Willowpark Apartments

Our goal is to help all investors stay educated by providing straightforward, unbiased 1031 exchange information for 2023:

1031 tax-deferred exchanges allow investors to defer paying capital gains tax by reinvesting funds from property sales back into their real estate portfolios. Section 1031 Exchanges are a key tool educated investors use to benefit from existing tax regulations and preserve and grow investment capital in any economic cycle.

Important Questions About Your Real Estate Investments & 1031 Exchanges

To get the most out of their on-going education, it’s important for investors to ask themselves three important questions about real estate investing:

  1. What is my real estate investment timeline?
  2. Have I Researched Available 1031 Exchange Information?
  3. Does Passive Investing Make More Sense Than Doing Everything Myself?

What is My Real Estate Investment Timeline?

A good way of thinking about a timeline for investing in real estate is to consider how important liquidity will be to you 5, 15, and even 30 years or more from now.

Historically, real estate has been an attractive way to build wealth over the long term. The trade-off is that capital invested in real estate is illiquid. Unlike shares of a publicly traded stock, real estate can’t be bought and sold at the push of a button on your computer keyboard.

Because real estate lacks liquidity investors should understand if and when they’ll need to turn their investments into cash and identify a real estate investment timeline accordingly.

Have I Researched Available 1031 Exchange Information?

Owning real estate gives a unique combination of three benefits that many other investments do not offer:

  • First, investment real estate provides two cash flow streams: short-term through the monthly net income and long-term through the appreciation of the real property when it is sold.
  • Second, tax law allows owners of real estate to reduce their annual cash income from the property by deducting a non-cash depreciation expense. This allows investors with positive net cash flow to reduce the amount of taxable income from their real estate investments.
  • Third, Section 1031 tax deferred exchanges allow real estate investors who sell a like-kind property and replace it with another piece of real estate to defer paying the tax on any capital gains resulting from the exchange transaction. In our NASIS 1031 Exchange Guide we illustrate how one investor was able to grow the value of his real estate investment portfolio by nearly 70% by deferring the payment of capital gains tax and reinvesting the sales proceeds in like-kind real estate.

Does Passive Investing Make More Sense Than Doing Everything Myself?

Most people begin investing in real estate in their spare time. They purchase a single-family home, rent it out to tenants, and manage the property themselves. That’s a common example of active real estate investing where the owner does everything.

However, when you’re hands-on it’s difficult to scale up and grow a real estate investment portfolio. Active real estate investing takes a lot of time and also limits the type and quality of property that can be invested in.

Passive real estate investing through an experienced real estate sponsor, like NAS Investment Solutions, can enable an investor to save time and expand the available type and quality of investment. By placing capital in a DST or TIC structured vehicle, investors have access to institutional-grade commercial real estate such as multifamily and student housing, and office, medical, warehouse, and industrial flex income property in both primary and high-yield secondary markets.

NAS Investment Solutions’ investment properties have been professionally underwritten and are managed by a team of professionals that have a wealth of experience in managing hundreds of investment properties across the country. DST and TIC real estate investments can offer an attractive 1031 opportunity, which can be precisely sized to meet the investor’s specific needs, and they can also be employed as part of an investor’s strategy to diversify his or her portfolio.

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Frequently Asked Questions

  • Are there limitations when a DST-Structured property is used as a 1031 Exchange?

    The IRS has determined that for a Delaware Statutory Trust (DST) to qualify as a replacement property in a 1031 exchange, each investor must be absolutely passive in the on-going investment operations.

    • Investors with interests in a DST structured property relinquishes control over the property operations and control over the sale of the property.
    • There is no secondary market for DST interests and considerable restrictions may apply to the transfer of DST interests.

  • What are the advantages of a DST-Structured investment in commercial property?

    There are numerous advantages to investing in a DST structured property offering.

    • The purchase of DST interests is simpler, faster and does not require as many documents as buying sole ownership of a property.
    • Capital Gains are deferred, if investment is for a 1031 Exchange
    • No daily property management obligations that come with sole ownership
    • Ability to create a diversified real estate investment portfolio
    • Cash flow distributions
    • Annual depreciation/tax deductions
    • Appreciation upon sale of the property
    • Upon the sale of a DST property, the investor may engage in a 1031 exchange, even if the DST interest was purchased without 1031 exchange proceeds.
    • A DST is a pass-through tax entity, which is not subject to federal income tax, nor to the Delaware franchise or income tax.
    • Because the DST is the mortgage borrower, the lender does not require individual DST investor guarantees, nor does the lender require investors to submit personal financial information to qualify for the mortgage loan.
    • Investors with interest in a DST property are protected from property liabilities held by the DST. As a result, the maximum pre-tax loss (excluding income tax considerations) is equal to the amount invested in the DST.

  • How does an investment in a DST-Structured property differ from an investment in a tenants-in-common structured property?

    Like TICs, DST’s have multiple investors that purchase fractional interests and the investors share in the total financial performance of the underlying investment property. However, the primary differences between the two investment structures are:

    • A DST is not limited to a maximum of 35 investors required by Revenue Procedure 2002-22.
    • DST investors are purchasing a fractional interest and do not receive deeded property
    • Investors do not form single-member Limited Liability Companies (LLCs). Investors are already insulated from liability as a result of the trust structure of the property.
    • Investors do not have voting rights or operational control of the property
    • In a DST structure, there can be no cash calls or additional money invested into the property beyond typical maintenance and capital expenditure needs.

  • Are there a minimum and maximum investment amounts to participate in a DST property offering?

    Yes; $50,000 to $100,000 are typical minimum and maximum investment amounts but this may vary from sponsor to sponsor.

    The maximum amount is contingent on the overall size of the property investment and discretion of the investment sponsor

  • Are DST-Structured properties commonly used for a 1031 Exchange?

    Since approved by the IRS in 2004, Interests in Delaware Statutory Trusts has since become the primary investment method for pooled 1031 exchange investments.

  • How is a replacement property identified?

    A like-kind replacement property is identified if it is either

    • Identified in a written agreement using a portion of the impounded funds for the earnest money deposit
    • Designated as replacement property in a written document signed by the exchanging party and received by the QI before the end of the 45-day identification period

    The property ultimately acquired must be substantially the same as that identified.

  • What Qualifies as a “like-kind” Replacement Property?

    The definition of a qualifying like-kind property is very broad, for both the sold property and the replacement property: real estate used for investment or business purposes. Personal use property is not eligible.

    Investment real estate (held for either appreciation or for rental) can be exchanged for real property used in a trade or business. Partial interests such as tenants-in-common or Delaware Statutory Trusts, are exchangeable with other types of real property (including a land contract in which equitable title has been transferred).

  • What is a 1031 Exchange?

    Subject to rules and conditions set by IRC 1031, a 1031 Exchange allows an investor to sell a property and then to reinvest the proceeds in a new property and to defer all capital gain taxes.

  • How a 1031 Exchange is Accomplished?

    There are eight steps common to any Section 1031 tax deferred exchange:

    • Step 1: Retain the services of a certified public accountant or an attorney with tax deferred exchange experience
    • Step 2: Enter into a 1031 exchange agreement with a qualified intermediary, being sure to name the qualified intermediary as the principal in the sale of the relinquished property and in the purchase of the replacement property
    • Step 3: Sell the relinquished property, making sure to include a cooperation clause requiring the buyer to cooperate with the seller’s 1031 exchange, and instruct the escrow officer or closing agent to order exchange documents from the qualified intermediary
    • Step 4: Escrow closes on the relinquished property, with the closing statement showing the qualified intermediary as the seller, and sales proceeds from the relinquished property are sent to the intermediary and placed in a separate segregated trust account
    • Step 5: Within 45 days of the close of escrow of the relinquished property the taxpayer identifies one or more replacement properties and sends written notice of this to the qualified intermediary
    • Step 6: The taxpayer executes a purchase contract with the seller of the replacement property, making sure the cooperation clause is included in the purchase contract, and naming the qualified intermediary as the buyer of the replacement property
    • Step 7: Within 180 days of the close of escrow of the relinquished property, the taxpayer instructs the qualified intermediary to transfer funds to close and send 1031 exchange-related documents to the escrow company, and the sale closes with the closing statement showing the qualified intermediary as the buyer
    • Step 8: The taxpayer reports the 1031 exchange to the IRS when filing his normal tax returns

    After the replacement property has closed escrow the qualified intermediary will send a final accounting statement to the taxpayer. The statement will show that funds have come from one escrow directly into another, all without the taxpayer having constructive receipt of the funds.

    Real estate investors should note that although the qualified intermediary is indicated as the seller and buyer on the purchase contracts, the deed and title are always from the taxpayer to the buyer, and from the seller to the taxpayer.

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Estimate the Tax Rate For Your State

Many states impose a tax on capital gains, in addition to the federal tax rate. Each state also has their own methodology for calculating the tax. Our calculator will help estimate the top marginal tax rate for your state.  Select your state from the drop down menu and your state’s taxes will be automatically estimated. The combined rate includes additional federal taxes at the tax rate of 20% based on head of household income over $523,050.

View Rates For All States

The information provided here is for your general informational purposes only. These are only estimates and should not be taken as fact or considered a recommendation or personalized advisory advice. NAS Investment Solutions, LLC has made this third-party information available from sources it believes are knowledgeable and reliable. However, its accuracy or completeness cannot be guaranteed and actual rates may change due to legal or economic conditions.

All investments involve risk including the possible loss of principal. You should familiarize yourself with all risks associated with any investment product before investing.

California Top Marginal Tax Rate on Capital Gains 33.30%

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State Rate 2023
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Combined Rate 2023
45180 exchange calculator

45/180 Exchange Calculator

We've provided a calculator to help you estimate your 45-Day Deadline for identifying a 1031 Exchange Replacement property and the 180-Day Deadline to have your exchange transaction completed.

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capital gains tax rates by state

Capital Gains Tax Rates by State

This is a reference guide to give to you an idea of the top marginal tax rate for your state as of January 2023. Tax rates are based on state plus federal max rate at 25% for unrecaptured Section 1250 gains.

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frequently asked questions

Frequently Asked Questions

Real estate investing and 1031 Exchanges bring a lot of questions. We've put together a list of those asked most frequently. Have a question not on the list? Contact us and we'll be happy to give you an answer.

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