What our LA multifamily clients have done with their sale proceeds, post-sale…
Perhaps the most common question we get from our LA multifamily clients when contemplating a sale is: “If I sell, what do I do with the money?” There is no one single right or wrong answer to this question. It’s situational. Sometimes the right answer is you should not sell at all.
But for the ones who have sold, we have seen a few various paths taken by the Sellers in terms of their next step and how they invest their sale proceeds. Of the last 20 or so transactions that we have completed, below are a few different paths taken by the Sellers post-sale, many of course with the goal in mind to avoid paying capital gains taxes.
1031 Exchange into Local Properties
Chances are, if you’re reading this, you have at least heard of the term 1031 Exchange. In case you haven’t, a 1031 Exchange is a tax loophole which allows Sellers of investment properties to defer paying capital gains taxes by selling their properties and purchasing a ‘like-kind’ property of equal or greater value than the property they are selling.
For real property transactions (rental houses, farmland, office buildings, strip malls, etc.) the “like-kind” requirement does not mean selling and buying the exact same type of property. Some of our clients have sold a 6-unit apartment building and 1031-exchanged into a 30-unit across town. Some have sold a 12-unit and traded down into one (or more) 4-plexes for their kids. Others have sought to exit apartments permanently and have traded into commercial strip malls locally. It varies on a case-by-case basis.
1031 Exchange into Out-of-State Properties
Under 1031 Exchange provisions, you do not have to sell and purchase in the same state. In other words, you can sell your LA property and 1031 into another state. Some investors are no longer buying in California as a result of increased regulation. Some of our clients have sold their LA multifamily properties and traded into properties in Sunbelt states such as Texas or Arizona – many with the intent of escaping the unforgiving rent control Laws in Los Angeles and California as a whole.
Other clients have sold their LA properties and purchased out-of-state “triple-net” properties (ie CVS, Walgreens, Dollar General etc) – where they simply collect rent from large commercial tenants without having to pay property taxes, maintenance or insurance for the property (ie nets).
1031 Exchange into Delaware Statutory Trusts
Some of our clients who are tired of direct ownership and oversight of a property, and prefer a completely hands-off investment such as a Delaware Statutory Trust, which also qualifies for a 1031 tax-deferred Exchange.
A Delaware Statutory Trust (DST) permits fractional ownership where multiple investors can share ownership in a single property or a portfolio of properties, which qualifies as replacement property as part of an investor’s 1031 exchange transaction. A DST takes all decision-making out of the hands of investors and places it into the hands of an experienced sponsor-affiliated trustee.
Seller-Financing
One or two of our clients have also carried paper or “Seller Financed” their transaction. Seller financing in real estate is, quite literally, when the seller of a property finances the transaction. The buyer furnishes a down payment and borrows the rest from the seller.
The seller essentially acts as the bank and holds a note, for which they are paid interest by the Buyer. There are certain tax advantages to this: An installment sale is taxed differently than a regular sale in that each installment is taxed in the year received, making it favorable for sellers who want to spread out their tax liability over a number of years instead of paying 100% of the tax in the year of sale.
Some Just Pay Capital Gains Taxes
Believe it or not, there is a large component of Sellers out there who are just done with real estate entirely. They simply do not want to own another piece of property or fractional share of a property. As a result, the transaction would result in the Seller paying Capital Gains taxes on the sale, which between State and Federal can be a significant amount depending on the situation.
Note: The above should not be construed as tax or financial advice. If you are considering any of the above, please seek the assistance of a qualified CPA and/or tax attorney
