In a recent article featured on Barrons.com, Rob Johnson, Head of Wealth Management at Realized, weighed in on selling investment properties prior to retirement. While many boomers gearing up for retirement may be rethinking their strategy around real estate investments, Johnson says there are multiple things to consider before you sell.
Examine the possibilities
Johnson points out that if you want to remain in the investment property business, there may be several options. For instance, to manage your tax liability, you could sell your current investment property and purchase another through a 1031 exchange.
If you prefer a less active role but still want the tax-deferral benefits of real estate ownership, there’s the option of a Delaware Statutory Trust, or DST. According to Johnson, DSTs offer investors fractional ownership of commercial real estate properties, but all of the management responsibilities are pushed to a Sponsor.
Among other strategies experts discussed were consulting with tax, financial, and real estate professionals before making decisions. Ideally, these discussions will take place before you retire, allowing enough time to properly strategize. From a tax standpoint, you’ll want to consider the ramifications of selling the property outright versus other tax-favorable options, such as the 1031 exchange option, which offers several benefits but also requires strict adherence to IRS regulations.
It’s also important to understand how a sale fits into your overall real estate strategy. Some owners, for instance, may choose to sell high, even with the tax consequences, because they believe there will be a correction where they can buy low and repeat the process. Others might simply want to get rid of an investment property and are willing to accept tax consequences to avoid emotional hassles.
While there’s no one-size-fits-all solution, advisors can help you wade through the pros and cons of the various options.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
Costs associated with a 1031 transaction may impact investor’s returns and may outweigh the tax benefits. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities.
No public market currently exists and one may never exist. DST programs are speculative and suitable only for Accredited Investors who do not anticipate a need for liquidity or can afford to lose their entire investment.