1031 Exchange in Florida
Top Five Reasons To Consider It
If you own real estate and live in the state of Florida, you may be wondering what the big deal is with the 1031 exchange. Maybe you’ve heard friends and family gush about the tax savings, or you’re doing the math on how much you can save as well. If you’re looking to sell a property that has high amounts of capital gains or depreciation recapture, you should strongly consider the 1031 exchange in Florida.
Even in a state with traditionally low taxes like Florida, the benefits of the 1031 exchange far outweigh the costs. While you don’t have to pay Florida state income taxes either way, with the 1031 exchange you can defer federal taxes. Many real estate investors use the 1031 exchange in Florida for other purposes as well. Estate planning, property flexibility, and cash flow improvements are all ways the 1031 exchange in Florida can benefit you.
In this article, we’ve outlined the top five reasons ALL real estate investors should consider the 1031 exchange in Florida. Even if your portfolio is focused on buy-and-hold, understanding the 1031 exchange could help you get a deal on your next property. If someone is selling a property in a 1031 exchange, they have extremely strict timelines to adhere to. By using the information on the 1031 exchange in Florida in this article, you can negotiate better terms.
#1 - 1031 Exchange in Florida for Estate Planning
While the 1031 Exchange in Florida is primarily known for its tax-saving benefits, it’s also an exceptional estate planning tool. Given the demographics of Florida, more of its older residents should consider the 1031 exchange if they own any kind of real estate.
Many investors plan to use the 1031 exchange indefinitely and “swap until they drop.” This means they’ll continue to defer taxes by “kicking the tax can down the road.” If you can pull off doing 1031 exchanges continually, your heirs will be very happy with the result. Even if you’ve been deferring taxes with the 1031 exchange, your heirs will inherit the properties on a “step-up” basis. This means their cost basis will be the market value of the property when they receive the property.
What if you don’t want to pass on a real estate portfolio to your kids? For many investors whose kids are not well-versed in property management, the prospect of giving them the “keys to the kingdom” is frightening. Another worry investors have is that their heirs will fight over control of the property. Especially if you own a single large property, passing that along to three children can be a recipe for disaster.
A tactic many real estate investors take advantage of is using the 1031 to exchange into a DST (Delaware Statutory Trust) property. The 1031 Exchange DST is a “crowdfunded” investment model and fully approved to be used as your replacement property in a 1031 exchange. They are fully passive investments. Rather than worrying about property management, repairs, or other issues, the DST structure allows each of your heirs to receive their “mailbox money.” The best part is that you can roll over your entire equity balance into a DST, and even “trade up” to a more valuable property.
#2 - Save Money on Taxes With a 1031 Exchange In Florida
This is by far the most obvious and clear reason to do a 1031 exchange in Florida - save money on taxes. Nearly every part of the state, from the panhandle to Key West, have seen tremendous levels of appreciation.
After the great recession, Florida became an even more attractive place to both retire and live. With a healthy jobs market and a steady stream of snowbirds from the east coast and all other parts of the country, Florida real estate did quite well during the 2010’s.
With property values rising and investors taking advantage of the tax breaks depreciation can offer, many investors in Florida will be looking at a large tax bill when it comes time to sell. Even though Florida has no state income taxes, a low basis in any property can mean hundreds of thousands in federal taxes. This is why more and more investors in Florida are doing the 1031 exchange. It can save on the following types of taxes:
Affordable Care Act (Obamacare) 3.8% Tax - If you’re in a high enough tax bracket, you’re subject to an extra 3.8% tax on capital gains. This does apply to real estate sales. It was instituted during the health care reforms under the Obama administration. By doing a 1031 exchange in Florida, you can defer this tax.
Property Taxes - Although property tax rates are not as high as Texas or some other states, they are fairly high in Florida. This helps state and local governments compensate for the lack of income taxes in Florida. If you’re looking to do a 1031 exchange in Florida and buy property in another state, this helps lower your property tax bill.
Depreciation Recapture Taxes - Even if you didn’t take full advantage of deprecation while you owned your investment property, the IRS does not care! Yes, they levy depreciation recapture taxes on you whether you took depreciation or not. This is taxed at income rates up to a marginal 25%. Many properties that have been owned for long periods of time are subject to a large depreciation recapture tax bill.
#3 - “Trade Up” With a 1031 Exchange in Florida
A fantastic advantage to doing the 1031 exchange in Florida is the ability to use your existing equity to “trade up” to a higher value property. This is one of the main reasons investors love the 1031 exchange and use it as their #1 wealth building tool.
If you’re confused, the concept is fairly simple: By using the equity you’ve built in your existing property as the down payment in your new one, you can “trade up” the overall value of property. Without the 1031 exchange you would need to pay capital gains and depreciation recapture tax on your equity, and the value of property you could buy would be smaller.
Still confused? Let’s use an example. If you own a property worth $1M and still have $600,000 on the mortgage, you have $400,000 of equity. With a traditional sale, you’d get taxed at a high rate on that $400,000 (let’s use 25% for simplicity). Then, you’d only have $300,000 to put toward the down payment on your next property. If your lender requires 20% down, this means you can only buy up to a $1.5M property.
By now, you’re likely seeing the large advantage to the 1031 exchange. By deferring the taxes with a 1031 exchange in Florida, you keep the full $400,000 of equity. Even if your lender still requires 20% down, with the 1031 exchange you can purchase a $2M property. This is the secret to building wealth with the 1031 exchange, the “trade up” method.
You should be aware that the original capital gains tax amount is still due when you sell. The 1031 exchange is a tax deferral method, not a tax avoidance once. That said, many investors choose to do continual 1031 exchanges until they pass away. This way, you can defer taxes indefinitely. When you pass, the real estate will be passed to your heirs on a “step-up” basis. This means their cost basis will be the market value of the property when the heir inherits the property.
#4 - Lots of 1031 Exchange Companies in Florida to Help
Some states, such as Indiana and others do not have a single 1031 exchange company within their borders. Florida, on the other hand, has a number of qualified intermediaries ready to help. Owing to Florida’s advanced age population and relative wealth, you will have no trouble finding a qualified intermediary for your 1031 exchange in Florida. Here are some of the best 1031 exchange Companies in Florida.
By our estimation, there are nearly 20 qualified intermediaries in the state of Florida. Each area of the state is well represented, not just the Miami metro area. Whether you’re on the Gulf or Atlantic side, you’ll be able to find someone local to assist. Especially since there are some laws that are specific to Florida with the 1031 exchange, having someone in-state is a large advantage.
#5 - More Flexibility on the Type of Property
Although the primary goal of nearly any 1031 exchange in Florida will be to save on taxes, flexibility on property type is an underappreciated benefit. Instead of sticking with the type of property you already own today (residential, industrial, business), you can use the 1031 exchange to buy a different type of property.
Many assume that 1031 exchange properties must be the same type (i.e. exchange an apartment building for another apartment building), but that is not the case! Any property that “is used in a productive business or investment” is considered like-kind to another. As long as it is not considered personal property, you can use the 1031 exchange in Florida.
Many real estate investors in Florida who have built a portfolio of single-family homes use the 1031 exchange to diversify into commercial properties. Or, if you’re sick of property management, a 1031 exchange DST property investment could be a great fit. With DST properties in a 1031 exchange, you can sell your existing property and purchase a share in a much larger commercial property. As part of the DST structure, you cannot have any type of operational or decision-making role, making them a completely hands-off investment!