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The Rationale of Revenue Procedure 2002-22

Section 1031 of the Internal Revenue Service Code is one of the most generous, widely available provisions of the code, carving out an exception to the general rule that all gain or loss from the sale or disposition of property must be recognized. However, to ensure the veracity of a proposed 1031 exchange, investors often want to ensure their transaction falls within the “safe harbor” provisions of the code. One of the grey areas for quite some time was whether Tenancy in Common (TIC) ownership qualified for 1031 benefits. What caused this potential confusion? TICs are often likened to partnership interests, and partnership interests are specifically excluded from 1031 exchange […]

Real Estate Options With A Delaware Statutory Trust

Real estate has always been an attractive option for investors for many reasons. Tax advantages, a steady stream of monthly income, potential equity appreciation and portfolio diversification are just a few of the reasons investors at all levels seek out attractive investment real estate. Yet these same investors also understand that the field of real estate is not as well-regulated and is far less transparent than the securities market. They also understand that investor-owned real estate requires much more day-to-day management than stocks or other investment options. So when securitized real estate investments became available, most commonly in the form of Delaware Statutory Trusts, it created an excellent opportunity for […]

How Does A Delaware Statutory Trust Work?

As the baby-boomer generation gets older, many older investors are seeking out more passive investment opportunities. They no longer wish to concern themselves with the day-to-day responsibilities of dealing with tenants and the issues that come from direct ownership of rental properties. This desire for passive investing is fueling greater interest in investment vehicles like Delaware Statutory Trusts (DST). With a DST, a trust is created as a separate legal entity under the laws of Delaware for the purpose of owning a 100% fee simple interest in real estate. The DST then invites investors to participate as beneficial owners of the property. A DST works by a real estate sponsor […]

Why Consider a DST or TIC For Your Next 1031 Exchange?

Many of my clients are individual investors, buying and selling real estate to grow their investment portfolios. One common question I hear from these clients is “how do I grow my investments faster?” They are concerned that the amount they have to invest on their own is simply not enough to achieve the long-term growth they desire. One option I often suggest is fractional or co-ownership in the form of a Delaware Statutory Trust (DST) or Tenancy In Common (TIC). Quite simply, this type of joint ownership allows an individual investor to acquire a larger and hopefully more profitable real estate asset than what they could have purchased with only […]

Requirements For Full 1031 Exchange Tax Deferral

The whole point of a 1031 exchange is to defer tax liability on the transaction in order to free up equity to purchase more valuable property and grow investments. Unfortunately, some investors don’t fully understand the requirements for full tax deferral, and make common mistakes that lead to unintended immediate tax liability on their investment transactions. To qualify for full tax deferral, an investor must meet two basic requirements in a 1031 exchange: Reinvest the entire net equity in one or more replacement properties, and Acquire one or more replacement properties with the same or greater amount of debt. Alternatively, the investor can acquire property of equal or greater value […]

Are 1031 Exchanges In Jeopardy?

Investors are keeping an eye on proposed legislation from the Obama administration seeking to cap annual 1031 exchange tax deferral at $1 million. This marks the second time in two years that the government is trying to limit the reach of Internal Revenue Code Section 1031. Last year’s failed efforts to curb 1031 exchanges were included as part of Wisconsin Representative Paul Ryan’s proposal for tax reform. This time around, limitations to 1031 exchanges are included as part of Obama’s budget. The budget has not yet passed, and the real estate industry is engaging in significant education efforts to outline the impact such a move would have on the industry […]

Understanding Time Limits In A 1031 Exchange

In a vast majority of 1031 exchanges an investor knows he or she wants to sell an existing property but has not yet found a suitable, like-kind replacement property. In these cases, the exchange can still be successfully completed so long as several time requirements are met. 45-Day Rule for Identification. This rule requires that the investor either close on the purchase of the replacement property or identify potential replacement property within 45 days of transferring the relinquished property. The IRS insists on strict adherence to this time limit or else the 1031 exchange will fail. To comply, an investor must, within the 45 days, close the sale or comply […]

What Are The Rules About Identifying Replacement Property In A 1031 Exchange?

For many investors, finding suitable replacement property is the biggest challenge in any 1031 exchange. While occasionally the perfect property will come along – sometimes even before the relinquished property is sold – this it not the case in most exchanges. For investors who relinquish before finding a replacement property, there are several important requirements that must be followed with regard to identifying replacement property in order for the 1031 exchange to succeed in the eyes of the IRS. These “Rules of Identification” include: Up to three replacement properties may be identified without regard to their fair market value (The Three Property Rule) Any number of properties so long as […]

How Does The IRS Determine “Held For Investment” In A 1031 Exchange?

One of the key requirements of a valid 1031 exchange is that the relinquished and replacement properties were “held for business or investment” purposes. Unfortunately, the IRS Code does not offer a brightline rule with regards to a period of time that satisfies this requirement. Instead, time is but one of the factors that will be scrutinized when determining an investor’s intent with regards to property. Since every situation is unique, the responsibility falls to the individual investor to substantiate his or her intent. Some of the factors an investor can use to substantiate intent include: A long period of ownership A use consistent with investment or business operations Tax […]

Risks Of Tenancy In Common

Although very popular, Tenancy In Common ownership presents a unique set of challenges that any investor should thoroughly consider beforehand. Beyond the typical risks associated with investing in real estate, when ownership involves multiple investors there is always the risk of conflict or disagreement among the owner pool. Any major decision requires the unanimous approval of all owners, which can be problematic if fast decisions are required. While most TICs contain a buy-out provision for dissenting owners, it is usually not a fast or easy process. The time it takes to resolve disagreements among owners can often cause the TIC to miss out on lucrative selling opportunities. Likewise, if the […]