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Section 1031 of the Internal Revenue Code allows an investor to defer the payment of capital gains taxes that may arise from the sale of real property. Using the sale proceeds to purchase “like-kind” real estate may defer taxes as long as the investor satisfies certain conditions.

Your clients who own investment property have likely heard of the 1031 exchange, and some may have used an exchange previously. But we find that even the most tax-savvy real estate investors aren’t familiar with the regulation’s definition of “like-kind” property and the latitude it provides.

1031 EXCHANGE RESOURCE CENTER
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DOWNLOAD GUIDE: UTILIZING DSTs IN A 1031 EXCHANGE

Potential Wealth Management Strategy for High-Net-Worth Individuals

Utilizing a DST 1031 exchange creates a unique opportunity for RIAs to provide advice on this specialized asset class. In 2020, nearly 60% of high net worth individuals (those with more than $1 million in liquid financial assets) had more than 10% of assets allocated to commercial real estate strategies.

With investors potentially benefiting from tax deferral, diversification and access to institutional-quality real estate management, wouldn’t it be in the best interest of your clients to learn more about the 1031 tax deferred exchange strategy?

Key Benefits of a 1031 DST Exchange

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Acquire partial ownership
of institutional-quality, multi-million-dollar
properties

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Divide your investment among multiple DSTs for a more diversified investment portfolio

Lower minimum investments
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Continue to exchange
real properties over
and over again

Insurance policy
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Like-Kind Real Estate

To execute a 1031 tax-deferred exchange, the replacement property and relinquished property involved must be “like-kind.” Properties held for productive use in a trade or business or for investment purposes is considered like-kind.

A primary residence would not be considered “like-kind” however, vacation homes or rental properties may be eligible if certain qualifications are met. Other examples of like-kind properties include hospitality, multifamily housing, student housing, self-storage, healthcare, industrial, office, retail and DST's.  

3 Steps to a 1031 Exchange

01

Exchanger sells property, known as the relinquished property, and proceeds are escrowed with a Qualified Intermediary (QI)

02

Qualified Intermediary, through a written agreement with the investor, transfers funds for purchase of replacement property

03

Exchanger receives beneficial interest in a DST

1031 Exchange Timeline

DAY 1

Sell
Relinquished Property

DAY 45

Identify Replacement Property

DAY 180

Acquire Replacement Property

1031 Exchange Guidelines & Requirements

It is important to follow all guidelines and requirements of the 1031 exchange in order to realize the tax-deferral benefits and avoid any penalties. 1031 exchange investors:

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Are required to reinvest all proceeds earned from the sale of a property

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Need to reinvest in “like-kind” real assets

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Must comply with debt and equity replacement requirements

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Engage a qualified intermediary, or QI, to facilitate the exchange

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Have 45 calendar days to identify a replacement property

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Complete reinvestment in replacement proprty within 180 days from the sale date of the original property

Debt & Equity Requirements

There are three general debt and equity requirements that 1031 exchange investors must follow to complete a successful transaction.

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The value of their new "replacement" property must be greater than the value of their sold, "relinquished" property

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They must invest all of the equity proceeds from the sale of the relinquished property into the replacement property. Any uninvested equity is called "boot" and will be subject to capital gains tax

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Your client must also meet the debt replacement requirements after reinvesting their equity. This means that debt on the replacement property (or the debt on the replacement property plus additional cash used) must be greater than or equal to the debt on the relinquished property

Role of a Qualified Intermediary

  • Preparing the 1031 exchange legal agreements and related transaction documents in order to properly structure the transaction
  • Receiving, holding and safeguarding the 1031 exchange funds throughout the transaction
  • Advising, coordinating or consulting on the implementation of the 1031 exchange transaction to ensure compliance with the Internal Revenue Code, Treasury Regulations and related Revenue Rulings and Procedures
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Inland’s 1031 Exchange Resource Center

The RIA’s Guide to Tax-Favored 1031 Exchanges

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Utilizing DSTs in a 1031 Exchange

A step-by-step guide for utilizing a Delaware statutory trust (DST) for your 1031 exchange.

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The Inland name and logo are registered trademarks being used under license. "Inland" refers to some or all of the entities that are part of The Inland Real Estate Group of Companies, Inc. which is comprised of a group of independent legal entities some of which may be affiliates, share some common ownership or have been sponsored and managed by such entities or subsidiaries thereof including the Inland Real Estate Investment Corporation (Inland Investments) and Inland Securities Corporation. Inland Securities Corporation, member FINRA/SIPC, is dealer manager and placement agent for programs sponsored by Inland Investments and Inland Private Capital, respectively. For more information on Inland Securities Corporation, visit FINRA BrokerCheck.