For many busy families, tax planning largely consists of finding the time to file a tax return by April 15 each year. But from our experience working with successful clients, true tax planning has some distinctive differences: It involves experts working on your behalf, and it
looks ahead.
We recently held our annual Year-End Tax Strategies workshop, which covers the top ten strategies we have seen make a meaningful impact on our clients’ lives — including the year-end strategies that deserve consideration before the calendar turns to January. Read on to learn one of the techniques we’ve recently added to this list, because it has resulted in outsized impact on some of our clients.
How to Defer Tax on Real Estate Gains
This strategy involves deferring tax on real estate sales, whether it be a home or investment property. The tax implications of selling investment property are as high as ever in Washington state, with the federal capital gains tax of up to 23.8% plus the up-to-9.9% state tax, resulting in a total possible tax of 33.7%. It wasn’t that long ago that the tax on real estate gains was between 15% and 20%, and so with the substantial increases, we’re seeing more people than ever looking for ways to reduce the tax.
Many are familiar with 1031 exchanges, where if you sell a property and properly replace it with a like-kind property, you can defer the tax. But there are several other methods for deferring the tax — methods like 721 exchanges, Delaware Statutory Trust (DSTs) and Tenants-in-Common (TICs) arrangements.
First, a quick overview of 1031s: Here, if investors adhere to strict timing requirements, it’s possible to defer the tax on the sale of a property. They must identify a replacement property within 45 days of the sale or transfer of the relinquished property, and acquire the replacement property within 180 days of the sale or transfer. Additionally, investors cannot take possession of the funds (i.e., the funds can’t go into a personal bank account) — instead, proceeds from the sale of the relinquished property must go through a qualified intermediary, such as an attorney or company set up to facilitate 1031 exchanges.
While the tax can be deferred, there is a downside to 1031 exchanges, which is that you’re generally replacing a property that takes time to manage with another property that takes time to manage. While real estate can be an incredible tool for growing wealth, it can also be quite time consuming, and many of our clients reach the point in their lives when saving time is more important than optimizing growth. And so they sell their real estate to do something much less time-consuming, where the income being produced is far more passive. Hence the problem with 1031s — you don’t end up with meaningful time savings because you still own and have to manage real estate.
That’s where 721 exchanges, TICs and DSTs come into play. Some 1031 exchange solutions may include a 721 exchange feature, in which DST interests can be exchanged for interests in a larger, diversified pool of real estate. These programs utilize Section 721 of the Internal Revenue Code, and the key benefit is that you can replace a concentrated investment in a single property with a diversified portfolio of institutional-quality real estate, which allows one to continue investing in real estate and at the same time achieve the sometimes more important time-
saving goal.
Learn Our Top Tax Reduction Strategies
At Heritage Wealth Advisors, tax reduction is one of the many ways we help clients get more out of their financial resources, and it can result in significant benefits. While there are often ways to reduce taxes in the current year, we find that we can exert far more control when our advisors and tax specialists coordinate with your CPA to evaluate future tax years and make decisions proactively rather than reactively — resulting in less stress, fewer missed opportunities and more of your wealth and resources preserved for the things that matter most to you.
Our goal with all of our tax workshops is to motivate our clients to take a relatively small amount of time now to develop a forward-looking plan, in order to create significantly more freedom for themselves in the coming years. If you’d like to learn more, we’re hosting another session of our Year-End Tax Strategies workshop on Friday, November 13. We’ll cover the top techniques that have driven the biggest positive outcomes for our clients, as well as how our team can help you execute on these strategies within your greater financial plan.
Click here to learn more & RSVP for the free virtual event now
