WHY WE ARE "YOUR REAL ESTATE PLANNER FOR LIFE"

Dan decided to sell the condominium he has owned for 6 years (relinquished property). The property’s current fair market value (F.M.V.) is $1,500,000; however, at the time he purchased the condo, the F.M.V. was $500,000. After Dan spent $50,000 in capital improvements and the property depreciated by $80,000, his adjusted cost basis was $470,000. Dan was advised by his tax consultant to engage in a tax-deferred exchange.

Dan’s real estate broker discovered an apartment building for $2,750,000 (replacement property). Dan purchased the property using the net proceeds from the sale of his condo within the 180 day period and successfully completed the 1031 exchange.  If Dan had sold his condo without using a 1031 exchange, he would have paid $144,500 in federal taxes.

Through the use of a 1031 exchange, Dan was able to defer his capital gains and depreciation recapture taxes, and had $144,500 more to invest into a replacement property.

1031 Exchange and Real Estate Planning

One of the major benefits of participating in a 1031 exchange is that you can take that tax deferment with you to the grave. If your heirs inherit property received through a 1031 exchange, its value is “stepped up” to fair market, which wipes out the tax deferment debt.

This means that if you die without having sold the property obtained through a 1031 exchange, the heirs receive it at the stepped up market rate value, and all deferred taxes are erased. An estate planner should be consulted to take maximum advantage of this opportunity. Tenancy in common can be used to structure assets in accordance with your wishes for their distribution after death.

A Delaware Statutory Trust (DST) is a separate legal entity created as a trust under Delaware statutory law, which permits a very flexible approach to the design and operation of the entity. Investors in a Delaware Statutory Trust own a pro rata interest in the trust and have the right to receive distributions from the operation of the trust, either from rental income, or from the eventual sale of the property.

As a co-ownership system, a DST allows investors to benefit from property investment gains without being responsible for management. With a Delaware Statutory Trust 1031 exchange, the trustee takes on the legal title and management responsibilities, while the investors serve as beneficiaries with the equitable title.

Through co-ownership, it's possible to fractionally invest in larger properties, such as medical offices, industrial properties or multifamily apartment communities that might be too costly to purchase in full. A DST expands the options investors have for replacement properties to meet 1031 criteria, allowing for more diversification. Finding eligible properties may also be less time-consuming because investors have more options for acquiring one or more properties.

To get a DST 1031 property, an investor must work with a Qualified Intermediary (QI) to handle the exchange. The stipulation is that a third party not affiliated with the seller or buyer must hold and transfer the money to complete the exchange. The investor cannot directly receive the money from the first property sale.

Typical 1031 Exchange Process

1. All 1031 exchanges have the same three basic steps:
2. Investor sells a property and the proceeds are escrowed with Qualified Intermediary.
3. Qualified Intermediary transfers the funds to purchase a like-kind replacement property.
4. An Investor may also receive beneficial interest in the form of a DST (Delaware Statutory Trust), if they so choose.  Contact us for a FREE consultation.

Basic 1031 Guidelines to Follow

• Seller specifies in the contract that the sale of the property may be in the form of a 1031 exchange.
• Seller does not control the net proceeds from sale of the original property; these must be deposited in a qualified escrow.
• Replacement property must be like-kind to the property that was originally sold.
• Replacement property must have equal or greater value than the original property that was sold.
• Replacement property must be identified within 45 days of sale link to 45 day id page of the original property.
• Replacement property must be acquired within 180 days of sale of the original property.