A Tax Strategy For Investment Real Estate Grows In Popularity

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Proponents Say 1031 Exchanges Are Good

For The Economy, But Congress Eyes Repeal

A popular tax-deferral strategy for people who deal in investment property could be in trouble as Congress ponders doing away with it.

But already rescue efforts, such as letter-writing and lobbying campaigns, are afoot to counter any talk of repealing Section 1031 of the Internal Revenue Code, which lets taxpayers defer their capital-gains tax on the sale of the property if they reinvest their proceeds in “like-kind” property.

“A lot of people want to make sure Section 1031 exchanges stay in place because doing away with or altering this section of the tax code could be detrimental to investors, the real estate market and the economy,” says Dwight Kay, founder and CEO of Kay Properties and Investments www.kpi1031.com.

His California and New York-based company specializes in helping clients purchase Delaware Statutory Trust properties (DSTs) using the Section 1031 Tax Deferred Exchange.

“It’s a strategy that’s becoming increasingly popular,” says Kay. “But it’s also something that they have their eyes on in Washington, and it’s on the chopping block with Congress.”

The average American probably knows little or nothing about Section 1031, but it’s a significant tax-planning tool for investors who want to sell investment property, but don’t want to get hit with the capital-gains tax that would result.

Here’s how Section 1031 exchanges work:

Taxpayers can defer their capital-gains tax on the sale of investment property if they reinvest the proceeds from the sale in other investment property. There are strict deadlines and other specifications that must be met.

Several types of property qualify as “like-kind” under the rules. Examples include: apartment buildings, farmland, office buildings, warehouses and rental homes.

Delaware Statutory Trust properties also fall on the list. Delaware Statutory Trust properties are pre-packaged as 1031 exchange properties, so an investor can close a sale quickly with no worry about missing those deadlines.

The idea of repealing Section 1031 has been talked about before. Critics of 1031 property exchanges say they allow people to defer paying capital-gains taxes for decades. Critics also say the definition of “like-kind” property is imprecise, leading to controversy with the Internal Revenue Service and providing significant opportunities for abuse.

The congressional Joint Committee on Taxation projects repealing Section 1031 would increase revenues $40.9 billion over 10 years.

Kay, though, suggests there are at least three reasons why keeping Section 1031 in place is good not just for investors, but for the overall economy as well.

  • Like-kind exchanges benefit millions of American investors and businesses every year by encouraging businesses to expand and by moving dollars within the U.S. economy. “These property exchanges give a boost to the economy, and can create jobs,” Kay says. Without the tax deferral benefit, reinvestment by small and medium-sized businesses and investors would be inhibited. The economy could suffer as a result.
  • Repeal could cause a decline in real estate values because investors would no longer have the ability to defer their capital gain taxes, one of the reasons many invest in real estate to begin with, and therefore may switch strategies and move to more liquid alternatives.
  • “Although big-money investors certainly make good use of the 1031 exchanges, this is not something that helps just the wealthiest Americans,” Kay says. It is available to and used by taxpayers of all sizes. “We have helped clients with 1031 exchanges as small as $50,000” Kay added.

About Dwight Kay

Dwight Kay, founder and CEO of Kay Properties and Investments, LLC (www.kpi1031.com), is a Series 7, 22 and 63 licensed, Registered Representative and Real Estate Professional. His firm, Kay Properties and Investments, specializes in Delaware Statutory Trust (DST) investment services. Kay Properties and Investments currently has offices in Los Angeles, New York City and Washington DC.

Risks & Disclosures

This material does not constitute an offer to sell nor a solicitation of an offer to buy any security. Such offers can be made only by the confidential Private Placement Memorandum (the “Memorandum”). All offerings are subject to availability. There can be no assurance that any offering shown will be available for investment. All offerings are subject to availability. There can be no assurance that any offering shown will be available for investment. All offerings are subject to availability. There can be no assurance that any offering shown will be available for investment. Please be aware that this material cannot and does not replace the Memorandum and is qualified in its entirety by the Memorandum. This material is not intended as tax or legal advice so please do speak with your attorney and CPA prior to considering an investment. This website contains information that has been obtained from sources believed to be reliable. However, Kay Properties and Investments, LLC, WealthForge Securities, LLC and their representatives do not guarantee the accuracy and validity of the information herein. Investors should perform their own investigations before considering any investment. There are material risks associated with investing in real estate, Delaware Statutory Trust (DST) and 1031 Exchange properties. These include, but are not limited to, tenant vacancies; declining market values; potential loss of entire investment principal; that past performance is not a guarantee of future results; that potential cash flow, potential returns, and potential appreciation are not guaranteed in any way; adverse tax consequences and that real estate is typically an illiquid investment. Please read carefully the Memorandum and/or investment prospectus in its entirety before making an investment decision. Please pay careful attention to the “Risk” section of the PPM/Prospectus. This material is not intended as tax or legal advice so please do speak with your attorney and CPA prior to considering an investment. IRC Section 1031, IRC Section 1033, and IRC Section 721 are complex tax codes, therefore, you should consult your tax and legal professional for details regarding your situation. Securities offered through registered representatives of WealthForge Securities, LLC, Member FINRA / SIPC. Kay Properties and Investments, LLC and WealthForge Securities, LLC are separate entities. DST 1031 properties are only available to accredited investors (generally described as having a net worth of over $1 million dollars exclusive of primary residence) and accredited entities only (generally described as an entity owned entirely by accredited individuals and/or an entity with gross assets of greater than $5 million dollars). If you are unsure if you are an accredited investor and/or an accredited entity please verify with your CPA and Attorney prior to considering an investment. You may be required to verify your status as an accredited investor.

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