Real Estate Tax Benefits and Utilizing Transactional Tax Law w/Brian Boyd
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Episode Description
Welcome to the Freedom Point Real Estate podcast! In today's episode, Jeremy Dyer asks Brian Boyd about REPS (real estate professional status), 1031 exchanges, the pros and cons of DSTs, the difference between general partnership and limited partnership, and what investors should prepare for in light of a new administration in 2025.
Brian is a practicing attorney in Nashville, TN who specializes in real estate, tax, and business law. He earned his undergrad from UTC, JD from Samford University, LLM in Tax from Georgetown, and additional education at Cornell University in Real Estate Finance. Brian also authored the book "Replace Your Income: a Lawyer's Guide to Finding, Funding, and Managing Real Estate Investments."
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Facebook: https://www.facebook.com/briantboydesq/
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CONNECT WITH JEREMY DYER!
Website: https://startingpointcapital.com/
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LinkedIn: https://www.linkedin.com/in/jeremydyer
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Book a Call! https://calendly.com/startingpointcapital/discuss-investing-with-jeremy-dyer?month=2023-12
Summary
Tip #1: Understand Passive vs. Active Income Buckets
"Passive profits and losses offset passive income. Active profits and losses offset active income. The two don’t really merge."
Understanding the difference between passive and active income is critical for maximizing tax benefits. Passive income from limited partnerships (LPs) cannot offset ordinary active income unless you qualify as a real estate professional. Investors should be aware that their LP investments will yield benefits primarily when the property is sold. This distinction can shape your approach to syndications and overall tax strategy.
Tip #2: Use 1031 Exchanges to Defer Capital Gains
"A 1031 is a like-kind exchange... You sell a property, and the money goes to a qualified intermediary until you identify new properties."
1031 exchanges allow investors to defer capital gains taxes by reinvesting proceeds from a property sale into a similar property. This strategy preserves capital, allowing it to grow tax-free until the next sale. The strict 45-day identification and 180-day closing timelines are key components that require careful planning but can lead to long-term compounding wealth.
Tip #3: Leverage Cost Segregation to Offset Depreciation Recapture
"Execute a cost segregation study... and that will offset your cap gains and depreciation recapture."
Cost segregation accelerates depreciation deductions by identifying building components that can depreciate faster. This strategy reduces taxable income and can help offset gains from a property sale. By using this method in conjunction with a 1031 or other exchanges, investors can significantly lower their tax burden.
Tip #4: Explore Reverse and Slow Man’s 1031 Exchanges
"A parking transaction lets you buy a property before selling another, holding the title until the exchange occurs."
A reverse 1031 exchange, or parking transaction, allows investors to acquire a new property before selling the old one. This is beneficial in competitive markets where waiting could mean losing out on a prime asset. The slow man’s 1031, completed within the same calendar year, gives more flexibility for identifying replacement properties, reducing pressure during the process.
Tip #5: Consider Delaware Statutory Trusts (DSTs) for Hands-Off Investing
"The problem with DSTs is you lose control, but they let you defer taxes for 10 years or more."
DSTs allow investors to defer capital gains by reinvesting in managed real estate projects. While this option eliminates active management responsibilities, the lack of control can be a drawback. Investors should weigh the long-term benefits of passive returns against the risk of losing influence over property decisions.
Tip #6: Know When to Exit with a 721 UPREIT
"A 721 UPREIT lets you exchange properties for shares in a REIT, slowly bleeding capital gains into the market."
For investors ready to retire from active property management, a 721 UPREIT (Umbrella Partnership Real Estate Investment Trust) offers a way to transfer assets in exchange for REIT shares. This strategy provides steady dividends and gradual tax realization, offering a phased exit from direct ownership.
Tip #7: Take Advantage of Bonus Depreciation Opportunities
"Bonus depreciation is coming back to 100%, which is phenomenal for real estate investors."
The potential return of 100% bonus depreciation under the new administration presents a major opportunity for investors. This allows for immediate expensing of qualifying property, significantly reducing taxable income in the year of purchase. It’s a key tool for rapidly scaling portfolios while minimizing upfront tax liabilities.
Tip #8: Prioritize Affordable Housing Investments
"Affordable housing is needed... It will pay you back in dividends and is a market gap worth addressing."
Investing in affordable housing aligns with market demand and government incentives. With housing prices rising, creating affordable developments can yield high returns and tax benefits. This area offers long-term stability and potential partnerships with local governments.
Tip #9: Don’t Fear High Interest Rates – Focus on Equity Growth
"People were buying real estate in the late 70s with higher interest rates... Property still goes up in value."
Despite current high interest rates, long-term property appreciation remains a reliable wealth-building tool. Equity grows as tenants pay down debt, and rising property values create future refinancing opportunities. Investors should focus on the broader horizon rather than being discouraged by short-term rate fluctuations.
Tip #10: Plan for Long-Term Tax Deferral and Inheritance
"Defer, defer, defer, die – and pass it on at a stepped-up basis to my children."
The ultimate goal for many real estate investors is to build generational wealth. By consistently deferring taxes and using tools like 1031 exchanges, investors can pass properties to heirs with minimal tax liability. Planning for this long-term outcome maximizes wealth preservation across generations.
