Real Estate Investors/Property Owners

If choosing to sell your property and not do any exchanges for various reasons, there are many tax efficient investment strategies to explore and implement. 

 

1031 Exchange Process

If you’re considering selling property and want to defer or even eliminate the capital gains that may arise from the sale of the property, a 1031 exchange may be an appropriate solution.

The rules and timelines that must be followed for a 1031 exchange are complex and may feel overwhelming. We help make sense of the process and guide you through the exchange so you can walk away feeling confident you’ve made the right decision. We provide access to investments from a number of sponsors who offer replacement properties structured as Delaware statutory trusts (DST). The investments offered by the sponsors include triple net, multi family, office, retail and medical properties among others. We will work with you to review a variety of potential replacement properties and help you select a replacement property(s) that fulfil your exchange requirement and are in line with your financial goals.

Most DST 1031 investment properties have distributions paid to investors, generally on a monthly or quarterly basis. By completing a 1031 exchange, an investor can preserve their equity by deferring taxes and in addition generate income. Investors are also able to diversify their portfolio both geographically and by property type. We have completed 1031 Exchanges for a wide variety of clients, including but not limited to: farmers and ranchers who have sold their land, individuals who have owned rental property and are now ready to take a more passive approach to owning real estate, and small business owners who sell their building(s) at the same time they sell their business.

It is important to remember there are risks with these investments. The actual amount and timing of distributions is not guaranteed and may vary. In addition, investors’ capital is not guaranteed. Additionally, these investments are not liquid, may have declining market values and tenant vacancies, so investors must carefully consider their overall financial situation prior to investing.

Whether you’re thinking about selling a property and want to better understand the 1031 exchange process and investment choices, or if you already sold your property and have the proceeds deposited at a qualified intermediary, we can help.

*DST investments are available to accredited investors only (generally described as having a net worth of over $1 million dollars exclusive of primary residence or income of over $200,000 ($300,000 with spouse if married) for each of the last two years) and accredited entities only.

If choosing to sell your property and not do any exchanges for various reasons, there are many investment options to explore and implement. 

 

1031 Exchange Guidelines

Constructive Receipt and Qualified Intermediary for a 1031 Exchange
The exchanger may not receive or control proceeds from sale of relinquished property. The proceeds must be deposited with a qualified escrow.

Timelines for a 1031 Exchange
The investor (exchanger) must follow the strict 45- / 180-day guidelines for an exchange. Once the exchanger sells their property, they have 45 days to identify replacement property(s). Once identified, the exchanger has 180 days from the day they sold their property to acquire the replacement property(s). There are a number of permissible ways to identify replacement property and the best way to identify will vary depending on the investor’s situation.

Like-Kind Property in a 1031 Exchange
The investor must acquire “like-kind” property, meaning it must be other qualifying forms of real estate. For example, the exchanger could sell a duplex and purchase a commercial property, or they could sell a piece of land and buy an apartment building. The property just needs to be “like-kind.”

Exchange Property Held for Investment
The property sold and the newly acquired property must be held for investment or business purposes. You cannot sell your primary residence and buy an investment property, nor can you sell an investment property to purchase a primary home.

Equal or Greater Debt and Equity in a 1031 Exchange
Generally, the cash invested in the replacement property must be equal to or greater than the cash received from the sale of the relinquished property, and the debt placed or assumed on the replacement property must be equal to or greater than the debt relieved upon sale of the relinquished property. The exchanger may add additional proceeds to the new purchase, and take on additional debt. If the exchanger does not want to use all of the sales proceeds they may elect to do a partial exchange, but must pay the applicable capital gains taxes on the difference. This is referred to as “boot.”

There are many provisions within the 1031 tax code. This is a summary of certain guidelines and is not meant be a comprehensive resource. This material is not meant to be interpreted as tax or legal advice.

Be sure to consult your own tax advisor and investment professional before taking any action that may involve tax consequences.

Recall, if choosing to sell your property and not do any exchanges for various reasons, there are many investment options to explore and implement.