Portfolio optimization and 1031 exchanges - by Russell Gullo

Do you own a portfolio of income-producing properties that are scattered across many different locations? Are you actively involved with the day-to-day management of these assets? Are you at the point in your life where you can’t afford to sell these properties because of the taxes associated with your potential gain? 

The following strategy is one of many that will allow you to consolidate your equity, pay no tax, acquire one large replacement property, and transition to a passive management position. 

Most individuals are familiar with the capital gains tax but few remember the additional recapture of depreciation and state tax. You may lose as much as one third of your selling price in the form of taxation associated with your gain, depending on how long you have owned your real estate investments. 

A 1031 exchange gives the opportunity to pay no tax when disposing of your income-producing, investment-held, or in some cases, secondary residence. Keep in mind that a professional qualified intermediary is needed and that you must acquire a “like-kind” replacement property, real estate other than your primary residence, to complete the 1031 exchange transaction. 

So if your portfolio consists of doubles, duplexes, or large multifamily properties that you have been actively managing you can sell and go into a passive, management-free position, such as a “NNN” leased investment property or a co-ownership real estate investment.

An example of a “NNN” leased investment property would be properties with long term leases with tenants like Walgreens, CVS, Dollar General, Auto Zone, Advance Auto Parts, or Family Dollar, just to name a few. Normally the real estate is a free-standing building occupied by one of these tenants, with guaranteed rent anywhere between 15–50 years. In addition, the tenant is responsible for the property taxes, property insurance, property maintenance and utilities. The required equity investment may be as little as $350,000 to individually own the entire asset or as little as $100,000 to partially own an interest in one of these investments. Because these properties are management free, their locations become less important than an actively managed investment since the tenant is responsible for all day-to-day activities. This allows the opportunity to expand your geographic scope to other prime locations throughout the country.

Another investment option could be a co-ownership arrangement such as an institutional sized apartment building ranging from 125 units to 250 units. A “sponsor” will locate, acquire and manage the potential investment on behalf of a group of co-owners that can participate with as little as $100,000 of equity investment. The objective usually is to hold the asset between five to seven years and then dispose with the intent to receive all the same benefits of ownership had you owned the asset by yourself without the managing the property.

There are many different management-free real estate investment ownership options available for those interested in optimizing their portfolio and transitioning into a passive management position. 

Visit our website at www.rjgullo.com for additional information or a free phone consultation on how to take advantage of these various opportunities.

Russell Gullo, CCIM, CEA, is founder and CEO of the R. J. Gullo Cos., Buffalo, N.Y.; founder and director of operations at the American Institute of Real Estate Exchangors; and founder of the Buffalo Investors & Exchangors Group.