1031 Exchange from the Stock Market into Real Estate?

Jon Hull

North Peak Contributor
One of the hardest things about getting started as a real estate investor is finding the available capital to do those first deals. Not many people have that kind of liquid savings or income. Or perhaps you having been watching the bull market wondering when this run will end and you want a place to shelter your investments? Maybe you are an experienced investor looking to diversify your portfolio or looking to move more heavily into real estate?
What if you could 1031 your stock market funds directly into a real estate deal without having to pay those nasty capital gains?

 

Did I get your attention?
Here is how this may be possible in the very near future:
Before we get started I need to remind you that I am in no way a tax attorney or CPA. Please consult with your own professional resources before making any decisions.
Let’s summarize what a 1031 exchange is. A 1031 exchange is a tax deferring strategy used by many real estate investors which allows you to sell a property and invest the entire sales amount into the next property without having to pay tax. In order to qualify for a 1031 exchange, you must reinvest the proceeds from the sale within 180 days and the new investment must be of equal or greater value.
Here is a great resource if you want to read the fine print on the 1031 exchange:
https://www.irs.gov/newsroom/like-kind-exchanges-under-irc-code-section-1031
You may be asking, “But Jon, I don’t own any real estate. How can I 1031 into real estate if I don’t own any?
Some history:
On December 22, 2017 “Opportunity Zones” were added to the Tax Cuts and Jobs Act.  According to the IRS, “An Opportunity Zone is an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment.” The first set of opportunity zones were released on April 9th of this year. This first list included 18 states and more census tract areas than I can count.
The intention of this program is the gentrification and revitalization of distressed areas. The IRS is calling it an “Economic Development Tool”. Don’t let this scare you off. Remember the first rule of investing: Buy low Sell high. Staying ahead of the curve is how we make money. Any time there is an influx of investors in a given area good things seem to happen.
This is not a 1031 exchange… sort of.
Here’s how this works. Normally when you liquidate an asset you are required to pay taxes on that asset based on the length of time you have owned it within that tax year. However, If you liquify the same asset and place the proceeds in a Qualified Opportunity Fund (run by an entity) the taxes do not have to be paid until the sale or exchange of the property or until December 31, 2026, whichever comes first.
In a nutshell, you may soon be able to take your other investment vehicles, convert them into real estate, gain all the benefits of real estate ownership and not pay any taxes for the next 8 years.
Although none of this is set in stone yet, it is without a doubt something to watch for on the horizon. Stay tuned and keep an eye on the headlines. There may be some great opportunities ahead!
For more information and details:
https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions

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