Most long-term campground owners that want to sell or are thinking about it have concerns about capital gains and what that means for their retirement funds.
The truth is that every year a seller claimed depreciation, they were in effect postponing taxes paid to the government. When you sell, it’s time to repay those deferred taxes.
There are some options to defer these taxes past the closing – it’s called a tax-deferred 1031 exchange. This basically means buying a like-kind property that replaces the one you sold.
There are some major points to keep in mind when you execute a 1031 exchange.
Once the sales money hits the Escrow Account – the clock is ticking. You as a seller, have 45 days to identify a property and 180 days to close on it! So time is of the essence!
Please understand that like-kind is not EXACTLY the same as what you sold. This can come in many “somewhat similar” opportunities. In the campground world, this means you are sort of renting to someone that stays at your park – so anything that is sort of “renting” typically will qualify for like-kind. I’ll speak to the “Mailbox Check” option soon.
Typically speaking you have to re-invest what you made to avoid capital gains.
Remember, there is a reason it’s called DEFERRED – eventually, you will have to pay it back.
The last thing to remember is the 1031 facilitator cannot be known to you in any business or personal fashion.
This is a clever way to avoid all the taxes upfront and possibly reduce them in total. I’ve spoken to several folks that look at these projects. These are really a hands-off approach to the rental business.
Simply put, a broker pulls several investors in to create the money to build large complexes such as a Walmart, Hy-Vee, Dollar Tree, etc. All of these companies have one thing in common – they don’t own their buildings! Instead, they do a triple-net lease and enter into long-term leases on those buildings. Then after the lease is up they have options.
This is what happens to the 1031 investor:
Whatever percentage of the project you own, you’re paid monthly from the tenants’ rental income in the form of a mailbox check, so you don’t really have to be part of it. Just reap the money monthly plus a nice interest. These buildings are generally paid off before the leases are up so really no way to lose!
These projects are called REIT’s (Real Estate Investment Trusts) and are typically privately traded. So even if after a few years, you would like to get out, generally speaking, the broker can resell your interests.
Call John for more information at (507) 450-5626 and he can explain, and/or point you in the direction of these folks to help facilitate this kind of 1031 Exchange.