Most folks are always looking for ways to save money and raise money, especially when it comes to considering a new year and all the possibilities it holds. After all, we work hard for our money and it’s painful to give it up to taxes. Likewise, it’s difficult to let your money sit there and not produce a return.
When it comes to keeping your money moving and not sitting around as equity, sometimes you have to explore some out-of-the-box remedies. One of those solutions is the sale/leaseback. If you are a business owner with some equity in a building you own, this is a wonderful way to raise capital for business expansion.
The simple solution involves looking for an investor to buy your building and then you lease the building back from them. The advantages are many. You are able to structure the lease as you like. Want to stay another 10 years or 20 years? No problem. Many investors are looking for long-term, solid tenants to stay in their buildings.
This creates a win for the investor too. The investor gets a tenant who is stable and committed to staying in the space. Want to spice the deal up a little bit too? You can ask to keep an equity stake in the deal too. So, in exchange for a higher rent, you might request to maintain a partial ownership in the real estate.
An additional way to keep your money moving is through the 1031 exchange. A 1031 exchange helps to defer capital gains, which is the tax owed on selling income-producing property.
A common misconception is that this strategy is for big business only. But, the average exchange is less than $500,000, indicating that it is primarily a benefit to middle class taxpayers. Most people that use this are selling a rental house or property they received from an inheritance. Presently, capital gains, plus the Georgia state income tax, is hitting investors in the pocket book at almost 30 percent.
But don’t despair, the 1031 exchange will help you get around this tax. The 1031 comes from the section of the IRS code that allows you to defer capital gains. In 1970, a family named Starker challenged the IRS’s ruling on capital gains and eventually won the court case against the IRS. A 1031 exchange merely allows you to swap properties without actually swapping the property.
When you sell an investment property, IRS rules will allow you to purchase a “like” property, of equal or greater value, and defer the capital gains into the new property. A third party company, known as an exchange intermediary, that’s approved by the IRS will hold your funds from the sale of the first property until you are able to close on the second property.
If done properly, this “exchange” will allow you to defer the capital gains until the sale, or another exchange, of this second property. It is possible, upon your death, to bequeath the property, and your heirs will not have to pay capital gains either. Through the use of the 1031 exchange, it is possible never to pay capital gains in your lifetime.
Keeping your money moving is an important way to build wealth. Continue to use these strategies to keep money working for you, and you will find the new year full of possibilities and continued prosperity.
Brian Patton, CCIM is an author and trusted advisor on commercial real estate investments and development. He can be reached at 770-634-4848 or via his website: www.BrianPattonCommercial.com.