Posted on 14. Aug, 2012 by LettySoliz in Press & Media
?DOW JONES NEWSWIRES
?Client is offered $5.6 million for an empty plot of land outside Las Vegas
?Adviser uses 1031 Exchange to avoid $900,000 in capital gains taxes
?Client now owns commercial properties that generate $365,000 a year
By Harper Willis
The client had inherited more than an acre of land in a small town outside of Las Vegas back in 1992. As Sin City boomed during the next decade, real estate developers offered her anywhere from $400,000 to nearly $2 million for her land. But she was patient and refused them all.
Then in 2006 she got an offer of $5.6 million from a company that had built a series of single-family homes and a strip mall around the plot and wanted to complete the development.
She decided the price was right. But there was a problem: Selling the land outright would generate $900,000 in capital gains taxes, which was unacceptable to the client. So she went to see John Graves, co-owner of Renaissance Group, a registered investment adviser in Ventura, Calif., that manages $480 million in assets and provides fee-based planning services for more than 600 clients.
Mr. Graves couldn?t eliminate the taxes completely, but he did know a way to defer them indefinitely. Through a 1031 Exchange, the client could trade her empty lot for real estate worth the same amount?$5.4 million after transaction fees?without paying taxes on the proceeds from the sale.
Here?s how it worked: The proceeds from the sale to the developer went directly to a third party, called a qualified intermediary, thereby avoiding capital gains tax. The intermediary held onto the money while Mr. Graves and the client came up with a list of income-generating commercial properties to exchange for her piece of land. The qualified intermediary could then purchase the new real estate on behalf of the client using the $5.4 million.
But the property search hit a snag: When it comes to commercial real estate, $5.4 million isn?t a ton of money?and the client didn?t want to risk her fortune on just one small property.
Mr. Graves had his client form a tenants-in-common (TIC) structure that allows for multiple investors to purchase shares in real estate. ?Think of it as a mutual fund for real estate that allows individuals to purchase small ownership stakes in properties worth $20 (million) to $80 million,? he says.
Through the TIC, the client was able to gain ownership stakes in multiple properties, including a shopping mall in Texas, an office building in Wisconsin, and a drug store in Kentucky. Each property had a low level of debt and together generated an average yield of 6.5%. The high-quality properties weathered the financial crisis and today provide the client and her husband with more than $365,000 a year in income.
The couple plans to collect income from the properties for the rest of their lives. After they?re deceased, their son will inherit the properties. ?When that happens, the properties will get a step-up in cost basis. So if or when the son chooses to sell, he?ll avoid almost all of the capital gains taxes,? says Mr. Graves.
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