One of the most common questions we get on our investor intake calls is, “What is a 1031 exchange?”
Today, David Meilan, Director of Investor Relations at Nighthawk Equity and Drew Kniffin, Nighthawk President, are going to break down this concept for us.
Simply put, 1031 exchanges are a way to defer tax liability through real estate. Using 1031s allows you to sell an asset and continue to own an investment property, without having a big taxable gain.
So, let’s say you bought a rental property and years down the road, you had a half a million dollar gain.
If you don’t have a 1031 exchange, you might have to pay $150,000 in taxes on that.
By having a 1031 exchange means that you can sell that asset, then move the proceeds of it over into a new one. This allows you to defer the payment of those taxes! 🤯
Basically – it's a way to liquidate a property and sell it. You can continue to invest and ultimately, give yourself the time that you need to pay those taxes.
Does Nighthawk typically permit 1031s into our investment opportunities?
The short answer is at this time is… no.
There are a number of reasons why it can be complicated to navigate 1031 exchanges.
There are generally some legal requirements and timing issues that come into play. So, historically, we have not done that.
At the same time, we've done a lot of research on this. We do see the avenue to pursue it in a way that doesn't let the tax tail wag the investment dog.
It's important to not let the fear of paying some taxes drive bad investment decisions.
One of the ways this could happen with a 1031 is that when you sell a property, you generally only have 45 days from the day that you sell to name the next property that you want to buy.
What I've seen happen a lot inside of that 45 day window, is that the investor will get into a deal frenzy, and end up overpaying for an asset.
The question for us is, how do we service our investors, find a way to utilize 1031s, and do so in a way that aligns their sales at the same time?
…but also does not drive us to make a bad investment decision that's hurried?
We think we have an answer that will allow people to use 1031 exchanges with us…
This is where you come in: one of the things we’re trying to do is figure out and understand who are the investors that are interested in a 1031 exchange?
>> If you have a 1031 that you want to let us know about, the best way to do that is to go to NighthawkEquity.com/survey
That way we can keep track of the investors who have interest in utilizing 1031 exchanges in their investments.
It will also give us the opportunity to have a conversation with you include you on any initiative Nighthawk Equity has going forward with 1031s.
How does the political landscape effect what's going on with 1031 exchanges?
There’s some talk around the idea that the Biden administration might remove 1031s entirely.
This can be a political lightening rod because over the years, millions and billions of tax dollars have been deferred, and effectively prevented from going to the federal government's pocket, through 1031 exchanges.
1031s have been around for a long time, and they've survived administrations of both political parties, because it's generally accepted that we want to incentivize and encourage public housing, and we want people to put their money into apartment buildings, in order to provide housing for more people.
Having said all that, during the campaign, a senior official for the Biden administration said that 1031s was one thing that the administration was going to look at removing in order to generate more revenue.
That has not been effectuated; we don't know if that's going to happen.
It's is something that's been discussed by the administration. It has a lot of people wondering if they can lock in that transaction now and actually get the benefit of the 1031, as opposed to waiting a year or two and maybe selling it and losing that opportunity if they do end up doing away with them.
So, the short answer is that it's being talked about, it's not for certain yet. If you are on the margin, if you're thinking about selling an asset, this might be something that tilts the scales towards selling and being able to defer that game for a long time.
If you're interested in potentially doing a 1031 exchange into one of our deals at Nighthawk, please fill out that survey and let us know what your thoughts.
For more conversation on 1031 Exchanges, check out this podcast with Michael Blank and Paul Moore!