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Please note that this guide is intended to familiarize the reader with the basic framework and purpose of a 1031 exchange. It is not intended to provide specific legal advice. Anyone planning on engaging in a 1031 "like-kind" exchange should consult an attorney, tax advisor, and a licensed, bonded, and experienced 1031 exchange intermediary company. * An accredited investor, (a) earned income that exceeded $200,000 (or $300,000 household income) in each of the prior two years, and reasonably expects the same for the current year, OR (b) has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).
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.
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.
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.
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.