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Amid a shifting tax landscape, advisors have opportunities and a balancing act to conduct. The latter comes in the form of balancing clients' needs for tax mitigation strategies while maintaining allocations to appreciating and/or income-generating assets for the future.
Opportunity comes in the form of advisors adding value by presenting clients with income-generating concepts with tax mitigation benefits with low correlations to traditional assets. Sounds like a tough task, but it's made easier with 1031 exchange portfolios offered by ExchangeRight.
For the uninitiated, “1031” refers to IRS Section 1031 – meaning tax code, meaning amplified opportunity for advisors because this wonky stuff laden with jargon 99.9% of clients aren't familiar with. There is, however, a simple definition advisors ought to consider using in client conversations.
“In real estate, a 1031 exchange is a swap of one investment property for another that allows capital gains taxes to be deferred. The term, which gets its name from IRS code Section 1031, is bandied about by realtors, title companies, and investors,” according to Investopedia.
By deferring those capital gains, capital is freed up, allowing a real estate entity to invest proceeds from one sale into a new project. Better appreciation, maximized depreciation, increased cash-flow, investment diversification and tax deferral are among the benefits of the 1031 structure.
How ExchangeRight 1031's
ExchangeRight, one of the premier names in the 1031 space, typically focuses on property assets with lengthy initial lease terms (10 years+) backed by investment-grade credit in the healthcare and necessity retail spaces. The company offers residential real estate strategies as well.
“ExchangeRight is committed to providing 1031-exchangeable DST offerings of multifamily properties, targeting Class B apartments with stable income and value-add upside potential,” according to ExchangeRight. “Our multifamily offerings have consistently featured strong cash flows, high debt-service coverage ratios, conservative underwriting, long-term fixed-rate financing, and the potential to enhance return with value-add strategies.”
At a time when repositioning a real estate portfolio is an attractive proposition, particularly after the carnage wrought on some parts of the industry by the coronavirus pandemic, 1031's are themselves alluring for clients. Advisors are taking note.
“An advisor can really add value by assisting investors in real estate with programs like 1031 exchanges. Not only can you offer them the opportunity to “cash out” of highly appreciated assets without triggering a taxable event, but you can show them different investment options going forward which may better suit their objectives and risk tolerance. ExchangeRight can help you exit an investment property, where you’re worried about the 3 T’s (Tenants, Trash and Toilets), and put you into a diversified, managed portfolio of single tenant, triple net leased commercial real estate,” says Douglas Blake, managing director – investment services at Kingswood U.S.
Unbeknownst to be many clients – adding to the theme of advisor opportunity – is that 1031's aren't solely reserved for big time commercial real estate deals. In fact, the structure is accessible to a broader swath of investors than many clients realize.
“The truth is that the benefits of a 1031 exchange are available to any taxpayer selling non-owner-occupied real estate, held for investment or held for productive use in a trade or business,” notes Legal 1031. “In a nutshell, these 'held for' standards mean no personal use or flips. Most rental real estate should qualify for an exchange if the proper use/intent and holding periods are met (special rules for vacation homes or multi-family with part rental/part owner occupied).”
ExchangeRight Does It Right
When it comes to real estate investing, many clients seek this path for income. That's all the more relevant today with Treasury and municipal bond yields low. ExchangeRight offers advisors income-generating platforms that can be passed onto clients.
“ExchangeRight also provides preferred equity and REIT investments that are structured to benefit from ExchangeRight's 1031 syndication platform,” according to the company. “These preferred equity and REIT investments are designed to provide investors with attractive and stable monthly or quarterly cash distributions and/or enhanced return potential.”
With dependable, low correlated income getting harder to source, advisors can bring something new and rewarding to the client table with ExchangeRight.
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