition sale of investment real estate make DST’s an ever increasing popular solution to the strict, unforgiving timelines of a 1031 Exchange.

What is DELAWARE STATUTORY TRUST (DST)?

First Choice, Or Last Resort?

DSTs can actually be either. They’re a first choice for those looking to become completely passive real estate owners, potentially receive monthly revenue, and avoid the “3-T” burden of active ownership (Tenants, Turnover, and Trash). DSTs can also serve as last resort ID replacement property to ensure a full tax deferral in a 1031 Exchange because they are more likely to successfully ID and close within the strict timelines required (ID within 45 days, close within 180). This is only for certain investors. If you’re interested in more information, we’ll connect you to a licensed financial securities professional now.

Qualified Opportunity Zones (QOZ) & Funds (QOF)

Internal Revenue Code (IRC) Section 1400Z

Opportunity Zones are a new community development program established by Congress in the Tax Cuts and Jobs Act of 2017 to encourage long-term investments in low-income urban and rural communities nationwide. Financially distressed communities that would benefit from revitalization are the primary target of Opportunity Zones however, over the years these communities have faced numerous challenges attracting commercial developers and institutional investors willing to risk investment into these communities without any additional incentives, fearing the opportunity cost of allocating capital to projects. Opportunity Zones provide potential incentives, with conditions, to investors which may include preferential tax treatment. An opportunity fund is an investment vehicle designed to invest in real estate in areas known as Opportunity Zones. Opportunity Funds provide potential tax incentives for investors to re-invest their realized capital gains into funds that are dedicated to investing into Opportunity Zones designated by the chief executives of every U.S. state and territory. Under Section 1400Z of the Tax Cuts and Jobs Act of 2017, investors who elect to reinvest capital gains into Opportunity Funds will potentially receive multiple capital gains tax benefits that may allow an investor to defer, reduce, and ultimately eliminate future capital gains.

The U.S. Treasury, in collaboration with State and Local governments, has certified 8,762 communities in all 50 states, the District of Columbia, five U.S. territories and Puerto Rico as Opportunity Zones. A federal list of designated opportunity zones are available by clicking here (Most States have their own websites and maps as well)

“Nearly 35 million Americans live in areas designated as Opportunity Zones. These communities present both the need for investment and significant investment opportunities.”
– US Treasury

Conservation Easements/Land Trusts

Internal Revenue Code (IRC) Section 170

In the United States, a conservation easement (also called conservation covenant, conservation restriction or conservation servitude) is a power invested in a qualified private land conservation organization (often called a “land trust”) or government (municipal, county, state or federal) to constrain, as to a specified land area, the exercise of rights otherwise held by a landowner so as to achieve certain conservation purposes. It is an interest in real property established by agreement between a landowner and land trust or unit of government. The conservation easement “runs with the land”, meaning it is applicable to both present and future owners of the land. As with other real property interests, the grant of conservation easement is recorded in the local land records; the grant becomes a part of the chain of title for the property.

Although sometimes continuous challenges with IRS audits may result in defending a declaration of conservation easement of currently owned or newly purchased land, there have been successful tax court decisions validating the need for preservation and conservation of land under IRC section 170. The foundation of utilizing section 170 is that the primary goal must be of a philanthropic “giving” motivation, instead of one of tax avoidance. Because of the very favorable potential tax deduction utilizing section 170 (up to 60% Annual Gross Income-2020), certain high-net-worth investors may dramatically benefit from tax treatment under section 170.

Section 170 "Bargain Sale"

Internal Revenue Code (IRC) Section 170

A "170 Bargain Sale" can be an excellent 1031 Exchange Exit Strategy!

An Internal Revenue Code (IRC) Section 170 Bargain Sale is not a tax deferral savings vehicle like a 1031 Exchange. In fact, the IRC Section 170, introduced in 1917, predates IRC Section 1031 which was introduced in 1921. The 1031 Exchange is a well-known tax-deferral real estate investment strategy that defers capital gains (rolled) into replacement property options. Those property options qualify in the exchange process as long as specific rules are followed. This is a great strategy for creating and maintaining generational wealth. By deferring capital gains, you can use tax savings as leverage to buy other real estate assets instead of paying the taxes on a traditional sale. Conversely, a section 170 bargain sale can allow real estate investors to potentially eliminate, instead of just defer, some or most capital gain taxes which can be of great benefit to taxpayers who have performed several consecutive 1031 Exchanges over the years and now looking to exit real estate altogether, even passive investment options such as DSTs mentioned earlier under the popular strategies tab above.

Since all of these tax savings vehicles are separate parts of the official IRS tax code, they can be combined for additional savings. Here are a few options:

Choose an IRC Section 170 Bargain Sale and use the 1031 Exchange on the cash proceeds to defer what you cannot eliminate in capital gains and depreciation.

Set up a 1031 Exchange and purchase a property that is located in an approved Opportunity Zone (OZ). Any capital gains from eligible improvements can then be reduced or eliminated (depending on length of ownership and adherence to OZ requirements).

Buy qualifying investment property in a 1031 Exchange that is not valued highly enough to receive a full tax deferral, then purchase a DST to “soak up” the additional capital gains required. DSTs are usually purchased in increments of $100,000, but smaller amounts ($25,000-$100,000) are available.

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