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Topic: Escaping the sect 1031 trap... (Read 842 times) previous topic - next topic
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Escaping the sect 1031 trap...


Essentially, the IRC 1031 is the same as an "IRA for Real Estate".
 
The diffference is that because you don't deduct the value of the homes in your account, you get to maintain the Long Term Capital Gain taxation status (preferred over ordinary income). You also get to stave off the claw back of the depreciation that is typically taken from the Investor. All of this is rolled forward and deferred from property to property until:

1. Death; then your Heirs get a step up in the cost basis from what you originally paid to the valuation at the time of your death), or
2. Do nothing; eventually, you die (see article 1 above) while maintaining the rental income and depreciation benefits. Mortgages and refinancing typically provides cash out for your life style but diminished income by doing this.
3. Take some, or part, or all of your 1031 properties out of your left pocket, and place them in your right pocket and escape all of this.
 
Most Real Estate investors want 4 things: 

-Income,
-Capital growth,
-Tax benefits, and
-Freedom. 

They get the first 3, and spend their time chasing rent checks, repairing replacing, fixing, etc their properties. This is not a "hobby". If you own more than 2-3 properties? It's a full time job. When you're 30-50? You can get away with the time commitments, but age has a way of changing our perspectives on life, and we come to recognize that it may be time to find other ways of getting the 3 benefits of real estate from other ways, and (hopefully) find freedom in the process.

The real hold back is the reclaimed and substantial taxes due that has been rolled forward for 20-25 years along with the depreciation clawback when these properties are liquidated and no further properties are purchased to protect these gains.

The solution is the use of the "Charitable Remainder Trust" or some variation of that model.***NOTE - I did not say "donate your property to charity" AT ALL. Not at ALL.

Set up your charitable trust with the consultation of your legal services provider. As this is the most audited strategy, using highly focused legal technicians is paramount. Reach out to me for (Hawaii property owners) qualified legal representation (I know a few).

First, target your high value properties. Have them appraised. Donate these properties by transferring the titles to your Charitable Trust. Depending on how you structure your trust to meet your goals and objectives:

1. You may receive a very significant tax deduction, as well as reducing the value of your estate for federal estate tax purposes;
2. You get GROWTH. The liquidated value is invested professionally to a Fiduciary standard with targeted growth ranges in mind. 6-8% is not uncommon, and is approximately what you enjoyed with the property growth rate.
3. You get INCOME for 2-20 years as you decide. On a 10 yr payout (middle ground) a property drawing $30k/ yr in rent worth $1mm will bring in approximately $110,000/ yr of income (Some of this may also be tax friendly for you) - almost a factor of 4 TIMES the income of rent alone. AND...
4. You get FREEDOM.

By donating your properties to your own charitable trust? All the taxes you would have paid are now paying YOU. At the end of the term you selected? The "remainder" of the remainder trust goes to your favorite charity (or, charities).

Without much complication, we can even make substantial provisions for your Heirs and have THAT excluded from your estate values as well.

Of the 3 options for escaping the Section 1031 program (Die, do nothing, or start your own charitable trust? 
OPTION 3 is the winner.

Please reach out to me for more information. You may have Investors who would love to talk with me.