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Category Archives: 1031 EXCHANGE

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 […]

Benefits Of A Tenancy In Common

One of the advantage of Tenancy In Common ownership of investment property is that the individual investors each maintain the ability to have a say in the day-to-day operation of the property, including when and under what terms to eventually sell the investment. Contrast this to Delaware Statutory Trust ownership where individual investors cede this authority to a third-party. Also, since buyers are able to pool their resources in a TIC, this gives the TIC collective much more buying power than an individual investor may have. This opens up a wider selection of potential investment properties, with greater growth potential. Finally, in cases where the TIC is offered as a […]

What Is Tenancy In Common?

Tenancy In Common (TIC) is a way for two or more individuals to have an undivided fractional ownership interest in a single property. With a TIC, each owner has individual rights and obligations related to the property. These rights equal the proportionate share of the owner’s interest. Having an ownership interest in a TIC gives an investor the right to his or her proportionate share of net income, tax benefits and appreciation. The TIC owner is treated similarly to a fee simple owner and receives an individual property deed and title insurance for his or her share of the property. A TIC owner may bequeath his or her interest to […]