1031 Exchange Requirements
1031 exchanges can be an opportunity for investors to defer the tax consequences that come from the sale of a property. However, there are certain requirements that must be met in order for 1031 exchanges to be considered valid by the IRS. These requirements include the following:
- The same taxpayer must appear on both the title of the property that sells and the title of the property that is bought. An exception to this rule is when an SMLLC sells, and the single member purchases in his or her individual name.
- After the initial property’s sale has been finalized, the Exchanger has 45 calendar days to present the accommodator or the closing entity a list of potential replacement properties. There are a number of rules that guide this process and determine the number of properties that can be identified, and their value limitations.
- The entire 1031 exchange timeline encompasses 180 days following the sale of the initial property. Within 180 days (or 135 days after the 45-day identification period) the Exchanger must purchase the replacement property. This 180-day period can also apply to the time frame following the extension of the Exchanger’s tax return, if the initial property is sold after October 15th.
- If the Exchanger wishes to defer 100% of taxes from the 1031 exchange, the net proceeds on the sale of the initial property must be equal to or less than the net sales price of the replacement property. Anything else would qualify as a partial exchange, and the Exchanger would have to pay tax on the difference. Additionally, debt and equity in the new acquisition must be equal to or greater than the debt and equity in the relinquished asset.
DST Properties and 1031 Exchanges
DST stands for Delaware Statutory Trust; however, DST’s are not confined to the jurisdiction of Delaware. A DST is a separate legal entity in which each owner, or investor, has an interest in the DST for federal income tax purposes. Each investor is treated as owning an undivided fractional interest in the investment property. DST 1031 exchanges have become increasingly popular among investors. There are several benefits that come from investing in DST’s. For instance:
- DST’s typically have lower investment thresholds, which allow investors to diversify their portfolio more easily.
- DST’s also allow investors to enjoy the benefits of owning real estate without the headaches that come from actively managing real estate.
When a DST 1031 exchange occurs, there are certain fees associated with the transaction. To have an idea of which fees are included in DST 1031 exchange transactions here is a list of DST fees:
- Selling commissions. Registered investment advisors and registered representatives that are licensed to broker DST investment sales must be paid a commission for their efforts. It is common for third party selling groups to play a part in DST exchanges, since most sponsors are not licensed through their own platform.
- Acquisition fees. This is also known as a “finder’s fee.” An acquisition fee goes to the sponsor for his efforts in identifying the property, negotiating the sale, and ultimately acquiring the asset in the DST.
It is good to plan ahead knowing the risks and fees involved in a Delaware Statutory Trust 1031 exchange. Each DST program will operate under different circumstances which means the risks and fees will also differ, so determine which path will best suit your goals. If you’d like to learn more about the fees and risks of any specific DST, these can be found in detail in the DST’s offering memorandum. Contact us today to request an offering memorandum for any offer listed on our platform.
If you’ve owned rental real estate in the past, you know that property management is time-consuming and stressful. Some investors find that it can be a major relief to hand over the management and the decision-making responsibilities to a professional team of experienced managers. With that being said, it is always important to do proper due diligence on the sponsor of the DST as well as the manager of the property.
Though there are some fees and risks associated with DST’s, there are investors who have found its financial outcomes rewarding. If you’d like to make DST’s work for you, create a free investor account at 1031 Crowdfunding today.
