What is a 1031 Exchange?
A real estate 1031 exchange allows you to defer paying taxes when you sell an investment property, by reinvesting the proceeds in a qualifying replacement real estate investment property under the Internal Revenue Code Section 1031.
This process allows investment property owners to sell their property through an “exchange” by purchasing a “like- kind” property and defer up to 100% of the capital gains taxes which would otherwise be due upon the sale of their property.
The term “like-kind” refers to the nature or character of the property, rather than its grade or quality. The relinquished or replacement property cannot be the investors primary residence.
The Process of a 1031 Exchange:
Retain a Qualified Intermediate
Sell your existing property and hold the sale proceeds in escrow.
Identify a Replacement Property
Find a property with us within 45 days after the sale of your property.
Purchase Your Replacement Property
Complete your exchange within 180 days after the sale of your property.
Benefits to a 1031 Exchange:
1
Defer your capital gains tax
Investors can defer capital gains on the sale of their real estate.
2
Monthly cash flow
Investors can sell a little to no income producing property (like land) and purchase property with greater cash flow performance.
3
Leverage
Funds saved by deferring capital gains and other taxes, investors have increased funds to purchase a larger property.
4
Consolidation
Investors can sell smaller properties and purchase one larger property to maximize ownership benefits while keeping none of the management responsibilities.
5
Increase depreciation
Investors can exchange from a non- depreciable property like land to a property that can be depreciated like a multi-family home.
6
Property management
Investors who don't want to have to manage high-maintenance properties can invest with us for our in-house management service.
7
Portfolio diversification
Investors can expand the number or types of property in their portfolio in addition to investing in various markets and/or states.
8
Estate Planning
Investors may continue to replace properties through consecutive 1031 exchanges, preserving profits until an estate can be passed down tax free (if under the tax cap).
Reasons to Invest in a 1031 Exchange
Recession-Resistant Characteristics
Real Estate investments are one of the safest investments since housing occupancy rates remain stable during economic booms.
Increase of Rental Rates
Overall the rental revenue, rental rates, and net operating income in housing properties across the country have continued to rise year over year due to demand and limited space.
Value-Creation Potential
Increased housing demand by renovating and creating value-add improvements to the properties, may help realize higher returns at a faster rate as compared to the acquisition of stabilized assets.
Optimal Investment Strategy
Investment properties provide appreciation potential, an inflation hedge, portfolio diversification, and monthly income with tax efficiency through depreciation anchored by real estate assets.
1031 Exchange Property Identification Rules
When you identify potential replacement properties for your 1031 exchange, you must comply with one of the three rules or your identification will fail.
1031 Exchange Guidelines
- Sales proceeds must go directly to accommodator
- 45 days from close to identify replacements
- 3 rules for Identification: 3-property, 95%, 200%
- 180 days from sale to close on replacement(s)
- Must maintain the same ownership entity
- “UpLeg” must have same sales price or higher
1031 Exchange Potential Risks
All real estate involves risk. Properties can be subject to market fluctuations, seasonal fluctuations, vacancy, higher-than-expected expenses, and other risks. In some cases this may lead to a reduction in distribution levels or even foreclosure in extreme cases. Please consult the Private Placement Memorandum (PPM) of any 1031 Exchange offering for a more complete list of potential risk factors.
1031 Exchange Ownership Options
Sole Owner
Buy the entire invest property and be the sole owner.
TIC: Tenant-In-Common
Investors are considered co-owners and hold a direct ownership position in the property.
DST: Delaware Statutory Trust
Investors buy an ownership interest in a trust that holds title to the property.
"Like-Kind" Exchange Properties
Single-Family Rental
Duplexes
Triplexes
Apartment Buildings
Condominiums
Hotels & Motels
Industrial Properties
Office Buildings
Rental Resort
Retail Centers
Senior Housings
Student Housing
Vacant Land
Warehouses
