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Category Archives: 1031 EXCHANGE

10 Things To Know About 1031 Exchanges

Some investors have been wise to the tax benefits of a 1031 exchange for years. Others are new to the game and may wonder what all the fuss is about. They may hear the phrase “let’s 1031 that” bandied about by realtors, attorneys or other investors, but may not be clear on what this process involves. Quite simply, a 1031 exchange allows an investor to swap one business or investment asset for another. Under normal circumstances, the sale of these assets would incur tax liability for any capital gains. However, if you meet the requirements of IRS tax code, section 1031 (hence the name), then you can defer any immediate […]

Why Are Delayed 1031 Exchanges So Popular?

The idea of conducting a 1031 exchange is appealing to investors for a number of reasons, particularly the tax-deferred nature of the transaction. Rather than paying capital gains tax immediately, an investor can trade up on investments and defer any tax liability for years. In some cases, where exchanged property is part of a decedent’s estate, capital gains can be effectively eliminated altogether. So why are delayed exchanges – where replacement property is not closed on for weeks or months after the relinquished property is sold – so popular? Two main reasons: The exchanger enjoys additional time to find and close on the purchase of suitable replacement property. This replacement […]

Formation Of A Delaware Statutory Trust

Formation Of A Delaware Statutory Trust

Savvy investors understand that real estate ownership through a Delaware Statutory Trust brings unique benefits not found in other forms of investing that involves real estate. While many investors will simply participate in already-formed DSTs, some will choose to create their own. In either case, it is helpful to understand how such trusts are formed. Four key elements are required for a valid Delaware Statutory Trust. The Governing Instrument – This is the written documentation that specify the creation and internal affairs of the trust, as well as govern the conduct of trust activities. This must be in writing and executed on or before filing the Certificate of Trust. Certificate […]

What Is A “Drop And Swap” Exchange?

Often times, real property held by a partnership or limited liability company is subject to a sale but there is disagreement among the partners as to how to handle the sale proceeds. Some investors want to conduct a 1031 exchange while others simply want to sell for cash. To satisfy these competing interests, the partnership or LLC initiates what is known as a “drop and swap” exchange. In such a transaction, before the exchange the property ownership title is changed to reflect individual partner names and their partitioned interests rather than the partnership or LLC itself. This title change is the “drop.” Thereafter, the exchange occurs and some members defer […]

Private Letter Rulings From The IRS

Any investor interested in conducting 1031 exchanges should be familiar with Private Letter Rulings (PLR) issued by the Internal Revenue Service. While many investors will never seek a PLR themselves, they will often rely on other rulings for guidance when conducting their own exchange. A Private Letter Ruling is a written statement issued by the IRS in response to a taxpayer’s formal request for guidance. The PLR interprets and applies tax laws to a specific set of circumstances. Given the potential complexity of 1031 exchanges, it is not difficult to understand why so many investors seek out PLRs for their proposed transactions. When a PLR is issued, its holdings are […]

Restrictions on Delaware Statutory Trusts

Although Delaware Statutory Trusts (DSTs) are a powerful way for investors to capitalize on securitized real estate, DSTs are not without limitations. IRS Revenue Ruling 2004-86 imposed some prohibitions on the power of the DST trustee. These prohibitions must be followed in order for the investors to be treated as acquiring a direct interest in real estate for tax purposes and thus qualify for 1031 exchange benefits. There are seven prohibited trustee activities. Once the trust offering is closed, no future contributions by existing or new investors is allowed. The trustee is prohibited from renegotiating any existing loan terms and can’t borrow new funds from anyone unless there is a […]

Financing Basics Of A Delaware Statutory Trust

With the advent of the Delaware Statutory Trust (DST), access to and participation in securitized real estate has been greatly simplified for many investors. In a DST, the trust owns 100% of the fee interest in the real estate and is the sole borrower. This usually results in very competitive interest rates, far more favorable than a single investor (or group of individual investors) may be able to obtain. There are several reasons why lenders find well-structured DSTs appealing. First, the DST sponsor usually has a solid property management reputation, which greatly enhances the likelihood that investment-grade real estate will be properly dealt with. Second, since the DST is bankruptcy […]

What is Securitized Real Estate?

For the non-professional investor, a phrase like “securitized real estate” may not be a familiar concept. However, it pays to learn about this type of investment, as it offers a unique set of benefits not found elsewhere. Securitized real estate is simply real estate that is packaged and sold as a security. As such, it is regulated by federal securities legislation which promotes fuller disclosure and provides more suitable investments. Traditional real estate investments have proven popular with investors because these type of investments provide straightforward tax advantages, regular monthly income, potential equity appreciation and portfolio diversification. Yet, these benefits are often offset by concerns that with real estate comes […]

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 […]