1031 Exchange Overview For Tax Deferral
OVERVIEW A 1031 EXCHANGE
1031 Exchange Overview begins with the definition of the 1031 exchange according to the IRS. 1031 Exchange Overview explains that in section 1031 of the IRS Tax Code, properly structured, allows a taxpayer to sell a property, reinvest the proceeds in a new property, and defer all the capital gains taxes. The IRS States: “No gain or loss shall be recognized on the exchange of property held for productive use in trade or business or for investment, if such property is exchanged solely for property of like-kind which is to be held either for productive use in or trade or business or for investment.” IRC Section 1031 (a)(1). 1031 Exchange Overview in brief is that in the sale of an investment property, the owner should not take constructive receipt of the funds, and exchange it for a like kind property to defer the tax consequences from the capital gains.
The success of a 1031 Exchange depends on several facts and circumstances related to the process including:
• The timing between the sale and purchase of the properties
• The nature of the property sold (relinquished property) and purchased (replacement property)
• The use of a qualified intermediary explained in the 1031 Exchange Overview
• The identification of the replacement properties.
THE 1031 EXCHANGE OVERVIEW PROCESS
• They must purchase like-kind property.
• The seller may not take constructive receipt of the sale proceeds of their investment property. They must use a qualified intermediary explained in this 1031 Exchange Overview.
• From the time the qualified intermediary receives the proceeds, the replacement property must be identified within 45 days from the close of escrow.
• The identified replacement property must be purchased within 180 days from the close of escrow.
WHAT PROPERTY QUALIFIES IN THE OVERVIEW OF 1031 EXCHANGE?
• Both the property being sold and the property being purchased must meet certain criteria. Both must be held for use in trade or business or for investment. Most real property will be like-kind to other real property listed below in this 1031 Exchange Overview.
• Real property can qualify. Personal property no longer qualifies.
• Raw Land
• Rental homes, condos, or apartments
• Commercial Office buildings
• Doctor’s office
• Retail property
• Industrial property
• Farm land
• Oil & Gas Interests
• TIC Interests
• Water, Air, or mineral rights
• 30-year lease-hold interests
• Delaware Statutory Trust “DST” Interests
THE 1031 EXCHANGE OVERVIEW OF A QUALIFIED INTERMEDIARY
The qualified intermediary creates the exchange of properties, holds the exchange funds, and prepares the exchange documents. The Role of the Qualified Intermediary (QI) is essential to the 1031 Exchange required by Treasury Regulation. (Treas. Reg. 1.103(k)-1(g)(4)). Sometimes called an Accommodator as explained in this 1031 Exchange Overview.
• What “qualifies” a Qualified Intermediary?
• Disqualified persons. i.e. taxpayer’s own attorney, accountant, real estate agent, banker/broker.
• Key components for any QI: Competence, Financial Strength, Integrity
1031 EXCHANGE OVERVIEW PROPERTY IDENTIFICATION RULES
The Three-Property Rule applies in the 1031 Exchange Overview when looking to defer the taxes from capital gains. The taxpayer may identify up to three-properties regardless of their fair market value. They may purchase one or all the properties The 200% Rule. The taxpayer may identify more than three properties provided their combined fair market value cannot exceed 200% of the fair market value of the relinquished property. The 95% Rule. The taxpayer may identify more than three properties and their combined fair market value may exceed 200% of the fair market value of the relinquished property provided the taxpayer acquires 95% of what was identified in this 1031 Exchange DST Info.
BALANCING THE EXCHANGE (avoiding taxable boot) The cash invested in the replacement property must be equal to or greater than the cash received from the sale of the relinquished property. The debt placed or assumed on the replacement property must be equal to or greater than the debt received from the relinquished property in this 1031 Exchange Overview.
THE DELAWARE STATUTORY TRUST
• The Delaware Statutory Trust (DST) is a fractional ownership structure.
• DSTs are in accordance with Revenue Ruling 2004-86
• A DST is not a business entity, it is a trust
• Pass-through entity is “not-recognized”, like a living trust
• Trustee (sponsor) has no power to vary the investment objectives
• A taxpayer may exchange real property for an interest in a DST without recognition of gain under §1031
1031 EXCHANGE DST ADVANTAGES OVERVIEW
1031 Exchange Overview allows the investor property choices and diversification
• No chance of “rogue” investor
• Investor cash flow yields 5-7% on equity on a monthly basis
• Financing (rate, terms, non-recourse)
• Structural Simplicity (no LLCs)
• Passive ownership
• Depreciation and IRC 199A (20%)
1031 EXCHANGE DST DISADVANTAGES OVERVIEW
• Illiquidity • “Seven-deadly Sins”
• Conversion to LLC “kick-out”
• Best suited for certain asset classes or master lease structures
THE RIGHT CLIENT FOR A 1031 EXCHANGE OVERVIEW
• 1031 Exchange Investors
• Cash Investors
• Investors looking to transition from active management to passive
• Investors seeking higher quality assets
• Accredited investors only
If you are looking for more information on the 1031 Exchange Overview and would like to speak to a registered representative to answer any questions you may have on a 1031 Exchange you can email firstname.lastname@example.org or call 805-603-4378