Cash-Out with DST (Unique to Safe Harbor Asset Management, Inc.)
It is possible to create tax-free liquidity from a 1031 exchange with a Delaware Statutory Trust. However, it must be structured correctly!
The IRS (under the “Step Transaction Doctrine”) can argue that a re-finance either before or after completing an exchange is merely an effort to avoid investing “all” the proceeds from your exchange. There are strict rules that need to be followed to avoid an IRS re-characterization of the exchange.
Deferred or Delayed Exchange
In a delayed exchange, the Relinquished Property is sold at Time 1, and after a delay of up to 180 days, the Replacement Property is acquired at Time 2.
The reverse exchange represents an exchange in which the Exchanger locates a Replacement Property and wants to acquire it before the actual closing of the Relinquished Property. Since the Exchanger cannot purchase the Replacement and later exchange into a property that he already owns, he must find a method to acquire the Replacement Property and still maintain the integrity of the exchange.
The most common reverse exchange approach is for the Exchanger to arrange the acquisition of the Replacement Property by adding enough cash (or arranging suitable financing) to buy the new property. The title for the new property is then held by an Exchange Accommodation Titleholder (an LLC created by the Qualified Intermediary). The EAT holds title to the Replacement property until such a time within the 180 day exchange period that the Relinquished Property is sold. At that time either the Replacement Property is deeded to the Exchanger by the EAT, or the EAT itself is transferred to the Exchanger.
In some cases, the replacement property requires new construction or significant improvements to be completed in order to make it viable for the specific purpose the Exchanger has intended for the property. Such construction or improvements can be accomplished as part of the exchange process, with payments to contractors and other suppliers being made by the Qualified Intermediary or Facilitator out of funds held in a trust account. Therefore, if the replacement property is of lesser value than the relinquished property at the time of the original transaction, the improvement or construction costs can bring the value of the replacement property up to an exchange level or value which would allow the transaction to remain completely tax-deferred. Most improvement or construction exchanges utilize an Exchange Accommodation Titleholder to hold the title to the property while the improvements are completed. This avoids a situation where the Exchanger is exchanging into property he already owns.