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Information on 1031 Tax-Deferred Exchanges

In disposing of appreciated real estate, generally, there are three basic limited options:

I. Sell the property and pay taxes – For many, this is an unacceptable option as upwards of 30% or more of profit may be due in taxes in addition to a recapture of depreciation at a 25% rate and 3.89% Medicare Tax.

II. Sell the property and exchange into another property – While this is an option, many people are tired of property management and headaches of direct ownership.

III. Sell the property and exchange into owning partial ownership of commercial properties which are professionally managed. This is a form of passive ownership where owners have no management responsibilities and receive potential monthly income and current income tax benefits and potential appreciation of the properties.

Our office has been involved in over 400 securitized passive income 1031 programs since 2004.

A Delaware Statutory Trust (DST) is set up to be exchanged repeatedly with a step-up in the tax basis upon death and no taxes to heirs until redemption.

While income will vary based on the property and financing, investor / owners have the potential to net “take-home” annual income historically ranging from 4%- 6.5% paid monthly directly deposited to your checking – all without management.

This income of “net take-home income” has the potential to be greater than the net income for one’s current property. Analysis of the most recent income tax return 1040 can determine the current “net” income one is realizing.

See Your Federal Tax form 1040

  • Review Schedule E
  • See Gross Rental Income Less: Expenses
  • Line 12: Add Mortgage payment in additional to interest Line 18: Depreciation should not be considered.
  • Total Expenses from Gross Income to determine “Net Income” Divide Equity by Net income to show Net “Take Home”
  • If the number is 5% or more, generally it’s good income property. If not, it’s time to consider other options.
  • If you are considering a 1031 with a DST, you must meet one of two financial suitability requirements to be an Accredited Investor.
  1. Income: For single, income for the last two years and current year of $200,000; for married, $300,000.Or,
  2. Net worth: $1 million net worth exclusive of home & furnishing STEPS in a 1031 Tax-Deferred DST Exchange Process
    1. Meet with financial advisor to consider all your options. (See San Diego
    Union Tribune article, “Own Investment Real Estate?”)
    2. If a 1031 is the selected option:
    3. Check with qualified realtor for estimated property value
    4. Consult with your accountant to provide a tax analysis (in writing) reflecting the amount of taxes which will be due if an exchange is not elected. Note: Generally, up to 30% or more lost in capital gain taxes, CA income taxes recapture of depreciation, etc.
    5. Contact a realtor and list property and alert your realtor that you are considering a 1031.
    6. Your realtor will assist in setting up escrow.
    7. Soon as you have a buyer, you must establish an Accommodator / Qualified Intermediary account (Exeter 1031 Exchange Services, Inc., for example).
    8. When escrow closes, net funds after commission and closing costs are wired to your QI account.
    If a QI account is not set up and escrow closes and you receive the funds, you will pay the taxes. Assuming your funds are now in your QI account…
    9. You now have 45 days to ID replacement properties and another 135 days which close escrow. This is where the experience financial advisor can provide guidance in selecting your replacement property.
    10. Note: DST closing can generally be completed within an approximately two-week period or less depending on availability.
    11. We can meet with you during the process to review and select a diversified portfolio of property sponsors or properties. Due to regulatory requirements, there are concentration restrictions of amount which can be allocated to a sponsor or property.
    12. If there are remaining funds after maximum DST properties have been identified, you can consider purchasing another property which you own outright or consider investing in other programs which may provide other tax deductions.
    13. Other options can be considered such as charitable planning, for example, which may also provide large first year tax write-off and cash flow potential to family with ultimate beneficiary, a 501(c)(3) organization.

For additional information, we have available 1031 Exchange and Delaware Statutory Trust (DST) information. Also, we have available “A Guide to 1031 Exchanges©” created by Exeter 1031 Exchange Services, LLC for your review and education.

We provide an initial complimentary (informal) meeting to discuss the concept, answer and questions you may have – including a review of your most recent income tax return to determine if your property is a viable candidate for a 1031 Tax-Deferred Exchange or other options.

It is important to note that DST investing is subject to specific eligibility criteria, and only individuals who meet the definition of an accredited investor are permitted to participate.

DST 1031 properties are only available to accredited investors (typically defined as having a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last two years; or have an active Series 7, Series 82, or Series 65).  Individuals holding a Series 66 do not fall under this definition) 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. Before considering a DST investment, it is crucial to evaluate your eligibility as a qualified investor. Our team is committed to assisting you in this process, ensuring that you meet the necessary requirements to participate in DST opportunities. Additionally, we are here to address any questions you may have and provide detailed information to guide your investment decisions.

Please be aware that DST investments involve risks and considerations which include but are not limited to substantial fees and expenses, inability of the DST to actively manage the property, strict timing limitations and risk of not meeting requirements for 1031 exchange tax treatment, and other negative tax consequences. 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, lack of liquidity with restrictions on ownership and transfer. Potential cash flow, returns and appreciation are not guaranteed and could be substantially lower than anticipated. Diversification does not guarantee profits or protection against losses.

Additional risks and considerations related to investing in 1031 DST commercial real estate include, but are not limited to, general real estate risks, financing risks, tax risks, interest rate risk, management risks, operating risk, market risks such as supply and demand, changing market demographics, tenant turnover, tenants inability to pay rent, acts of God such as earthquakes, floods or other uninsured losses. There are also potential risks relating to the trust structure and the potential for adverse changes in laws and regulations. This material is not to be interpreted as tax or legal advice.

We look forward to assisting you. Please contact us to set up your complimentary meeting, phone call or Zoom.