Fortitude's Insights

Dos and Don'ts of 1031 Exchanges

Posted by Daniel Raupp on Jun 28, 2018 10:39:00 AM
1031 exchange is a practice named after a section of the IRS tax code. It allows taxpayers to potentially defer capital gains taxes from the sale of a property if they meet certain conditions. Those conditions can be complicated, tricky and confusing.To make sure you’re on the right path, pay close attention to these do’s and don’ts as you set up a 1031 exchange.

 

DO advanced planning for the exchange

Talk to your accountant, attorney, broker, financial planner, lender, and Qualified Intermediary prior to exchanging and possibly investing in a DST.

 

DO keep in mind these three basic rules to qualify for complete tax deferral:

  1. Receive only “like-kind” replacement property
  2. Use all proceeds from the relinquished property for purchasing the replacement property
  3. Make sure the debt on the replacement property is equal to or greater than the debt on the relinquished property. (Exception: A reduction in debt can be offset with additional cash; however, a reduction in equity cannot be offset by increasing debt). 

 

DO attempt to sell before you purchase

Occasionally exchangers find the ideal replacement property before a buyer is found for the relinquished property. If this situation occurs, a “reverse” exchange (buying before selling) may be necessary.

 

DO NOT miss your identification and exchange deadlines

Failure to identify within the 45-day identification period, or failure to acquire a replacement property within the 180-day exchange period, will disqualify the entire exchange resulting in the sale of the downleg property being fully taxable. Reputable Intermediaries will not act on back-dated or late identifications. 

 

DO NOT try doing a 1031 Exchange using your attorney or CPA to hold title or funds

IRS regulation requires a Qualified Intermediary to properly complete an exchange. Call us for the name of one that operates in your area. 


 

DO NOT dissolve partnerships or change the manner of holding title during the exchange

A change in the Exchanger’s legal relationship with the property may jeopardize the exchange. 
 
 

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This is for educational purposes only, does not constitute an offer to buy/sell securitized real estate investments, and is not meant to be interpreted as tax or legal advice. Because investors situations and objectives vary this information is not intended to indicate suitability for any particular investor. Please speak with your legal and tax advisors for guidance regarding your particular situation. Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services offered through Concorde Asset Management, LLC, an SEC registered investment adviser. Insurance offered through Concorde Insurance Agency, Inc. Fortitude Investment Group is independent of CIS, CAM and CIA.

Written by Daniel Raupp

Under Daniel’s guidance since 2000, Fortitude Investment Group has guided clients into over $1 billion worth of securitized real estate investment offerings directly and indirectly, in both the DSTs for 1031 Exchanges and REITs. Daniel directs a range of strategic initiatives in the firm to successfully leverage core competencies in tax efficient investing, alternative investments, and operational excellence to create customer value.

Have a commercial real estate investment question?

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Topics: 1031 Exchange

DST 1031 properties are only available to accredited investors (generally described as having a net worth of over $1 million dollars exclusive of primary residence or $200,000 income individually/$300,000 jointly of the last three years) and accredited entities only. If you are unsure if you are an accredited investor and/or an accredited entity please verify with your CPA and Attorney. There are risks associated with investing in real estate and Delaware Statutory Trust (DST) properties including, but not limited to, loss of entire investment principal, declining market values, tenant vacancies and illiquidity. Diversification does not guarantee profits or guarantee protection against losses. Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated. The information herein has been prepared for educational purposes only and does not constitute an offer to purchase or sell securitized real estate investments. Because investors situations and objectives vary this information is not intended to indicate suitability for any particular investor. This material is not to be interpreted as tax or legal advice. Please speak with your own tax and legal advisors for advice/guidance regarding your particular situation. Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services offered through Concorde Asset Management, LLC (CAM), an SEC registered investment adviser. Insurance products offered through Concorde Insurance Agency, Inc. (CIA). Fortitude Investment Group is independent of CIS, CAM and CIA.

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