by Matt McFarland
Any investor considering selling investment real estate will undoubtedly consider a 1031 exchange.
A 1031 exchange refers to the IRS code which allows significant tax advantages for investors. How? When you sell an investment property and make a profit, you normally have to pay capital gains tax. A 1031 exchange allows you to sell your real estate investment and reinvest the proceeds in a “similar” property, which defers capital gains and other related taxes. This does not mean that you eliminate any of these taxes, but that you can defer them to a later date.
However, any investor who has done a 1031 exchange knows that one of the biggest hurdles to overcome is the many time constraints and tight closing windows that the IRS imposes when it comes to investing in exchanges. of the same nature. The entire 1031 exchange process must be completed within 180 days. The countdown begins on the first day after your derelict property has been sold and the funds are blocked with a Qualified Intermediary (QI). By the way, it is essential that you never hold the proceeds of the sale apart from an IQ. If you touch the funds at any time during the process, you eliminate your eligibility for a 1031 exchange and you must pay all capital gains and other related taxes.
As a professional 1031 exchange expert, I can tell you that it is the initial 45-day identification period that causes the most stress, as an investor is required to formally identify the property(ies) that he intends to buy within about 6 weeks. Specifically, in order to avoid any tax liability, you must identify an asset or assets of equal or greater value to the abandoned property. You can identify up to 3 separate properties regardless of their value (3-property rule), or you can identify an unlimited number of properties that do not exceed more than 200% of the value of the abandoned property (200-percent rule). %).
Here is a brief summary of the rules of the 1031 exchange that investors should keep in mind when considering the sale of investment property:
The entire 1031 exchange process must be completed within 180 days
Day 1 – Sell your property; the products are escrowed with a qualified intermediary (QI)
Day 45 – Identify one or more properties; you must notify your QI of the identified goods
Day 180 – Close on new property; you must close within 180 days of the first sale
Maintain an equal or greater amount of equity
Maintain an amount equal to or greater than the debt
Plan ahead to reduce identification stress by 45 days
One of the best ways to ease the stress of this short window of time is to start researching and screening potential similar properties before you officially close your derelict property and the 45-day deadline begins to roll.
With respect to Delaware Statutory Trust properties, the underlying real estate that is part of a particular offering is acquired and held by the trust before it is available to 1031 stock investors to consider as an option. This “pre-packaged” element of DSTs offers investors who are in the process of completing a 1031 exchange the luxury of a quick and seamless closing of their purchase of a DST property.
Another great benefit of DSTs for 1031 Exchange investors is that they can be a great backup or contingency plan. Real estate transactions collapse all the time, and if your replacement property in a 1031 exchange collapses for any number of reasons, you could be in for a tough spot. Using a DST as an “identified” property is a great contingency plan if your initial deal fails.
However, it is important to remember that even if the real estate sponsorship company has completed its due diligence and acquired a particular property for one of its DSTs, this does not mitigate the need for an investor to conduct their own due diligence. on the different DSTs.
Be sure to check out the current DST properties offered on the market www.kpi1031.com.
All 1031 Exchange investors, with the assistance of their registered Kay Properties representative, will evaluate the various opportunities to determine the best potential solution for their particular situation and/or circumstance.
When is the best time to start the DST screening process?
In most cases, the best time to begin the screening process is approximately 30 days before your abandoned or downstream property is scheduled to close. The reason for this is simple: DST investments have a limited lifespan or a limited time during which they are “open” for investment. DST offers are capped at a specific value and as soon as the last dollar is invested, that particular DST offer is no longer available for further investment.
In my experience, DST offers are usually available for purchase for around 1-3 months. In many cases, it would be a poor allocation of their time to start the screening process 3-6 months later, as most of the opportunities considered will be sold by the time they have the capital to invest in their 1031 exchange. Within 30 days, many of the opportunities will likely be viable options to consider as a reservation can be made for their allowance. In a perfect scenario, an investor has decided exactly which DSTs he is buying before closing his abandoned property. This gives them the ability to quickly close their DST investments as soon as funds from the sale become available and successfully complete their 1031 exchange just days after their 45-day identification period begins.
Keeping these points in mind should not only significantly alleviate most of the stress associated with a 1031 exchange, but they will also help you potentially start building cash flow immediately from their investments (a luxury afforded by buying quickly transparency of a DST compared to a traditional real estate transaction, which can take months). For more information on the 1031 exchange and the DST screening process, please contact your registered Kay Properties representative or visit www.kpi1031.com for more resources.
ABOUT Kay Properties is a national investment company of the Delaware Statutory Trust (DST). The www.kpi1031.com platform provides market access to DSTs from over 25 different sponsor companies, custom DSTs only available to Kay clients, independent advice on DST sponsor companies, comprehensive due diligence and verification of each DST. Members of the Kay Properties team collectively have over 115 years of real estate experience, are licensed in all 50 states, and have participated in over $15 billion in DST 1031 investments. For an overview of property types DST that investors use for estate planning purposes, please visit the Kay Properties Marketplace at www.Kayamag.com. This document does not constitute an offer to sell or a solicitation of an offer to buy any securities.