The 1031 Exchange
TAX DEFERRAL ON REAL ESTATE GAIN
Let’s say you’ve owned a building for 15 years. You’re excited because you just received an above-market offer on it, so you contact your CPA and she informs you that when combining federal, state and Medicare taxes, along with some recapture of prior years’ depreciation, you will owe about 30% of the proceeds in capital gains taxes. Ouch!
You seem to recall hearing somewhere in the past that there is an IRS code section (IRC 1031) that will enable you to defer some or possibly all of this tax liability so your excitement returns. But then you discover:
- You will have only 45 days from closing on this property to identify a replacement building.
- If you do identify an appropriate property within the allotted time frame, you will only have up to 180 days from the original sale closing to close on the replacement property.
- You also find out that you can’t take possession of your sales proceeds at closing, rather you must utilize a Qualified Intermediary, or QI.
You need to fix this fast as closing is in two days! You were looking forward to cashing out, and just settling back and collecting income on your sales proceeds. The thought of becoming a landlord again, and all the related headaches with tenants, property management, property taxes, zoning laws, etc. is causing you angina and you just don’t want to do it anymore! The good news is: There is a solution.
"Every man lives by exchanging."
IRC (INTERNAL REVENUE CODE) SECTION 1031
People who currently own (or want to own) real estate or real property for investment purposes require financial advice and experience from advisors who understand real estate tax laws and work closely with CPAs. While it can be complex, real estate ownership can offer significant advantages to savvy clients, depending on their unique situation and goals. Silverhawk Private Wealth offers this service to our clients.
A popular strategy for real estate ownership that can defer taxes is called the 1031 Exchange. The 1031 tax-deferred exchange allows investors to defer capital gain taxes as well as facilitate significant portfolio growth and increased return on investment. A properly structured 1031 exchange allows an investor to sell a property, to reinvest the proceeds in a new property and to defer all capital gain taxes.
IRC Section 1031 (a)(1) states: “No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment, if such real property is exchanged solely for real property of like-kind which is to be held either for productive use in a trade or business or for investment.”
HOW A DELAWARE STATUTORY TRUST WORKS
The state of Delaware, always a progressive one when it comes to taxes and corporate structures, has created a special use trust, the Delaware Statutory Trust (DST). This trust can hold one real estate investment, or multiple properties. Trust members can encompass multiple individuals, corporations, limited partnerships or multiple LLC members.
Investments exchanged into a DST via 1031 exchange by trust members are fully eligible to receive all of the benefits provided by a 1031 tax deferral. Some of the added benefits of the DST include:
- You could invest your 1031 proceeds from your current sale into one, or many different DSTs.
- You can identify DSTs that own property; for all cash, minimal debt, or very highly leveraged (typically 65-70% loan-to-value).
- Some DSTs will limit all their investments to only triple net lease (NNN) properties possessing long term (10 to 20-year length) tenant leases with large, publicly-traded Fortune 500 tenants.
- Some DSTs will own brand new ground-up developments in rapidly growing, attractive real estate markets.
- Basically, you discover that you can identify and invest your proceeds into DSTs in pretty much any kind of real estate that you could imagine regardless of the type of real estate you sold, and the new DST investment will be eligible for meeting 1031 like-kind exchange requirements.
DSTs invest in:
- Multifamily/Apartment complexes
- Commercial buildings
- Office buildings
- Medical properties
- Retirement centers
- Retail properties
- Public storage facilities
- Industrial properties
By investing in multiple DSTs, you can have not only property-type diversification, but substantial geographical diversification, plus utilize multiple general partners to run the projects for you. You will be collecting “mailbox money,” helping enable you to live your life as you desire and enjoy your time, hobbies and family.
Want to learn more?
Want to learn more? Contact a knowledgeable Private Wealth Advisor today to see if a 1031 Exchange may be the right fit for you. Ask for Paul Mershon or Joe Laux at Silverhawk Private Wealth at (480) 296-0200
This is not intended to provide specific legal, tax, or other professional advice. For a comprehensive review of your personal financial situation, always consult with a tax or legal advisor.
A diversified portfolio does not ensure a profit or protect against loss in a declining market.