Webinar Recap: Practical Application of 1031 Exchanges in 2022
In our March webinar, attorney Joe Cobb was joined by Kyle Williams, vice president of investment property exchange services at IPX1031, to discuss what you need to know about 1031 exchanges. These transactions enable you to sell an existing investment property and use all the equity – not just the after-tax equity -- to buy a new “like-kind” investment property for equal or greater value.
The strategy can be used for most property types provided they are “held for productive use in a trade or business, or for investment purposes” including:
Retail and restaurant
Single- and multi-family
Raw land
30-year leaseholds
Office space
Building wealth with 1031 Exchanges
1031 Exchanges create good financial upside for investors by deferring:
Capital Gains Taxes (15-20% Fed, 0% State)
Depreciation Recapture (25% Fed, 0% State)
Net Investment Income Tax (3.8%)
Executing a 1031 Exchange
We recommend you hold the property for at least one and preferably two years before and after each exchange. The timeline for 1031 exchanges looks like this:
Open your exchange before the close of escrow, which is considered "day zero".
Identify properties to be purchased within 45 days after the transfer of the Relinquished Property. You can identify three properties of any value, or – if the total fair market value doesn’t exceed 200% of the FMV of the relinquished asset/s. If your identified properties exceed the 200% rule, you must acquire at least 96% of the value of all identified properties.
Close on the replacement property within 180 days.
Using a Delaware Statutory Trust
A Delaware Statutory Trust (DST) holds institutional-quality real estate of a specific type that is acquired and managed by a third-party “sponsor”. The SEC requires DST investors to be accredited, which includes having a net worth above $1 million (excluding the value of your primary residence) or income more than $200,000 (for individuals) or $300,000 (married filing jointly) for the last two years. DSTs appeal to investment owners because they deliver:
Passive cash flow
Portfolio diversification
Low closing risk
Relatively low premiums
Estate planning advantages
Choosing a Qualified Intermediary
Many investors elect to work with qualified intermediaries (QI), like IPX 1031 to hold exchange funds. Here are three things to look for in a QI:
Security: Look for a bonded provider with a third-party written guarantee of funds and sufficient errors and omissions coverage.
Service: Seek a QI that offers complimentary consultations, the full range of QI services, and has a good track record of meeting deadlines, which can be rushed.
Experience: Make sure the team includes Certified Exchange Specialists®, and attorneys and staff who are experienced in 1031 transactions; and reverse/build-to-suit capabilities.
This information doesn’t constitute investment, financial or legal advice. Always check with an attorney or investment expert before making decisions.
As ever, reach out if you have any questions.
