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1031 Like-Kind Exchanges in Fremont, NE

Have a Question About 1031 DST Like-Kind Exchanges?

The following is a list of some of the most Frequently Asked Questions about DST (Delaware Statutory Trust) Exchange Properties: 

What it a 1031 Like-Kind Exchange?

Internal Revenue Code Section 1031 allows an investor to sell an investment or business real estate property and re-invest the proceeds into another property without having to pay capital gains taxes, depreciation recapture taxes or the Medicare surplus tax from the profit of the sale. In reality the 1031 Exchange can be thought as an interest free loan from the IRS in which your entire equity may be increased through successive tax deferred exchanges.

The replacement property’s, debt and equity, must be of equal or greater than the property sold. Because real estate has a stepped-up cost basis upon death, your tax deferred gains become entirely tax free to the heirs upon the death of the owner. All real estate in the United States, improved or unimproved, is available for exchange. Foreign real estate is not available for exchange.

What are the different types of 1031 Like-Kind Exchanges?

1031 Like-Kind Exchanges have been an integral part of deferring taxation on appreciated property since 1921. The first Like-Kind Exchanges were executed through a simultaneous exchange of real property, which in many cases the timing was difficult to execute. In 1979, the Starker case dramatically broadened the definition by allowing delayed exchanges with specific time guidelines, which are used today.

There are many variations of delayed exchanges under the IRC 1031. The most commonly used are (property to property), Tenant-in-Common (TIC) (2002 Revenue Ruling 2002-22), Triple Net Lease (NNN), Construction or Improvement, Delaware Statutory Trust (DST) (2004 Revenue Ruling 2004-86). Reverse and Simultaneous exchanges are available but are not a delayed exchange.

DSTs are the only 1031 Like-Kind structure where you, the fractional investor, will purchase a beneficial interest, where you are not and cannot be active in property management decisions. The DST is a completely passive ownership with the 1031 replacement property. With the possibilities of indefinite tax deferral, 1031 DST Like-Kind Exchanges may be an effective, tax friendly solution to grow your net worth. Our firm handles and specializes only in 1031 Delaware Statutory Trust Exchanges (DST).

What is Like-Kind property?

1031 Like-Kind Exchanges in Fremont, NE

Generally, Like-Kind property refers to the nature or character of the property and not to its quality. With 1031 Like-Kind Exchanges the "property exchange" definition is broad. For instance, if you are selling farmland you could exchange for commercial, single family rental, apartments, condos, raw land, duplexes and vice versa. A common misconception is that "Like-Kind" refers to an exchange of property that is of or has similar use… i.e. farmland exchanged for farmland or a duplex exchanged for a duplex. This is a misnomer. Exchanged properties, to qualify, have a much broader scope. View the types of properties that could be available.

What is a 1031 Tenants-in-Common (TIC)?

A 1031 Tenants-in-Common ownership often referred to as a "TIC" is where the entity that exchanges the property acquires an undivided fractional ownership in other "Like-Kind" property. There can only be up to a maximum of 35 co-owners. The lender may require you to provide personal guarantees. With a TIC you are purchasing an exchanged property where you usually have active management responsibility. You and your co-owners (if any) maintain management control or dictate day-to-day property management operations. You will receive a property deed, but you also have recourse debt that you are held personally liable. In general, recourse debt (loans) allows the lender to collect the debt from you even after they have taken the collateral (property).

What is a 1031 Delaware Statutory Trust (DST)?

A 1031 Delaware Statutory Trust, often referred to as a "DST," is a separate legal entity created as a trust under Delaware law. Each owner creates a "beneficial interest" in the DST for Federal tax purposes. The investor (you) is called a Beneficiary, and receives a proportionate share of the tax deductions, net income and potential growth from the trust. In order to invest in a DST the entity (owner) must be an Accredited Investor.

This is considered passive ownership-not active-and importantly you have non-recourse debt…meaning your loan is secured by the collateral (property). If the borrower would happen to default the issuer could seize collateral but cannot go to the borrower for any further compensation. Your liability is limited to the underlying collateral. The DST owner does not maintain any management control or dictate any day-to-day property management operations (as a Tenants-in-Common (TIC) exchange usually does) nor any control over the sale of the DST property.

It is professionally managed by an institutional third party, which remedies the active property management headaches of being a landlord. With the DST Exchange being able to defer your taxes, and generating a steady stream of income, many investors find this 1031 strategy appealing. Our firm handles and specializes only in 1031 Delaware Statutory Trust Exchanges (DST).

'1031 Like-Kind Exchanges have been an intrical part of deferring taxation on appreciated property since 1921.'

What are the basic differences in a 1031 Tenants-in-Common (TIC) and a Delaware Statutory Trust (DST)?

One of the biggest differences with these two IRC Section 1031 Exchange strategies is with the DST the trustee is responsible for all the property decisions. With the TIC, the investors (you) are usually responsible for making important property management decisions and unanimous approval is required for a sale, lease or any other new financing from each co-owner. With a DST, the sponsor or an affiliate trustee is the sole borrower and is fully responsible for any loan guarantees and property management decisions.

With a TIC, each investor is a borrower and is responsible for loan liabilities. While the DST Exchange offers less property control to investors, it does remove the challenges faced with many TIC property owners. With a DST there is no need to achieve a consensus, which means that one or two disagreeable investors cannot hold up an important decision…as with a TIC.

The DST property is utilized by having a national institutional sponsor who usually has available different properties diversified by type, geography and value. The big difference is the Tenants-in-Common (TIC) structure usually has active property management. The Delaware Statutory Trust (DST) structure lets the investor play a passive role in ownership.

While many investors like to maintain control over their properties and make every decision about the operation of that property, there may come a time when you want to give those responsibilities up… passively own the properties, collect your dividend check and leave all the time-consuming headaches of property management to someone else. You must be an accredited investor to purchase a 1031 DST.

What/who is an accredited investor?

1031 DST Exchanges may only be sold to an accredited investor. An accredited investor is an individual having income that exceeds $200,000 singly (or $300,000 with spouse) in each of the last two years, with reasonable expectations of the same income in the current year… or has a net worth of over $1,000,000 alone or with spouse (excluding the equity of that person’s primary residence).

What is a Delayed Exchange?

A Delayed Exchange (sometimes referred to as a "Starker Exchange") is the most often used 1031 Like-Kind Exchange. All of the 1031 DST Exchanges that we offer are Delayed Exchanges… they are quite straightforward…the "sold" or relinquished property transaction happens first, then the "purchased" or replacement property is acquired. There are strict timelines established by the IRC Code 1031 for a successful completion of a Delayed Exchange. Let's take a closer look at the 45-day identification and 180-day closing periods.

45-day property identification period deadline

With a deferred exchange you have 45 days from the time of the sale-closing (close of escrow) of your relinquished (sold) property to designate and identify up to three potential replacement properties (to purchase) of Like-Kind. The 45-day deadline is not extended if the deadline falls on a Saturday, Sunday or legal holiday, so it’s very important that it’s completed by midnight of the 45th day. You have three property identification rules…

The 3 property rule - Allows the investor to identify up to three potential replacement properties (without regard to the fair market values of these properties) with no prioritization- and to close on any one or all to complete the 1031 exchange. This is the most used rule for replacement property identification.

The 200% rule - This allows any number of properties to be identified as long as the combined total value doesn’t exceed twice the value of the relinquished property. With similarity to the 3-property rule, once the properties are identified, any or all of these potential replacement properties can be purchased to complete the 1031 exchange.

The 95% rule - As a practical matter, this rule is not often used and hard to adhere to. This rule allows an investor to identify an unlimited number of replacement properties, but the investor must purchase 95% of the combined value of all the properties identified.

180-day rule-When is the deadline for the actual exchange (closing on the purchase of the new property)?

You must complete the purchase of one or more for your Like-Kind replacement property(ies) no later than the earlier of…

  1. 180 calendar days from the sales closing of your relinquished property or…
  2. By the date (including any extensions) of your Federal income tax return for the year in which your relinquished property was sold.

These two "timeline rules" are set in stone. If you fail to close on a replacement property within the 180-day period, you will have to pay the capital gain, and other taxes due, on the sale of the initial property and your 1031 Exchange will be eliminated.

What is a Qualified Intermediary?

A Qualified Intermediary or "QI" is a "third party" who assists you in accomplishing the tax deferred exchange. The QI (also known as an Exchange Accommodator or 1031 Exchange Facilitator) is responsible for drafting of the 1031 Like-Kind Exchange documents to properly structure your 1031 Exchange transaction. The QI is often a title company, attorney, accountant or Bank Trust department with whom you are not related and have not had a financial relationship within the last two years prior to the close of escrow of the exchange.

When your original appreciated property is sold, the transaction will be assigned on your behalf and the net sales proceeds will be held by the Qualified Intermediary, pursuant to the exchange agreement, until the Like-Kind replacement property transaction is ready to close. It is paramount that you as the seller does not receive any of the cash or equity out of the transaction and is held in a trust or escrow by the QI. This ensures the taxpayer never has an actual or a constructive receipt of the sales proceeds. The amount that is not exchanged will be a taxable event. If it’s a partial amount, it’s called "Boot." Proceeds must go to the Qualified Intermediary in escrow. Finally, once the exchange is completed the QI releases the proceeds to purchase the replacement property. That completes the tax deferred 1031 Exchange. QIs do not give tax or legal advice. Always rely on your council (attorney & tax advisor).

What type of replacement properties do 1031 DSTs have available?

When it’s time to purchase your replacement property, 1031 DSTs have a variety of property types to select from. The DST replacement property is utilized by having national institutional sponsors who usually have available different types of properties-diversified by type, geography and investment grade value. These property types could be selected from retail, office, multifamily, medical office, industrial, self-storage and student housing. This is not an exhaustive list, and may not be available in the future, but gives you a broad overview of different types of properties you could possibly select from. View the types of properties that could be available.

Can I exchange out of one property and into multiple properties with a 1031 DST?

Yes you can. It doesn’t matter how many properties you exchange in or out of as long as they have the same, or higher value, equity, and debt. But you must make sure the 45-day identification period, as well as, the 180- day closing rule are adhered to. Minimums do apply.

Are 1031 DST Properties liquid?

If you are considering a 1031 DST Exchange you can assume that your equity in the DST will remain invested until the properties are sold. DSTs are considered a long term investment. The expected time period to hold your property before sale varies, but typically between five and ten years. Because of the illiquidity, there is no public or secondary market where you can sell your fractional ownership.

Do I have to invest all my profits back into another property?

No. Investors are not required to invest 100% of the proceeds received from the sale of their appreciated property back into another for exchange. However, the amount that you do choose not to reinvest is recognized as taxable income and is subject to capital gains and depreciation recapture taxes. This partial, taxable, money, coming out of the exchange is called "Boot."

Do I need to keep the same ownership for the relinquished property?

Yes. You must acquire the replacement property under the same legal entity (same taxpayer) that was the seller of the relinquished property. So, if you purchased your previous property in your name, the new replacement property needs to be in your name also. If your previous property was purchased using a trust or LLC then you need to use the same trust or LLC to purchase the replacement property. Not following these strict guidelines may result in the entire 1031 Exchange to be treated as a taxable event. There are some exceptions to this general rule, always consult your attorney and tax advisor.

Our Experience

What is Dave Pimper’s background in dealing with 1031 Like-Kind Exchanges?

My first 1031 Exchange client in 1992 was actually myself. I sold an existing office building and 1031 Exchanged the proceeds to build a larger office building. This is called a Construction 1031 Exchange or Build-to-Suit Exchange. Since then, I have helped provide the expertise to many clients looking for tax deferred real estate investment options. Few Financial Advisors have this "1031 Like-Kind DST niche" as an integral part of their financial practice.

Read Dave's Commentary page to learn more about 1031 DST Property Exchanges, what they are, how they work, and more information about industry trends in simple language you can understand.

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What does the 1031 Exchange Cost?

That depends… a Qualified Intermediary typically charges a fee dependent on the complexity of the exchange transaction. This could be determined by the number of properties involved, the size of the transaction, or special circumstances. There are certain expenses paid at the closing which are considered "exchange expenses." Because the QI will use the exchange funds to pay those expenses, there is no tax liability to the investor doing the 1031 Exchange.

Some of the exchange expenses that may be paid at the closing that do not have any tax consequence could be…exchange fees, escrow fees, attorney’s fees specifically connected with the sale or purchase of the property, real estate broker's commissions, title insurance fees for the owner’s policy of title insurance, appraisal fees required by the purchase contract, recording fees and transfer fees.

These are not an exhaustive list but gives you an idea of the important role the QI plays in the 1031 Exchange transaction. The average QI fees (which we’ve seen) for non-complex exchanges range from as low as $250 for a local small-town title company to $1,000 for a large national full service 1031 exchange company. We can certainly help you select a QI that fits your budget and needs.

What is "Boot?"

The cash left over after the Qualified Intermediary acquires the replacement property. If that happens, the QI will pay it out to you, after closing, by the end of the 180 days. That cash is known as "Boot." It will be taxed as partial sale proceeds and generally as a capital gain if held for more than one year.

Can you use personal property for the exchange?

No. The provision is only for investment and business real property. A person’s primary residence and vacation homes for personal use, are not covered under the IRC Section 1031. A tax payer is allowed only one primary residence. A second home may be considered 1031 exchangeable real property if it meets the guidelines of time owned and rental use, and also qualifies under the IRC Section 1031 for investment property.

Did the new Tax Reform (The Tax Cuts and Jobs Act) effect the 1031 Exchange rules?

The newly passed tax regulations (signed into law on 12-22-17-taking effect on 1-1-18) did not effect the 1031 Like-Kind Exchange, involving real estate, in any way. However, exchanges no longer apply to any specific personal property, such as machinery, artwork, aircraft, etc.

What happens if there is a death of the taxpayer during the "life" a 1031 DST Exchange?

If the taxpayer dies before the replacement property(ies) are sold, this asset is inherited by a person(s) from the estate of the taxpayer who completed the original 1031 DST Exchange. At the time of death, the replacement property will have a stepped-up cost basis equal to the property’s fair market value on the date of death. Whatever gain was deferred in the original Like-Kind Exchange transaction will be eliminated entirely following the inheritance. The initial tax deferral on the property now turns into a tax-free event. This clearly could be a vital estate planning tool to eliminate large tax liabilities on appreciated property.

In Summary

Deferring taxes, though a 1031 DST Like-Kind Exchange, can be a very valuable benefit to the investor. To receive the tax deferred benefit, all of the 1031 DST Exchange rules must be strictly adhered to. Please contact us today or call us at (402) 727-1031 or (800) 727-1031 to discuss your questions concerning 1031 DST Exchanges, and how we may be able to help you with this unique tax deferred/wealth building strategy.

This type of investment is subject to risks, including those real estate risks associated with the operation and leasing of retail properties. These investments are for Accredited Investors only. There can be no assurance the investment objectives will be achieved.

This material is neither an offer to sell nor the solicitation of an offer to buy any security, which can be made only by the Private Placement Memorandum (PPM), filed or registered with appropriate state and federal regulatory agencies, and sold only by broker/dealers authorized to do so.

Securities offered through Calton & Associates, Inc. 2701 N. Rocky Point Dr., Suite 1000, Tampa FL 33607 (813) 264-0440. 1031 Property Xchange and Calton & Associates, Inc. are separate entities.