Frequently Asked Questions About the 1031 Exchange and DSTs
The 1031 exchange offers one of the most strategic planning tools available to real estate investors. A properly executed 1031 exchange can defer taxes, create a sustainable stream of income, and potentially offer estate and liquidity advantages. We can help you strategically maximize the benefits of a 1031 exchange by setting up a Delaware Statutory Trust (DST). With a DST, you can be a part owner of real estate assets by purchasing fractional units and gaining the same benefits as large institutional real estate investors -- without the management hassles.
What is a 1031 exchange?
The tax code has permitted these tax-deferred exchanges of “like-kind” property for many years, most recently reaffirmed under the Tax Cut and Jobs Act passed in 2017[1]. A qualified 1031 exchange allows investors to defer recognition on the gain or loss from a sale of investment or commercial property. 1031 exchanges are not available to sellers of homes that are primary residences. With a 1031 exchange, investors can choose between whole-property purchases and fractionally-owned purchases (i.e., a Delaware Statutory Trust).
Why would I want to set up a 1031 Delaware Statutory Trust (DST)?
While 1031 exchanges can be executed using a Qualified Intermediary (QI), DSTs require additional third-party affiliations. BakerAvenue can provide strategic guidance, planning, access, and the necessary tax considerations for the initial set up. DSTs allow multiple owners to purchase fractional units. The advantages include diversifying and investing in large institutional-style real estate projects to potentially gain the same benefits as larger institutional real estate investors. Another benefit is eliminating the headaches of property management.
What defines "like-kind" property?
If you choose to go with a traditional 1031 exchange, the IRS requires that a property must be “exchanged” for a new property that is the same type. Properties are of like-kind if they’re of the same nature or character (e.g., apartment buildings), even if they differ in grade or quality or are improved or unimproved. They must be held for business or investment purposes and can include apartments, office buildings, shopping centers, storage facilities, land, etc. However, real property in the US is not like-kind to real property outside the US.
How much time do I have for a 1031 exchange?
45 days.Can I change the replacement property?
Yes, but only within the 45 days.When must the exchange be completed?
Within 180 days.Deciding What to Do With Your Investment Property
Because the window to complete a 1031 exchange is relatively aggressive, this is where a 1031 in the form of a DST becomes a particularly attractive option. Contact BakerAvenue to determine if a DST is right for you.
Can I get an extension on the time limits?
Only for a state or federally-declared disaster.What is a Qualified Intermediary (QI) and do I need one?
Yes, an intermediary is required unless the exchange is completed on the same day, which is rare.Can I buy the replacement property first?
Yes, it’s called a “reverse 1031 exchange,” which is more expensive and complex.
Do I just need to reinvest my profit?
No, to defer taxes, you need to replace the entire net sales price of what you sell, not just the gain.Do I have to replace my existing loan amount?
Yes, you need to buy equal to or greater than the entire net sales price to take advantage of the tax deferment.
Do I have to get another loan?
Yes, you need to replace the loan's value with another loan or with additional cash from outside of the exchange.
Do I need to buy the replacement property in the exact same vesting as I sold?
No, but you have to be the same taxpayer.Can I move into the property I buy?
Yes, but the replacement property needs to be purchased to be a business or investment property.Can I rent the property to my child or other family members?
Yes, at fair market rent.
Can I buy the replacement property from a related party?
Yes, but there are some very limited exceptions, so you’ll want to speak to your real estate attorney or tax advisor.
[1] IRS: Like-Kind Exchanges - Real Estate Tax Tips