Many investors are familiar with the concepts and perhaps the benefits of 1031 exchanges, but they may be concerned about additional work and the unknown of new properties. There are options for 1031 exchanges which can almost eliminate management, produce a consistent return and provide the tax deferring benefits of an exchange.

According to Investopedia, ‘…1031 exchange (also called a like-kind exchange or a Starker) is a swap of one investment property for another. In effect, you can change the form of your investment without (as the IRS sees it) cashing out or recognizing a capital gain. That allows your investment to continue to grow tax-deferred.’

Exchange Options

The IRS has specific rules which govern 1031 exchanges. Some of those rules relate to the time frame in which a like-kind investment/property needs to be identified along with how the proceeds from the sale of the property need to be managed. Be sure to understand these rules prior doing a 1031 exchange.

As a young investor, I always thought if I wanted to 1031 exchange I would have to purchase and manage a larger property.  However, I was introduced to TIC (Tenant in Common) about 15 years ago and thought, ‘What a fantastic option.’  There is also an additional vehicle called a DST (Delaware Statutory Trusts) that has gained popularity.  Let’s explore them both.

Tenant in Common 1031 Exchange 

The IRS created TIC (Tenant in Common) in 2002.  Here are a few of the basic guidelines for a TIC:

  • Number of co-owners can’t be greater than 35

  • Regardless of investment size, all co-owners have equal voting rights

  • Property is held as Tenants in Common, not as partners

  • Each co-owner must be able to transfer their interest without undue restrictions

  • Loans for the property are under each co-owner (often non-recourse and assumable loans)

You may have noticed that one of the guidelines is that all owners, regardless of investment size, have equal voting rights.  According to Realtymogul.com, this caused an issue getting consensus during the Great Recession and sent many properties into foreclosure.  Banks then became much more hesitant to loan on a property in the TIC structure.

Delaware Statutory Trust 1031 Exchange

2004 welcomed in the DST (Delaware Statutory Trust).  Here are a few of the basic guidelines for the DST:

  • Not limited to 35 investors

  • Lower investment minimum

  • The lender makes only one loan (to the DST Sponsor)

  • Ownership = a beneficial interest in the trust

A couple of things to watch for when looking for these opportunities are as follows.

According to The Balance ‘The real estate sponsor firm, which also serves as the master tenant, simply acquires the property under the DST umbrella and opens up the trust for potential investors to purchase a beneficial interest.’  It is essential that these real estate sponsor firms don’t ask the investors to fund the properties, they typically acquire the real estate which will help them reduce the risk for the investor for closing the 1031 exchange on time.  Also, find a sponsor firm that has a solid reputation.

We expect to see more of these exchanges become available as the baby boomers want more flexibility with their assets.

 

This content is intended to provide educational information only. This information should not be construed as individual or customized legal, tax, financial or investment services. As each individual's situation is unique, a qualified professional should be consulted before making legal, tax, financial and investment decisions. The educational information provided in this article does not comprise any course or a part of any course that may be used as an educational credit for any certification purpose and will not prepare any User to be accredited for any licenses in any industry and will not prepare any User to get a job. Reproduced by permission from OTAcademy.com click here for Terms of Use: https://www.otacademy.com/about/terms

Education feed

Editors’ Picks

EUR/USD surges above 1.1100 as Trump announces steps against China

EUR/USD is trading above 1.1100, up on the day. President Trump said he orders companies to search Chinese imports for drugs. Earlier he criticized Powell's lack of action. 

EUR/USD News

GBP/USD jumps above 1.2250 on USD weakness

GBP/USD is trading close to the monthly highs above 1.2250 as the US dollar falls following Powell's hint of cutting rates and Trump's angry response. 

GBP/USD News

USD/JPY plummets to ten-day lows below 106 as Trump goes berserk on Twitter

The USD/JPY came under strong selling pressure in the last hour and erased nearly 100 pips as US President Donald Trump's latest rant on Twitter forced investors to seek refuge and ramped up the demand for safe-haven JPY. 

USD/JPY News

Editors’ Picks

EUR/USD surges above 1.1100 as Trump announces steps against China

EUR/USD is trading above 1.1100, up on the day. President Trump said he orders companies to search Chinese imports for drugs. Earlier he criticized Powell's lack of action. 

EUR/USD News

GBP/USD jumps above 1.2250 on USD weakness

GBP/USD is trading close to the monthly highs above 1.2250 as the US dollar falls following Powell's hint of cutting rates and Trump's angry response. 

GBP/USD News

USD/JPY plummets to ten-day lows below 106 as Trump goes berserk on Twitter

The USD/JPY came under strong selling pressure in the last hour and erased nearly 100 pips as US President Donald Trump's latest rant on Twitter forced investors to seek refuge and ramped up the demand for safe-haven JPY. 

USD/JPY News

Powell powerless against Trump's trade wars – US braces for recession, USD set to move

"The most powerful central banker in the world" – is how we and others characterize Fed Chair Jerome Powell. While that may be true – monetary policy is reaching its limits – especially in the face of a trade war.

Read more

Gold gains more than $30, eyes 2019 highs on Trump’s tweet

Gold continues to rise sharply amid concerns about the impact of the escalation in the US-China trade war. The demand for safe-haven assets emerged over the last hours, leading to a rally in the yellow metal. 

Gold News

RECOMMENDED LESSONS

7 Ways to Avoid Forex Scams

The forex industry is recently seeing more and more scams. Here are 7 ways to avoid losing your money in such scams: Forex scams are becoming frequent. Michael Greenberg reports on luxurious expenses, including a submarine bought from the money taken from forex traders. Here’s another report of a forex fraud. So, how can we avoid falling in such forex scams?

What Are the 10 Fatal Mistakes Traders Make

Trading is exciting. Trading is hard. Trading is extremely hard. Some say that it takes more than 10,000 hours to master. Others believe that trading is the way to quick riches. They might be both wrong. What is important to know that no matter how experienced you are, mistakes will be part of the trading process.

Strategy

Money Management

Psychology