For anyone that has experience when it comes time to sell an asset, what’s the best way to sell?
Do funds ever 1031 exchange buildings or just sell outright and take the tax hit?
Is there anything else besides doing a 1031 that also avoids the tax hit?
What strategies does your firm apply come sale time and why do sell in the first place as opposed to refinancing or holding on?
If you are an LP you usually have so many passive losses that taxes don't really matter.
Can you further explain this? Why do they have so many losses? Thanks
Depreciation is why they have losses.
Here is what I found quickly in google that helps explain it.
https://ttlc.intuit.com/community/investments-and-rental-properties/dis…
Unless you've been booking them for 20 years and suddenly you're hit with the recapture
Just buy a couple Private Jets and you can depreciate those suckers like 33% per year, to help offset that.
Funds don't do a lot of 1031s because that would mess up the waterfalls.
That’s what I was thinking. So they take the tax hit in order to distribute funds?
Funds are generally going to be pass-through entities so gain or loss is passed on to investors for tax purposes, correct?
You can do it but you have to have a TIC structure and only one piece of the TIC is required to have an Up-leg, so an LP who only has a few deals and wants to 1031 would have to structure around that in the beginning.
Not sure about closed ended funds - but open ended funds and reits use 1031s and reverse 1031s to avoid paying taxes on sales. Other than 1031, if you have assets with high tax bases, you can sell that an offset a gain with a loss (although there are earnings reasons that REITs won't generally do this)... REITs can also distribute gains as dividends, but then you're just passing the gain on to your investors - not deferring or avoiding. I'm sure there are other structures/strategies (entity sales? OZs?) but I think that if you have permanent capital, paying capital gains taxes with asset sale is generally not going to be your preferred route.
I thought about this for a sec, and let me know if I am thinking about this right. REITs dont really pay tax because they distribute out to investors, but would a sale count as FFO or would that be bad income that causes the REIT to lose the tax sheltering at the REIT level, thus lowering distributed cash?
Gains on sale of property is excluded from FFO (losses are included in FFO - hence why shielding a gain with a loss is not common, the FFO hit from the loss could impact management compensation). Separate from FFO/financial reporting, a REIT has to distribute 90% of it's taxable income to investors (among a host of other requirements) so if a significant gain causes your normal dividend to not represent 90% of your taxable income, you would need to either do a special dividend, or find a way to shield that gain (1031, sell something at a loss, etc).
You were asking about the Funds, however, if you by and sell through SEP IRA you can avoid capital gains tax. You just can't touch that money until you retire. Nor can you pay yourself.
It's not legal, but you can avoid the tax hit by evading the tax. just giving you options!
Real talks though More info would have to be required...Are you holding it personally? is it held via investment in a fund? etc.
I second/third that Funds are typically flow through to the investor regarding taxes.
Spin off asset into another corp, sell shares of that corp piece by piece to defer tax over time? The transfer of ownership would likely be deemed a disposition, so consult a tax lawyer/accountant.
This is intriguing would love to hear more
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