Knowing when, and if, to sell takes on a lot of variables, mostly subjective. Let’s begin by thinking about the positive and negative consequences of liquidating a property versus trading up, as it were, into a higher valued property (hence, the 1031 tax deferred exchange).
For our analysis, let’s say that you purchased a 20,000 square foot retail center in Jacksonville, Florida for $200,000 about twenty years ago. Today, your property would fetch a sales price of $4,000,000 ($120/SF). You’re before tax cash flow (BTCF) is about $14,000 per month ($168,000 a year). After taxes, at a 40% tax bracket, your cash throw off (CTO) is about $100,800 net profit.
So, you meet with a real estate broker to discuss the following options:
- You sell the property at current market value: $4,000,000 – capital gains taxes and depreciation recapture. Then what? Deposit the proceeds in the bank and live off a small rate of return, less the effect of inflation? Plus, you would lose the ability to gain future appreciation (equity) of the current property. On the other hand, the property is aging and you are likely to incur repair costs while capturing little to no depreciation.
- You sell the property and transfer the funds into a higher valued property (1031 exchange). This may be a good strategy to increase your monthly cash flow and leave a property in trust for your beneficiaries.
- You refinance the property and use the cash-out to invest in a second property, lowering your existing income from property #1, but increasing it by property #2, as well as the added benefit of price appreciation (equity) in two buildings!
- You do nothing.
As you can see from this basic example, there are several factors to think about when considering an exit strategy. The 1031 exchange may provide you with additional leverage for long-term wealth accumulation for your family trust and circumvent handing over lots of money to the government. If you would like to request a personalized exit strategy or to explore your current 1031 exchange options, please feel free to contact me directly at (786) 327-6326 or email me at John@mylrw.com to schedule a free initial consultation.