Jill Norton, MBA, CCIM, can help you consider your options when you decide to sell your investment properties.  Sellers have three choices when selling commercial real estate:

1. straight sale
2. 1031 tax deferred exchange
3. charitable remainder trust.

STRAIGHT SALE

A straight sale is likely to generate capital gains taxes on the proceeds of the sale.  Ask your accountant about determining your taxable proceeds.

1031 TAX DEFERRED EXCHANGE

Anyone who owns investment real estate should consider tax-deferred exchanging when disposing of investment real estate.  The “1031” reference is to Section 1031 of the IRS tax code that has the regulations for a tax deferred exchange.  It is also sometimes referred to as a Starker Exchange.

A 1031 real estate transaction generally follows the model of an IRA (Individual Retirement Account) in which stock A is sold, cash is received and replacement stock B is purchased, all held in the IRA framework. 

In an investment real estate transaction, a property owner exchanges one property for another and defers federal income taxes.  It is important that the transaction is structured as an exchange and not as a sale and purchase.  Note that the “exchange” is one owner trading ownership of one property for another, like Stock B for Stock A in an IRA.  “Exchange” does not necessarily mean that two property owners swap properties.

In the 1031 real estate process, usually the first stage is the sale of the original property, referred to as the relinquished property.  The proceeds from the closing of this sale are put into escrow.

The closing date of the relinquished property also starts the clock at day one for the second stage.  The Seller has 45 days to identify the replacement property and 180 days to close on the purchase of replacement property.  This second stage is at no cost to the Purchaser nor does it in any way delay the first stage.  The closing of the second stage may require the Purchaser’s cooperation in signing appropriate documents.

There are many other details to consider.  For example, the Seller’s adjusted basis in the relinquished property must be carried over to the replacement property.  Deciding if this is the best strategy for you will require planning and analysis by your tax and legal advisors.

CHARITABLE REMAINDER TRUST

A Charitable Remainder Trust allows property owners to convert real estate to an annuity income stream.  In simple terms, the property is donated to a qualified charity or non-profit organization that in turns sells the property.  The non-profit then uses the sales proceeds to:

1. fund an annuity for the original donors
2. further the work of the charitable organization

Note that there are two closings or transfers of the property.  The first occurs when the owner donates the property to the charity, and the second occurs when the charity sells the property to the ultimate buyer. 

A Charitable Remainder Trust is especially suitable for owners who have owned a property for a number of years and who are likely to have substantial capital gains taxes if they did an outright sale

The benefits of a Charitable Remainder Trust are that the original owners receive a tax deduction for the charitable donation, the lifetime income steam from the annuity, and the knowledge that they are helping a worthwhile cause of their choice.  The owner’s charitable motive and following proper procedures are critical to the success of the transaction and any IRS review.

For further information on selling your commercial real estate, contact:

   Jill Norton, MBA, CCIM    jnortonrealtor@woh.rr.com
   Real Living Realty Services
   8243 N. Main Street    directions
   Dayton, Ohio 45415
   Phone: (937)431-7148