I've been a CPA for nearly 20 years - serving private small business and real estate the entire time. I take the lessons learned in serving and now running a small business and share them here. For business owners, investors, and advisors looking to lower their cost of capital, subscribe for delivery straight to your inbox 👇 Also on YouTube at PlugAccountingandTax!
Real Estate Exits Map
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Real estate is special. Every time a new tax law comes out meant to raise federal revenue, real estate somehow gets a way out. We see it in the passive loss exceptions, the reduced rate on depreciation recapture, like-kind exchanges, the at-risk limitation, interest limitation carve-outs, and the carried interest exception. All real revenue raisers - just not from real estate pros. 👷♂️ The government has a special place in its heart for developers and investors - for good reason. Capital spent improving real property is a powerful economic engine for the country. These carve-outs make real estate that much more interesting when it comes time for exit planning. You already know I had to create a flow chart for this - let's jam ⤵️ Sell now, hold forever, or give it away?Every exit starts here, and most owners have never said the answer out loud. Most default to "sell" because that's where the offer came from. Plenty of them, once they see the hold-forever column, change their answer. Selling: defer the gain, or take the cash?If you want to defer, the classic move is the 1031 exchange. Sell, identify replacement property within 45 days, close within 180, and the gain rides into the new building untaxed. The depreciation recapture (usually) rides along too. 🏘️ The complication is partners. A 1031 has to be done by the same taxpayer that sold, so when not everyone wants to defer, the partnership can't split itself into a 1031 for some and cash for others. Three workarounds: a Delaware Statutory Trust (passive, no landlord duties, no control), a tenancy in common (each owner takes a direct slice of the property before the sale and exchanges or cashes out on their own), or a workaround - refinance, redeem the partners who want out with the loan proceeds, then the remaining partners 1031 the property. These take a lot of foresight, so best to tighten up the process before you get an offer. Third door: sell, put the gain into a Qualified Opportunity Fund within 180 days, and the original gain is deferred. Hold the fund interest 10 years and the appreciation inside it is never taxed. Same trade as the DST: control for deferral. If you want the cash, own the decision. Pay the tax: 20% federal on the gain, 25% on the depreciation you took, plus 3.8% on both if the property was passive to you. Or soften it. A partial 1031 defers most of the gain and pulls some cash out taxable. Buying a new building and running a cost seg (now at 100% bonus rates) creates a bonus depreciation loss in the year of sale that can offset the gain, if you qualify to use rental losses. An installment sale spreads the gain over the years you collect the note, though recapture on the cost-segregated components is due in year one regardless. Never selling: the Warren Buffets of real estateHold-forever is a real exit, and the code rewards it more than any other. 💎 A cash-out refinance puts money in your pocket with no tax, because loan proceeds aren't income. A cost seg study front-loads the depreciation (100% bonus is back for property acquired after January 19, 2025), and the paper loss shelters the rent, and your other income too if you or your spouse qualify as a real estate professional. Hold until death and your heirs get a step-up in basis to fair market value: every dollar of gain and every dollar of recapture disappears. Move it into a family limited partnership first and the property passes to the next generation at a discount while you keep control. Refi, depreciate, die (hopefully not at the same time). 🪦 Giving it awayIf you're charitably inclined, don't sell first. A straight donation of appreciated property gets a deduction at fair market value and the gain is never taxed. But it comes with limitations in how much you can deduct against your income, and the need to pay $$$ for a good appraisal. A charitable remainder trust is for owners who still want the income: the trust sells the property tax-free, pays you an income stream for life or a term of years, and the remainder goes to the charity. You get a partial deduction up front and never owe the gain. The TakeawayThree questions sort every real estate exit: sell, hold, or give; if selling, defer or cash; if deferring, does everyone at the table agree. The carve-outs are real. The problem is in answering the questions after the buyer's contract is signed, when half the boxes on the chart have already closed. Circle the box you want to land in and bring it to your tax guy. 🫡 Group Chat Worthy Posts 🔥📲
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The Plug [Newsletter]
I've been a CPA for nearly 20 years - serving private small business and real estate the entire time. I take the lessons learned in serving and now running a small business and share them here. For business owners, investors, and advisors looking to lower their cost of capital, subscribe for delivery straight to your inbox 👇 Also on YouTube at PlugAccountingandTax!
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