Late last year I sold a client’s rental home in Manhattan Beach. This property sold for 3x what the owner bought it for 20 years earlier. When it was first purchased the owner lived in it, many years went by, this home was always used as their principle residence. In the last few years of owning this property, the owners started to rent it out and moved on to another property as their primary home. Once this property became a rental for them it was then eligible for 1031 deferred tax exchange.
A 1031 exchange is a legal tax shelter for an owner of an income property (rental property). It allows them to sell their property and buy another one, and not pay any capital gains taxes on the sale of the old property
The owner hired me last year to sell the home and at the same time look for a new property to buy so they could conduct the exchange. The real motivation was not to save the tax only, the real motivation behind the move was the rental income. With the old property being worth so much in value but not able to generate a lot in monthly income as a single home, that equity was underperforming especially since the sellers were at a stage in their life where their focus was less about asset appreciation, and more about monthly income. They could then take that money from the sale of their old property, avoid paying taxes on that sale, and buy a new property that generates more income as well as other advantages.
For example; multiple units. This helps when having a vacancy it won’t equate to zero monthly income since it’s not your only unit. Another example is a newer property. There is less upkeep, maintenance, and upgrading of aging vital systems like plumbing and electrical and so on, and the monthly income generated goes in the owner’s pocket and not towards repairs. The bottom line is, given my client’s situation with a large tax liability and a desire to trade that property into another one that better suited their needs from an investment strategy perspective this is great tool use. It’s not rocket science, but there are a lot of moving parts and requirements to make it all work and if you can, it’s well worth it.
This is a great example of why an experienced agent provides a lot of value…they are able to navigate you through these complicated deals hopefully with ease and get you in a position to capitalize on great tax savings as well as put your real estate assets to better use for your life needs. I worked with these owners for months going over the process and preparing their old property for sale as well as scouting for the new “exchange” property so that they could accomplish their goal and make their money work better for them. On top of that, my property management company is now in charge of their new income properties allowing me to continue to provide top-level service even after the transaction is over.
