Smooth Sailing
for 1031 Exchanges

What is a 1031 Exchange?

MINIMAL EFFORT.
MAXIMUM TAX ADVANTAGE.

Do you have investment real estate? Are you ready to sell it but are worried about paying taxes? The Internal Revenue Code (IRC) offers a tax planning approach through a transaction called a 1031 Exchange. With this approach, you can completely defer capital gains taxes from selling real estate.

By considering a 1031 Exchange for your investment property, you can reinvest the proceeds in “like-kind” real estate and defer the payment of taxes on the sale. The Internal Revenue Service (IRS) defines “like-kind” as “of the same nature or character, even if they differ in grade or quality.”  

While the 1031 Exchange process can seem daunting, Ocean1031 will help you determine the best solution for your real estate investments using Delaware Statutory Trusts (a property replacement vehicle in 1031 Exchanges).

What Qualifies?

If you have a business or investment property (like a single-family rental property), then you are eligible for a 1031 exchange. Assets for personal use, such as a primary residence or a vacation home, usually do not qualify.

Property pictured is not associated with any current offering.

PROCESS AND TIMELINE

Ocean1031 guides you through each step of the 45-day and 180-day process for completing a 1031 Exchange. Below is an outline of the strict timeline all 1031 Exchanges must complete.

In the first 45 days of the 1031 Exchange, Ocean1031 reduces the complexities of the exchange by working with a qualified intermediary to execute documentation, manage the sale of the property, and quickly identify and purchase the replacement property. Note that the seller cannot receive or control the net proceeds. All sale proceeds must be transferred to the qualified intermediary. Within the 45-day timeframe, a replacement property must be identified via a written document known as the “Identification Notice.”

You must close on your new property within 180 days of selling your original property. The replacement property must be of equal or greater value, all equity must be reinvested, and you must obtain an equal or greater amount of debt on the replacement property.

Using Delaware
Statutory Trusts (DSTs)

While Delaware Statutory Trusts (DSTs) have existed for some time, it wasn’t until 2004 that the IRS issued an official ruling outlining the specific structure of a DST that would meet the criteria for being considered a property replacement vehicle in 1031 Exchanges.

A DST is an option for accredited investors ready to relinquish the day-to-day hassle of property management and turn it into a passive and turn-key investment. A Delaware Statutory Trust functions as a real estate ownership arrangement in which investors possess a fractional stake in the trust’s holdings. This trust is initiated by a specialized real estate firm, a “DST sponsor,” which takes the initial steps of identifying and procuring the real estate assets for the exchange.

Property pictured is not associated with any current offering.

DST Benefits

  • Non-recourse Debt
  • Lower Minimum Investments
  • Portfolio Diversification
  • Pre-packaged Investment
  • Institutional-grade Assets

DST Real Estate

  • Multi-family Apartments
  • Industrial Space
  • Self-Storage
  • Medical Facility
  • Student Housing
  • Retail Centers
  • Oil and Gas

What to know

Accredited Investors

Delaware Statuary Trusts (DSTs) provide a turn-key solution for completing a 1031 Exchange. This investment vehicle is available only to accredited investors and high-net-worth individuals as defined by Regulation D of the Securities Act 1933.

Limited Liability

The DST is the single owner and borrower of the property(s), and the lender only underwrites the DST, not each investor. The loan is non-recourse to the investor, meaning the borrower is not personally liable for the debt but still has limited liability in the equity.

Passive Investment

The DST trust agreement will govern the rights and obligations of investors in a DST. Investors have limited voting rights over the operation and ownership of any properties the DST owns.

Securities

DSTs are packaged and sold as securities. They may consist of a single asset or multiple properties grouped together and are regulated by federal securities rules and regulations. The DST sponsor must disclose the deal details outlined in a Private Placement Memorandum (PPM).

Is a DST Right For Me?

When the tide of life changes, you can rely on Ocean1031 to conduct a needs analysis, educate you on the process and DST properties, and assist you with reinvesting in real estate. One of the biggest questions we answer is, “How do I know DSTs are right for me?”

DST Considerations
  • You want to defer the capital gains tax.
  • You prefer limited personal liability.
  • You are not interested in property management responsibilities.
  • You no longer have a say in property management decisions (remodeling, rent, etc.)
  • You seek to create and prolong wealth and are an accredited investor.
  • You are not concerned about liquidity, as DST investments could have a holding period of two years or more (DSTs usually hold for five-seven years.)

Property pictured is not associated with any current offering.

Common Questions

A 1031 exchange is a tax planning strategy that allows investors to sell an existing property and defer the payment of capital gains taxes and other transaction-related costs. The three basic rules to qualify for complete tax deferral are:

  1. Receive only “like-kind” replacement property.
  2. Use all proceeds from the relinquished property to purchase the replacement property.
  3. Ensure the debt on the replacement property is equal to or greater than the debt on the relinquished property.

The transaction must occur within a 180-day timeframe. Failure to identify a replacement property within the 45-day identification period or failure to acquire replacement property within the 180-day exchange period will disqualify the entire exchange, resulting in a fully taxable original property. (IRS Like-Kind Exchanges Under IRC Section 1031)

IRS regulation requires a Qualified Intermediary to complete an exchange correctly. A “QI,” referred to as an accommodator or facilitator, is an entity that facilitates Internal Revenue Code Section 1031 tax-deferred exchanges. A QI enters into a written agreement with the taxpayer under which the qualified intermediary:

  • Acquires the relinquished property from the taxpayer;
  • Transfers the relinquished property to the buyer;
  • Acquires the replacement property from the seller;
  • Transfers the replacement property to the taxpayer.
    • We advise you to work with an Exchange 1031 professional, and we can connect you to a QI.

Properties are like-kind if they’re exact or character, even if they differ in grade or quality. Real properties are like-kind, regardless of whether they’re improved or unimproved. For example, an apartment building would generally be like-kind to another apartment building. However, real property in the United States is not like-kind to real property outside the United States.

Below are some examples of “like-kind” real estate:

  • Vacant land
  • Commercial property, including commercial rental property
  • Industrial property
  • 30-year or more leasehold interest
  • Farm property (but not farm equipment)
  • Residential rental property
  • Doctor’s own office

Though DSTs and REITs are passive investments focused on property buy-ins, they are different:

  • Structure: While a DST is a legal entity (established by the state of Delaware as a trust), a REIT is an organization that acquires, manages, and sells real estate. REITs can hold hundreds of assets at one time. A DST, in comparison, is usually a single asset or a small portfolio of properties.
  • Company Shares: An investment in a REIT gives you a share of the company that buys/manages/sells the asset rather than actual real property ownership.
  • Minimum Investments: REITs have much lower minimum investments ($1,000 versus $100,000), fee structures, and investment objectives.
  • Tax benefits: While taxable income from a DST investment may be written off through interest and depreciation deductions, dividends distributed by REITs cannot since a REIT investment is not considered a direct interest in real estate.

Any real estate investment is subject to market value, rental income fluctuations, tenant issues, vacancies, taxes, and governmental regulations. A DST investment has costs and fees, and the tax benefits must be weighed against the investment costs.

In the News

Craig shares his experience using 1031s with the National Association of REALTORS® in an article on the NAR website.

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Find out why Craig advocates for 1031s in this Pennsylvania Association of Realtors® article, which can be read on the PAR website.

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Capitol Building in Washington D.C.

Craig takes a meeting “on the hill” with several influential members of the U.S. Congress to discuss 1031s. Read the article from the RealEstateRama website.

READ MORE

https://www.irs.gov/pub/irs-news/fs-08-18.pdf
https://www.irs.gov/businesses/small-businesses-self-employed/like-kind-exchanges-real-estate-tax-tips

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