Dos And Don'ts When Reinvesting Real Estate Returns
Legacy real estate properties often pass from one generation to another. But when it comes time to sell these properties, are there right and wrong ways to roll over the proceeds to new real estate investments? According to Steven Hornstock, co-managing partner of New York City-based ABS Partners Real Estate, a full-service vertical real estate company involved in management and leasing, adhering to a handful of proven strategies can make a huge difference. And the strategies are all the more key given the new Trump-era tax laws pushed through in 2017.
Hornstock bases his insights on his firm's two decades of experience in partnering with real estate investors to maximize returns tied to real estate investments. His firm specializes in providing services that add value in leasing, investment sales, property management, construction management and advisory, and by organizing opportunities for its clients to participate in the ownership of real estate.
"First things first, you have to understand the goal of reinvesting," Hornstock says. "A family with generational real estate holdings may want to reinvest to defer taxes, or the family might look to income-producing properties for growth. Some want very, very passive investment, some want active investing. The answer to what's right and wrong is finding an approach that's manageable for you and comfortable for you."
Trump-era tax laws
The new tax laws passed under the Trump administration usher in two new and very favorable developments for real estate investors. The first is an IRC Section 1031 exchange. The sale of a business or an investment property normally requires the seller to pay tax on the gain at the time of sale. But the IRC Section 1031 provides an exception. The seller can postpone paying taxes on the gain if the proceeds are reinvested in a similar property as part of a qualifying like-kind exchange.
If your grandfather bought a property in 1950 for $100,000, and it's been kept in the family since, and you sell the building for $1 million, you'd normally have to pay taxes on the gain of $900,000. "But under the 1031, you buy a new property for $1 million, and your basis is the $100,000 your grandfather paid," Hornstock says, "You're transferring your basis from the 1950 property to the one you just bought. You pay no capital gains."
New under the revised tax laws is the qualified business income deduction. "You can deduct 20% of your real estate income, which never existed before," Hornstock says.
"The rationale is real estate helps create jobs."
Timing and location
In Hornstock's view, worrying about when to reinvest makes no sense. "You can't time the market, and if you're reinvesting for the long term, you just do it. If you have solid fundamentals, you go ahead. But you need to make an economic analysis of the property."
The same approach applies to location. Investors with the time and the patience should buy real estate in the Bronx, because, he says, "It's not a question of if, it's a question of when."
Finally, don't assume harnessing technology will necessarily benefit one real estate investor over another. With more information than ever before bombarding investors, anyone can learn everything they need on properties across the globe. "But you still need to understand it and process it," Hornstock adds. "Real estate is a pretty boots-on-the-ground thing. The information is off the charts now. Doing your due diligence, getting comparables, you can do that in five minutes but you still have to be able to process the information, because there's a guy in New Delhi doing the same thing."
Originally appeared in Forbes