Investor Profile: The Retiree
A couple in their early 70’s purchased a mixed-use building back in 1979 for $400,000. The couple lived in the building and had a large commercial space in which they ran their business for 40 years. They are recently retired and had very little liquidity or retirement income.
The equity in this property represented around 85% of their net worth. The couple exchanged their property and downsized into a small condo. They took their 500K homeowners exemption and an additional $125,000 in cash from the 1031 exchange for liquidity needs. They also purchased 2 triple net lease investment properties.
The client had a large percentage of their net worth tied up in their home and needed more income. If you sell a property that has significant appreciation, the gain may be subject to a high capital gains tax. This tax can be quite large and may deter some investors from selling their properties.
Because the property had already been sold, there were only 60 days left to identify replacement properties for the 1031 Exchange or the client would have to pay $700,000 in capital gain tax.
A 1031 Exchange is a great solution to this problem by allowing you to defer any capital gains taxes otherwise due upon the sale. All or some of the sale proceeds can be re-invested to maximize your portfolio’s growth.