1031 Like-Kind Exchange: An Overview

When a person sells or disposes of property, a gain or loss is recognized for tax purposes. This gain or loss results in federal income tax consequences in the year the property changes hands. For an instance, if an apartment with a value of $90,0000 is sold for $1,50,000 in cash, the gain of $60,000 is considered to be the owner’s income. Now, the owner has to pay federal income tax on that gain. According to Section 1031 of the Internal Revenue Code, there is an exception to the above-mentioned rule that makes a certain exchange of property not immediately taxable. These exchanges are generally referred to as ‘Starker Exchanges’, ‘1031 Exchange’ or ‘Like-kind’ Exchanges.

When is the right time for 1031 Farming?

When you sell an investment property, you end up paying the capital gain tax. If you have made some bad investments, then selling your property might cost you more than you have gained. However, if you own a rental property that is valued more than what you have purchased it for, then you can make a good amount using this powerful strategy.

How to use this strategy now?

To use this strategy, you have to exchange one property for another of the same value. In the process of exchange, you have to skip capital gains, at least for a while. Eventually, it is easy for an investor to cash out and pay taxes, however, meanwhile, an investor can trade the properties easily without incurring a sudden tax obligation. It is an essential tool for the real estate investors as it is a bulls-eye for tax reform evangelists.

According to the exchange rule, the purchase price and the new loan amount should be the same or higher on the replacement property. For instance, if an investor were selling $1,00,000 property that had a loan of $50,000, then they would have to buy a $1,00,000 or more of replacement property with $50,000 or more leverage.

conclusion

1031 exchange is thus one of the best ways of settling down the non-income producing real estate investment for a much superior property that can easily help you gain some cash and income flow in return. One can even go for 1031 exchange from property to land depending upon the value of the property one possesses and the land one wants to acquire. The exchange is also beneficial for the people who have been holding different types of properties for long and don’t have much value for them, they can simply be disposed off and help them to acquire different new property that could be of much value for the investor. 1031 exchange is also an amazing deal for those who own properties that may be located in the areas of not much value of now and can be traded with those that are in better location. It is one of the most smartest strategies of exchanging your property without the hassle of paying taxes and with proper planning one can gain a lot too.

What are the 1031 exchange timeline requirements?

A 1031 exchange, or like-kind exchange, helps real estate investors delay capital gains taxes indefinitely. But these exchanges are more complex than just selling one property and buying another.

Besides the rules, you should know there’s the issue of timing as well. Let’s check out some of the time-related rules of 1031 exchanges, as well as some of the other key principles you should know.

1031 Exchange Timeline Requirements

It is normally measured from the date the relinquished property closes. The exchanger then gets 45 days to nominate or identify potential replacement properties. A total of 180 days are given to the exchanger to acquire the replacement property. Please note the exchange is completed within 180 days.

What Are The Identification Rules?

As an exchanger, you are required by law to provide in writing an “unambiguous description” of the potential replacement property prior to midnight on the 45th day after the first relinquished property is closed. A legal description or property address will suffice. If you opt to identify or purchase multiple properties, you must follow one of the following guidelines:

1. An exchanger is allowed to identify up to three properties of any value with the intent of buying at least one.
2. Identifying more than three properties with an aggregate value that does not exceed 200% of the market value of the relinquished property.
3. Identifying more than three properties with an aggregate value exceeding 200% of the relinquished property. You should also know that 95% of the market value of all properties identified must be acquired.

A submitted purchase agreement is accepted as sufficient identification. Any property bought and closed within the 45-day time period qualifies as an identification.

There are many other rules and principles investors must know before doing a 1031 exchange.

For instance, your sale price and the amount of financing you get for the new property must be the same or more than the equivalent amounts for the property you sold.

On selling an investment property with a $300,000 mortgage for $500,000, your new property needs to cross both of those figures. But you can buy more than one property to meet these rules. A 1031 exchange is only valid for like-kind properties. That simply means you usually have to buy investment real estate with proceeds from investment real estate. You can’t sell an investment property, then buy a residential property, and call it a 1031 exchange to defer paying taxes.For an overview of all the rules you need to know, be sure to check out our FAQ section to get answers to all your 1031 exchange timeline related questions.. If you’re not sure about anything in your situation, speak with a tax attorney or other tax professional. A 1031 exchange can save you a lot of money. For further assistance call 1031 sponsors at 1-888-876-6005 or drop an email: info@1031sponsors.com

Why 1031 Exchange NNN Investments?

You must be aware of the benefits of 1031 Exchange NNN investments. There are numerous ways to structure a lease agreement, such as Gross Lease, Net Lease, NN Lease, NNN Lease, Absolute Lease, or Bond Lease. Here, in this blog, we will explain all the differences between these common lease structures.

At a basic level, the names of these lease structures define the terms of the leases. A gross lease requires a rent from the tenant that will cover gross, or all operating expenses the landlord realizes on the property like real estate expenses, maintenance costs, and property insurance fees. A net lease, in contrast, requires a rent payment that will cover the operating expenses net or excluding certain expenses. The more “nets” in the contract or lease, the fewer property expenses the rent installment is going to cover. Let’s dive into a more in-depth explanation of every lease structures and show you why 1031 Exchange NNN investments are well known among real estate investors.

Gross Lease:

These are a common residential lease structure. Under this, the tenant pays the rent of the property. Here, the landlord is responsible for paying the property insurance fees, estate taxes, and property maintenance expenses.  

Net Lease (Single Net Lease):

This lease allows the tenant to pay rent in addition to utility costs, real estate taxes, or property insurance. The landlord is responsible for paying all the maintenance and expenses not covered by the tenant.

Net Net Lease (Double Net Lease, NN Lease): The tenant is liable for paying the rent and all the property’s operating expenses that exclude the aspects of property maintenance, especially of common areas, rooftop, and the base structure. The landlord maintains liability of the property and is liable for areas of maintenance that is not covered by the tenant.

Net Net Net Lease (NNN Lease, Triple Net Lease):

Under the NNN lease, the tenant is liable for paying rent and all operating expenses,

including structural maintenance. The landlord bears the responsibility in the case of any casualty or condemnation if the property gets destroyed.

Absolute NNN Lease (Bond Lease): Under this lease, the tenant is liable for paying rent and all operating expenses, even in the unlikely event of a casualty.

When there are fewer “nets” in the rent agreement, the investor takes on less risk and obligation for the property. The landlord seeks high rent from the tenant and addresses a greater amount of maintenance issues. The landlord maintains control over the property’s utilization and upkeep. With the increase in the “nets”, tenants take more responsibility for the property and gain control of the upkeep and the property costs. As they pay taxes, insurance fees, or utility costs, tenants are less likely to be cheated for these costs when they are evaluated into a standard lease rate.

Reference: https://bit.ly/33pqpMc

What are “build to suit” and “rehab to suit” exchanges?

It’s always good to plan everything before proceeding for the 1031 exchange. So, here in this blog, before discussing “build to suit” and “rehab to suit” exchanges, an investor or the taxpayer must have a brief knowledge of 1031 exchange. As the 1031 exchange has stringent deadlines, and there is no extension if the investor fails to complete 1031 within the specified time. However, many times, it takes more time to find a new property that’s why everything must be planned before starting a 1031 exchange.

1031 exchange

1031 exchange from section 1031 of the IRC (Internal revenue code) is used for deferring the capital gain taxes. In this process, the taxpayer or the investor sells the property, hire an expert also known as qualified intermediary for the exchange, and reinvest the proceeds to buy a new replacement policy, and defer all the capital gain taxes. The taxpayer has a time period of 180 days from the sale of the property to complete the exchange. Qualified Intermediary is involved in the exchange process without whose presence the exchange cannot be completed because the proceeds received from the sale of the relinquished property is kept in an escrow account. If the investor uses or touches the cash, then he/she is disqualified from doing the 1031 exchange.

“Build to Suit” and “Rehab to Suit” Exchanges

The construction exchange or “build to suit” involves the procurement by the QI of empty land on which a structure will be fabricated . This outcomes in pretax dollars from the QI’s appropriated funds being used (which can be enhanced by proceeds from new debt financing). Before the completion of the project or the termination of 180 days from the Income tax department (ITD), the part constructed and considered as realty qualifies as replacement property, provided that the “as built” structure is considerably the same (in terms of completion) as what had explicitly been timely recognized under the 45-day rule.

The “rehab to suit” exchange is same because the QI acquires reality, which needs rehabilitation with pretax dollars being held by the QI.

In either case, the relevant documentation should use “time is of the essence” language, as well as address the issue of liquidated damages for purposes of guaranteeing the fulfilment of the contractor’s work before finishing the exchange in order to avoid the receipt of boot. Documentation should also require sequential deeding, in which the QI accepts legal title as an interim grantee during the development and rehabilitation period, eventually deeding the title to the exchangor before the expiration of the 180-day exchange replacement period.

Who is a 1031 Exchange Qualified Intermediary?

Experienced 1031 investors are well aware of the importance of Qualified Intermediaries in 1031 exchanges. In case it’s your first time, a Qualified Intermediary is a person responsible for handling 1031 exchanges on behalf of investors. Also known as a ‘facilitator’, Qualified Intermediaries play a vital role in 1031 exchanges. As per the rules laid down by the IRS, an investor must involve a 1031 exchange qualified intermediary in every exchange they do.

What does a Qualified Intermediary do?

• As soon as the Qualified Intermediary gets to know about the exchange, they start preparing for it. Their first job includes doing all due diligence and preparing the required documents.
• The Qualified Intermediary can also find a buyer for your relinquished property if you approach them before closing on the sale of your relinquished property.
• Upon closing on the sale of the relinquished property, the Qualified Intermediary deposits the funds into a secured third party account or escrow account.
• The Qualified Intermediary then starts looking for potential replacement property and identifies the same within 45 days. Every 1031 investor gets 45 days to identify one or more replacement properties. This time frame of 45 days is known as the Identification Period.
• Once a replacement property is identified, the Qualified Intermediary transfers the funds to the seller and acquires it.
• On the closing day, the Qualified Intermediary transfers the property title to the investor without any constructive receipt. The entire exchange process within six months or 180 days.

What should you look in a Qualified Intermediary?

Along with the rise in the number of 1031 investors, the demand for 1031 exchange qualified intermediary has also increased by leaps and bounds in recent times. More and more individuals have started facilitating 1031 exchanges in the states. Because of this, it has become difficult to compare different Qualified Intermediaries. The following factors can help in closing on a good qualified intermediary –

• Experience – The more experienced a Qualified Intermediary is, the better it would be for your exchange. You must select the one who has facilitated more 1031 exchanges than others.
• Contacts – A Qualified Intermediary’s network is their weapon. It’s their network that helps them in locating properties. Therefore, the bigger the network, the easier it would be to locate properties.
• Services – You must also reconfirm with your Qualified Intermediary the services they would provide. Some Qualified Intermediaries may not offer all services.

Service Charge – Compare your options on this. Different Qualified Intermediaries will ask for different fees as they don’t charge a specified amount. Choose the one with a lower fee.

Still confused? Let the experts do it for you…

In case you’re still wondering where to find a 1031 exchange qualified intermediary, you can consult a 1031 expert or advisor. They can suggest you some of the top Qualified Intermediaries in your area. Besides this, they can also help you plan your 1031 exchange in a better way.To speak to a 1031 exchange  expert, you can call 888-993-2835 or email us at info@1031sponsors.com

Longing For 1031 DST Property List? This Is What You Should Do…

No prize for guessing why you’re eyeing a DST investment. The opportunity to invest in a diverse and less complicated market is enough to lure any investor. That’s why the number of investors doing a 1031 exchange into DSTs has increased over the years. One of the major benefits of investing in DSTs is freedom from property management. As DST properties often come with pre-arranged property or asset managers, DST investors don’t need to bear the burden of property management. However, one must have a 1031 dst property list to be able to evaluate different grade properties. Before we get into that, let’s explore some of the other possibilities of a DST investment.

How many investors can invest in a single DST?

A Delaware Statutory Trust or DST is a private governing trust responsible for buying, managing, administering, and selling income-producing properties. DSTs lets investors co-own income-producing properties without the liability to go out and find those properties. Unlike TICs, where the number of investors is limited to 35, a single DST may have a hundred investors or more. This is why small investors get to own large institutional-grade properties, which otherwise they may not be able to afford individually.

How 1031 investors invest in DSTs?

As you may know, a 1031 exchange allows investors to defer capital gains tax on exchanging an investment property for another like-kind property. A 1031 investor can exchange any investment property for the other without recognizing any gain or loss in the exchange. Since DST properties are also used for business or investment purposes, they qualify for a 1031 exchange. Investors can invest their 1031 proceeds into a DST and close their exchange.

How to evaluate a DST?

This should be your main concern, instead of a 1031 dst property list. When you’ll step out in the market, your biggest challenge would be to choose one DST investment option from many. As all DSTs promise to offer almost the same benefits, it gets difficult to compare them. Here are a few tips you may find handy while evaluating a DST –

• Experience – How old is your DST? This should be your first query. A DST with more years of existence than others is likely to have low risks and good control over the market.
• Number of investors – Though having a large number of investors is the strength of a DST, it may not be profitable every time. Because of its big structure, a DST investor gets to own large institutional-grade properties at a much cheaper price. However, their profit may get divided among others along with the increase in the number of investors.  
• Properties Grades – What kind of properties a DST possesses should also be checked. DSTs with large institutional-grade properties are likely to generate more revenue than the ones with single-unit buildings.

To compare DST properties of different grades, an investor requires a 1031 dst property list. However, it isn’t publicly disclosed. You may find such lists with a real estate firm or a broker. Apart from this, you can also reach out to a DST expert for this.

Role and Responsibility of a 1031 Qualified Intermediary

1031 investors need to follow a set of rules in order to successfully close their exchange. The IRS has established a series of guidelines, following which, an investor can complete a 1031 exchange. One such rule requires investors to involve Qualified Intermediaries in their exchange. The IRS has made the participation Qualified Intermediaries compulsory for every 1031 exchange. It could be said that a 1031 exchange is impossible without the participation of a 1031 Qualified Intermediary.

Who is a Qualified Intermediary?

A Qualified Intermediary is a person authorized to handle a 1031 exchange on behalf of investors. Qualified Intermediaries act like a third party in the transaction and make sure that a 1031 exchange gets completed within the specified time limit. They play a major role in locating properties for investors. Not only this, but they are also responsible for closing an exchange after acquiring the replacement property. There were many cases in the past, in which, the investor failed to identify a potential replacement property within the time limit. As a result, they couldn’t successfully close their 1031 exchange. Thinking of it as a big obstacle for investors, the IRS added Qualified Intermediaries to 1031 exchanges.

What does a Qualified Intermediary do?

The presence of a Qualified Intermediary itself is enough to provide relief to investors. After all, they do almost everything that could be done in a 1031 exchange.

• The job of a Qualified Intermediary begins as soon as they get to know about the exchange. If asked, a Qualified Intermediary looks out for a buyer for the investor’s relinquished property.
• Upon closing on the sale of the relinquished property, the Qualified Intermediary moves to the street for locating a potential replacement property. The proceeds from the relinquished property are transferred into a third party account, known as an escrow account, which obviously is controlled by the Qualified Intermediary.
• Once the replacement property is identified, the next task of the 1031 Qualified Intermediary requires them to acquire the same before the end of the exchange period, which is 180 days in a 1031 exchange.
• On the closing day, the Qualified Intermediary deposits the proceeds and closes the exchange.
• Once a 1031 exchange is closed, the Qualified Intermediary transfers the property title to the investor.

Apart from these duties, the Qualified Intermediary also gathers the required documents without bothering the investor. A Qualified Intermediary is an important part of a 1031 exchange, and you must hire an experienced person for this job.

1031sponsors idea for QUALIFIED INTERMEDIARY

If the investor wants to go for a 1031 exchange, and want to reinvest the property for the benefit of tax deferment you can get connected with us i.e. 1031sponsors.com. We have a team of experts to help you to complete your 1031 exchange in the best way. So, before executing for 1031 exchange you should have a brief knowledge of the 1031 exchange and who the experts are?

1031 Exchange in brief

1031 exchange emerged from section 1031 of the IRC (Internal Revenue Code). This is a great rule used for deferring the capital gain taxes. In the 1031 exchange process, the investors sells the property and reinvests the proceeds to buy new replacement property, and defer all the capital gain taxes within 180 days of the sale of the property. The qualified intermediary also known as 1031 accommodator is involved in the exchange process without whose presence the exchange cannot be completed because the money received from the sale of the relinquished property is kept in the escrow account and if the investor touches the cash then he/she is disqualified from the 1031 exchange.

Who the experts are?

The experts also known as Qualified Intermediary (QI) plays very important role in 1031 exchange, as he handles all the mandatory mechanics of a 1031 exchange for an investor . Here an exchange must be facilitated by an independent third-party in accordance with the US treasury Regulation 1031. Sometime Qualified Intermediary is also referred as Facilitator or Accommodator.

It is essential to have an exchange agreement and use a QI, so that the IRS does not consider a taxpayer to have taken a constructive receipt of the proceeds from a sale. When the sale is closed the proceeds of the sale will directly go to the QI, not to the taxpayer. The Qualified Intermediary holds the proceeds until they are needed to acquire the replacement property or properties, at which time the QI will send the funds directly to the closing agent who deeds the property to the exchanger. The proceeds received from the sale of relinquished property are kept in a special type of account known as escrow account.

If the Qualified Intermediary is not involved in the exchange then the investor will not be able to complete the exchange and he will be disqualified from the exchange. When you complete the transaction there is a lot of stake in it’s as this transaction includes your hard-earned money plus it includes the regulations involved in deferring the tax gains, so it is very important to choose the right Qualified Intermediary. For consultation and assistance regarding 1031 exchange expert you can call – 888-876-6005 or email us at info@1031sponsors.com

The Delaware Statutory Trust (DST) Basics You Need To Know

In DST many investment properties are combined together to form a trust, and the investor is allowed to buy the shares of trust according to his capacity. DSTs are mostly preferred because under this investor has a regular income even for small investments. You can know more about DST at https://bit.ly/2uSULbo

DSTs-best solution for your 1031 Exchange

A Delaware Statutory Trust (DST) is a platform which allows the investor to co-invest with other 1031 exchange investors in one or more institutional-grade properties. Under DST, the investor is assigned a fractional ownership of equity and debt, fulfilling the exchange requirements of the investor. Investors receive 1099 for ordinary income, 1098 allowing for mortgage interest write-off, and an operating statement or profit and loss statement for depreciation. DST helps the investor to enjoy the benefit of owning real estate without dealing with day-to-day responsibilities of managing the real estate.

What Delaware Statutory Trust is?  

Delaware Statutory Trusts, or DSTs, are legal entities that are driven from Delaware Statutory Law. DSTs allow the investors to own a proportional interest along with the rights to distribution from the rental income or sale of the property.

In the year 1988 DSTs were established by the Delaware Statutory Trust Act, and recognized by the state law. A Delaware Statutory Trust is formed as a private governing agreement under which a property is managed, held, administered, and invested. DST investments are offered as replacement properties to investors looking for deferring capital gains taxes with 1031 Exchange. It is a blessing for small investors as it allows them to acquire a share of interest in comparatively large and developed properties. DST properties are spread across different states of the USA. That is managed by professional real estate asset managers or property managers.

As we know ‘Investments are subject to market risks’, and to reduce such risk a real estate investment known as Delaware Statutory Trust(DST) offers the same benefit to its investors.

Advantages of DST’s:

1. DST’s create a valuable inheritance for our heirs. Suppose if you are having an intension of creating income generating investments for our heirs long after if you are gone, a DST could be a worthy investment.
2. It gives the opportunities for the diversification of your investment like if you don’t want to invest your entire amount in single property then you can split your investment among multiple DST properties; so it gives you the opportunity to diversify your real estate portfolio.
3. DST’s are the backup plan because during the identification period of the 1031 exchange DST property can be used as one of the three candidate properties. Suppose the investor is not able to acquire the first two choices of identified candidate property to meet the deadline, DST property remains as an option that can be closed very quickly to meet the exchange deadline.

Can DST be chosen as a right option? Now that you have a better understanding of Delaware Statutory Trusts , and you have to decide whether it’s the best type of investment for you to be making. The current tax laws have made DSTs a preferred investment vehicle for passive 1031 exchange investors. Multiple owners are involved in this and controlled by the master tenants. DSTs provide a number of potential advantages to investors. They can be an effective tool for building and preserving wealth.