As the year comes to a close, so does the deadline for many tax deductions, or so most people think. If you’re a real estate investor, especially this year, these deductions may be more top of mind. After all, one of the perks of investing in real estate is not just to generate income but also to reap some of the benefits at tax time.
Currently, people are under the impression that our economy is unstable and their money is not safe in the stock market. They’d rather put their money in a tangible asset with a guaranteed return, like real estate, until things stabilize and then they can sell it off and put it back into the market if they want to. So, what we see happening right now is people moving their money out of the stock market, which they would have to pay tax on if there was profit made, and then putting it back into real property.
I recently had a buyer who had a 1031 he was closing Dec 2nd and he wanted to start looking for property. I told him there’s no reason to look for property at the beginning of November. Everybody who is trying to close before the end of the year is bidding up the cost of property so you’re going to pay a quarter and a half percent too much on a triple net. Why overpay when you don’t have to? You have 45 days to close so it makes more sense to start looking beginning of December into January since you’re going to close next year anyways.
The year ends December 31st, however, in real estate, the end of the year is an artificial timeline. People say they want to close by then for tax purposes, but you have until April 15th to make tax changes for the previous year. We see people scrambling for the end of the year all the time – from leases to purchases. Other than tax purposes, another main reason we see this scramble happening is folks want to get in with the real estate committee before they’re all out for the holidays.
From the outside looking in, most people have no idea there is a committee and how those committees are structured. Why is this a big deal? Retailers have a committee that meet 1-2 times on a monthly basis where they’ll approve deals to go to lease. If we get an LOI negotiated and everyone is happy, then usually we can get a committee day at corporate about a month out from that point. It’s not usually a big deal in the middle of the year but when it’s the end of the year it’s a problem. The reason for this is it gets bumped from the last meeting which is the first week of December, meaning it might not go through until the middle of January.
The end of the year for commercial real estate is December 15th. Regardless of what religion you are and which holidays you celebrate; everyone takes the end of the year off. Nobody works at the end of December and nobody works hard in January. Retailers are doing planning meetings and lawyers are a little slow to get leases turned around. Therefore, realtors want to get the LOI signed before December 15th to get the package ready. Now, there are quite a few people involved in a deal. You need agents, lawyers, title companies, bankers, buyers and sellers. It gets very hectic at the end of the year and that’s a lot of people to organize at a time when no one wants to be organized.
This hurry up and rush, fear of missing out dilemma can lead to decisions that you might not make other times of the year. My advice is to slow down and evaluate the deals so that you make good, informed decisions that set yourself up for success. At the same time, if necessary, push items forward to the next step. If you want more information or have some questions, don’t hesitate to reach out. I’d be happy to come alongside you and walk you through everything step by step. You can find me at firstname.lastname@example.org or by phone at 615-234-4900.