Types of 1031 Exchanges
Depending upon your circumstances, there are several ways to complete an IRC compliant 1031 exchange
Four Steps to Exchanging
Plan your transaction and setup your
exchange with a Qualified intermediary
Every 1031 exchange deserves to be planned beforehand. With the limited time constraints and the logistical difficulties associated with closing multiple properties, spending a short time laying out the objectives will allow an Exchanger to minimize obstacles and create suitable contingencies.
Locate and Identify Replacement
Property within 45 days
The most difficult part of any 1031 exchange is locating and identifying candidate or target replacement proeprties within the brief 45 day identification period. The Exchanger will also be required to identify using one of two rules (three property rule, 200 percent rule, or the 95 percent exception.
Complete the Replacement Property
purchases within 180 days
The other critical time related rule is that all the replacement proeprties must be acquired and closed within 180 days or whenever your tax return is due. This means if it is late in the year, you may need to file an extension of your tax return in order to have access to all 180 days.
Report the 1031 Exchange on
Form 8824 with your tax return
The Internal Revenue Service views the taxpayer's use of Section 1031 as a method for moving the cost basis from one qualifying property to another. Therefore your exchange must be reported to the IRS on Form 8824 with your tax return for the year in which the exchange was started.
Types of Investment Grade Property
Delaware Statutory Trusts
Delaware Statutory Trusts or DSTs are organized investment structures which allow individual investors to own fractional interests in larger, investment grade properties. DST property portfolios are professionally managed and sold as securities to Accredited Investors only. DST investors receive their share of the property rents monthly rents as well as their ratale percentage of tax benefits. DST interests are considered like-kind properties for the purposes of IRC Section 1031 and therefore qualify as suitable replacement proeprty in a 1031 exchange.
Net Leased Properties
Net lease refers to the contractual arrangement between the owner of a property and the lessee where the lessee pays a portion or all of the taxes, insurance and maintenance costs for a given property in addition to their rent.
Net Lease: tenant pays one of the three expense categories. Net Net Lease: tenant pays two of the three expense categories. Net Net Net (TripleNet) Lease: tenant pays all three expense categories. Triple net leases usually include an entire building and are written for longer periods than the other two categories.
Tenant in Common
Tenancy in Common is a specific type of concurrent, or simultaneous, ownership of real property by two or more parties. This means that each owner can own an undivided interest in a property and receive their ratable share of the income and tax benefits. This is a common method for owning investment properties. This also means that each owner has the right to sell their ownership interest.
Because a TIC interest represents an interest in the underlying property, it can be exchanged pursuant to Section 1031 of the Internal Revenue Code.
1031 Educational Materials
This comprehensive guide to 1031 exchanging will cover everything you need to know to be an informed Exchanger.
If you just have a question or two check out this FAQ and you'll probably find the answer to your inquiry.
There are a handful of keys to 1031 exchanging which experienced Exchangers always heed. See them for yourself.
Easy 1031 Exchange MathA completed 1031 exchange not only defers capital gain and depreciation recapture taxes, it dramatically increases your buying power as well. The IRS allows you to defer your capital gain taxes because they view it as simply moving your costs basis from one qualifying property to another.
DETERMINING YOUR REPLACEMENT VALUEIt is important to understand how the underlying math can impact the value of your Replacement Property. For instance, this nearby wizard will help you determine your ideal net purchase price, cash downpayment and the amount of debt you'll need to have a toally tax deferred transaction.