Solving a Taxing Problem for an Investor
IGHLIGHTS
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Was contacted about six acres of San Jose farmland purchased in the 1960s with substantial capital gains implications
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Coordinated a “1031 Exchange” of this land for a 120,000 square foot office complex in Fremont
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Brokered the transaction, and also directed a team including estate attorney, CPA and insurance broker to handle 1031 Exchange requirements
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Deferred all capital gains taxes on sale of land
Several decades ago, tax reform legislation created the concept of a tax-deferred exchange. Commonly known as a “1031 Exchange,” — after the section of the tax code from which it is taken — this allows investors to trade like-kind property and defer or delay taxes on the exchange.
In commercial real estate, the rules applying to the “like-kind” standard are quite liberal. Virtually any type of investment real estate can be exchanged for a different type of real estate. For example, bare land can be exchanged for an office complex, or an empty R&D building can be swapped for a shopping center. This gives investors a significant amount of flexibility to adjust their portfolios, so that they can adapt to changing financial needs and strategies.
CHALLENGE
An investor was facing a major tax-planning issue. In the 1960s, this family had purchased six acres of farmland in the King Road area of San Jose. The land had remained undeveloped for more than 35 years, and with the city having grown up around it, it was being leased for yard space at under performing rental rates. However, selling the land would produce a very large capital gain—with a substantial tax on the profits.
SOLUTION
When Borelli Investment Company was brought into the transaction, its first step was to conduct a comprehensive analysis of the situation. This analysis indicated that the land was in an area where rezoning to residential was a viable option. Borelli immediately began working through the process, drawing upon its extensive experience with public agencies to reposition the land for its best use.
With a plan in place, a team of professionals at Borelli Investment Company—working closely with other professionals brought in by the family, including an estate attorney, CPA, and insurance broker—began to implement the various steps.
- Terminate all leases for yard space to clear the way for a sale
- Broker the land sale to a housing developer at the best possible price per acre
- Coordinate a 1031 Exchange and work with the family’s advisors to ensure all requirements are met
- Identify acceptable income property for the exchange
- Broker the purchase of the selected property—a 120,000 square foot office complex in Fremont
In addition, because the purchase price of the Fremont complex exceeded the sales proceeds from the six acres of land, Borelli Investment Company assisted the client in securing a loan for a portion of the new purchase. Borelli also assumed property management and leasing responsibilities at close, and has continued to provide these services over the past six years.
RESULTS
With Borelli Investment Company’s help, the client was able to successfully sell his land, recognizing a substantial gain in appreciation and a very significant increase in rental income—while deferring capital gains taxes. Further, the “1031 Exchange” enabled the client to restructure the title to the property to aid in long-term inheritance planning.