As boomers retire and relocate, these
tax-deferred deals offer a sweet way
to offload real estate investments.
By Donald Jay Korn
The coming wave of baby boomer retirements is likely to trigger a related shift in the real estate market. As clients
retire — and relocate — you may find
yourself discussing what to do with a
Snowbelt investment property held for
many years, which a client doesn’t want
to manage from the Sunbelt.
“We see a lot of that here,” says Paul
Auslander, chairman and CEO of American Financial Advisors in Orlando, Fla.
“Many people in that situation are
interested in a tax-deferred exchange,
rather than paying tax on a sale.” That,
in turn, may draw more attention to
property exchanges spelled out under
Section 1031 of the tax code.
Even though property values have
plunged in many areas from their 2006
peaks, selling may still trigger a huge tax
bill. Investment properties are depreciated each year for tax purposes — so
long-held real estate might have scant
basis, or none at all. Most or all of the
sales proceeds may be subject to income
tax, and prior depreciation might be
recaptured at a relatively high tax rate.
“The tax bill can be surprising,” says
William Jordan, who heads a wealth
management firm in Laguna Hills, Calif.
Here’s how a so-called 1031 exchange
might work: A retiring investor from Las
Vegas sells his strip shopping center and
lets an unrelated intermediary hold the
proceeds. Then the seller arranges for the
intermediary to buy a medical office for
the investor in Dallas, using the money
held from the previous sale. The double
transactions let the investor avoid paying tax now; he might be able to hold the
replacement property until he dies and
the income tax obligation vanishes.
“Deferring taxes by using a tax-free
exchange allows 100% of the dollars
to be reinvested,” says Rob Studin,
executive director of financial advisory
services at Lincoln Financial Advisors
in Birmingham, Ala. “Assuming some
basis, an investor who sells and doesn’t
exchange might have 85% to 90% to
reinvest after tax.”
KE Y FACTORS
Clients considering a 1031 exchange
should consider many factors, from
existing diversification to life expec-
tancy, as well as taxes. But psychologi-
cally, the weakened real estate market
may be the most important issue.
December 2012 Financial Planning 83