Are you looking for a replacement property for your 1031 Exchange? Have you wondered if a 1031 Exchange would work for you? Let’s discuss the ins and outs of a 1031 Exchange, as well as a solution that could work well with the 1031 Exchange. Please be advised that this article is general in nature and is not in any way intended to give tax and/or legal advice. You should always work with your own tax and legal professionals when evaluating if a financial strategy is appropriate for your situation.
A 1031 Exchange originates from the IRS tax code, Section 1031. It requires that the Seller of income-producing property work with a Qualified Intermediary (QI). The QI takes receipt of the sales proceeds from the relinquished property and deploys them into escrow for the purchase of the replacement property. The time constraints of a 1031 Exchange must be strictly followed to achieve tax deferral. You will have 45 days from the sale of your property to identify one, or multiple, qualified “like-kind” replacement properties of equal or greater value. You must purchase the qualified replacement property(ies) by the 180th day after the closing of the property you sold. Qualified properties are those that have been held for business or investment purposes. Properties that have been held for your personal use, such as your residence do not qualify for a 1031 Exchange. All of the properties in the exchange must be qualified properties.
While capital gains tax deferral is an attractive option, the time constraints of a 1031 Exchange give some people pause. Today, it’s a little harder to make an exchange in 180 days because the inventory of eligible replacement properties is low. The fact is, sometimes 45 days is just not enough time to make sure you found all the skeletons in the closet before committing. And as some can attest to, making a hasty decision and failing to do the proper due diligence on a property can be very costly in the long run.
One option that should be considered if you’re looking for a properly vetted replacement property is a Delaware Statutory Trust (DST). A DST is an entity that holds commercial income-producing property, that qualifies as replacement property in a 1031 Exchange. A DST may have several investors vested in the entity, each with fractional ownership interest. The owners in the DST participate in their portion of the cash flow, tax benefits, and capital appreciation, if any, of the entire holdings. The property holdings in the DST are professionally managed by a third party. What does this mean for you as an investor? It means that you can enjoy a passive position in real estate without the hassles and headaches. The 1031 Exchange investor may defer their capital gains tax liability, could receive income from their interest in the DST, and can participate in the growth over time through the appreciation of the properties. When the time comes to sell, the investor may utilize a 1031 Exchange to identify another qualified replacement property or Delaware Statutory Trust to move their appreciated sales proceeds into and continue to grow their investment with the capital gains tax deferred.
If this strategy is of interest to you, what’s next? First, partner with professionals that can help you.
Work with a company like Equilus Capital Partners, which sponsors Delaware Statutory Trusts. As the Trustor, Equilus Capital Partners also manages the holdings in the trust. Our DST holds properties that have been vetted and acquired for the benefit of the investors.
Jake Carpenter is vice president of investor relations for real estate investment company Equilus Capital Partners LLC. He has professional expertise in estate planning, business succession, wealth transfer, and asset management. He works out of the Wenatchee and Tri-Cities offices and can be reached at (509) 665-8349.
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