Category : 1031 Exchange

Growing Your Wealth with Tax-deferred Exchanges Via IRC § 1031

  • Robert L. Boggess
  • June 14, 2018

Retire Tax Savings

Many real estate investors buy property as a long-term wealth-building strategy. They start investing small, then reinvest to grow their portfolio. Investment property provides passive income and may create legacy wealth for investor and their family. Investors buy property as a vehicle to create wealth from cash flow and appreciation, but taxes are also a big piece of the puzzle especially when one sells their property.

Real estate has a number of built-in potential tax advantages that are unavailable in most other investments, such as the ability to depreciate the building portion of the property, which can effectively reduce your annual income tax while you are in operation mode. And, when you sell you may be able to use other tax strategies to defer capital gains taxes resulting from the sale.

Defer your Capital Gains Taxes at the Time of Sale

The IRC §1031 exchange allows the investor to defer taxes on the capital gain to a more opportune time. A 1031 exchange allows the investor to keep more money in their pocket and use it as additional purchasing power on their next transaction. It’s like a gift from the government. The 1031 exchange can be a vehicle that can continue to grow your wealth.

Get Out of Management (Retire) With Turnkey DST Properties

In this time of unknown economic factors, diversification may provide more stability. And, “like-kind” for a 1031 exchange has a broad interpretation that may allow investors to exchange a warehouse for an interest in an office building, a shopping center, or an energy production property, as well as a different geographical area than your current property. Such diverse properties are often available as Delaware Statutory Trusts “DST”, or DST properties, in which you own a fractional interest with others.

If you are ready to hang up your management duties, using a 1031 exchange allows you to move from management into a professionally managed, institutional quality DST properties that provides passive income.

 

1031 Exchange Rules

Requirements to qualify for a 1031 exchange.

Sell and buy the right type of assets; the property is held for business or investment.

  • The Investor must acquire title to the replacement property in the same manner as title was held in the relinquished property.

Requirements to fully defer 100% of capital gains tax.

  • Investor must reinvest all proceeds from the sale of the relinquished property(ies).
  • Investor must acquire debt equal or greater to debt paid off from the relinquished property (or replace the debt with additional cash)

Time frames to complete exchange

  • Replacement property(ies) must be identified within 45 days calendar days of the relinquished property sale date.
  • The exchange must be completed by the earlier of:
  1. 180 calendar days from the date of the relinquished property closing; or
  2. The due date of the investor’s federal income tax return, together with all extensions.

Identification rules for replacement properties:

  • 3-Property Rule—up to three (3) properties can be identified without regard to their fair market value.
  • 200% Rule—any number of properties can be identified, as long as their combined fair marketing value does not exceed 200% of the fair market value of all relinquished property.
  • 95% Rule – any number of properties may be identified, as long as the investor closes on 95% of the fair market value of the identified properties.

Tax-deferred exchanges allow investors to defer capital gain taxes as well as potentially facilitate portfolio growth and return on investment.

 

*  Income and net worth restrictions apply.

  1. Except where noted, the client must be an Accredited Investor as defined in Regulation D under the 1933 Act (i.e., $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly two of the last three years).
  2. IRS tax code is subject to change and the IRS could disallow some or all of the benefits discussed above.  The above numbers are for specific cases. Past performance  is not guaranteed.

 

IREXA® Financial Services / Wealth Strategies collaborates with CPAs, attorneys, and other tax planning professionals to assist clients with tax mitigation strategies.  IREXA® and Great Point Capital, LLC are not tax professionals or attorneys. IREXA® only provides client tax mitigation strategies through, and with the approval of, the client’s professional counsel. You should review any planned financial transaction that may have tax or legal implications with your personal tax or legal representatives or advisors.

Securities offered through Great Point Capital, LLC, Member FINRA/SIPC, 200 W Jackson Blvd #1000, Chicago, IL 60606, telephone (312) 356-4872. IREXA® Financial Services / Wealth Strategies is not affiliated with Great Point Capital, LLC

 

Credit Tenant Loan: Using a 1031 Exchange for a Cash-out Solution

Credit Tenant Loan

The Credit Tenant Loan 1031 exchange strategy focuses on the potential of obtaining the maximum cash out of a real estate transaction. It relies on a 1031 exchange, but the exchange is only a vehicle for providing cash from the sale of the relinquished property.

Some property owners want to sell their property, cash-out, and pay the taxes rather than complete a 1031 exchange. Yet, most owners also want to reduce their taxes on capital gains from the sale. With a credit tenant loan, they may be able to do both. For this 1031 exchange strategy to be effective, the relinquished property should have limited or no debt.

The Credit of the Retail Tenant is the Collateral

The replacement property is purchased all cash via a 1031 exchange. Some time after the replacement property purchase has closed, the property is refinanced. The type of loan that is used is specific to the type of tenant and length of the lease. It is called a Credit Tenant Loan (CTL). With a CTL, collateral for the loan is not the property, it is the credit strength of the tenant. The better the tenant’s credit, the better the loan terms.

The credit tenant is typically a national company with an institutional credit rating of BBB- or higher, and the primary term of the lease should be close to 20 years or more. Replacement properties with institutional quality tenants and leases of sufficient length can make this strategy viable and are available. With a lease that is close to twenty years, Credit Tenant Loans can exceed 80% Loan to Value (LTV). Some LTV approach 90%. The loan is fully amortizing over the remaining term of the lease.

A shorter-term lease will reduce the LTV on the loan, because the length of the loan is the same as the remaining original term on the lease. If the loan/lease term is too short it can adversely affect the viability of this strategy. The loan has a one-to-one debt coverage ratio which means the loan payment is equal to the rents received from the tenant. In a loan, as leverage increases, cash flow decrease. Since the investment produces no cash flow, the loan proceeds are maximized.  Because this is a loan, it is a non-taxable event. And, since the loan is based on the tenant’s credit strength, mortgage risk to the investor is minimal.

Tax Considerations

One should note:  a CTL loan can create phantom income, which is taxable. Phantom income is effectively equal to the reduction in principal balance during the tax year. That is offset by the fact there is no cash flow from the property with which to pay tax liability. That’s why we recommend to investors, it is extremely important to evaluate the positives and negatives relative to the investor’s particular needs. Consulting with your CPA is recommended.

Cash and Equity

The net effects are very tax-efficient. By using a 1031 exchange in combination with a Credit Tenant Loan strategy, one can achieve a higher level of cash from the sale of relinquished property than by directly paying taxes. Another benefit of this strategy is that the loan on the property will be paid down according to the mortgage, which will allow gains from this property to be realized again.

 

IREXA® Financial Services / Wealth Strategies collaborates with CPAs, attorneys, and other tax planning professionals to assist clients with tax mitigation strategies.  IREXA® and Great Point Capital, LLC are not tax professionals or attorneys. IREXA® only provides client tax mitigation strategies through, and with the approval of, the client’s professional counsel.

Securities offered through Great Point Capital, LLC, Member FINRA/SIPC, 200 W Jackson Blvd #1000, Chicago, IL 60606, telephone (312) 356-4872. IREXA® Financial Services / Wealth Strategies is not affiliated with Great Point Capital, LLC. 

 

1031 dst properties

Options When Members of a Partnership or LLC Want to Cash Out

A partnership or limited liability company (LLC) cash-out 1031 exchange occurs when one or more of the partners or members want to cash-out of the investment property to be sold instead of re-investing all of the proceeds from the sale of the relinquished property into the replacement property. One popular method is a Drop and Swap.

 

Assuming this fact scenario, ABCD, LLC has four members, one of which wants to cash out a 25% interest and not participate in the 1031 exchange, an example of a drop and swap transaction would be one in which:

(1) ABCD, LLC would first distribute a 25% undivided interest in the relinquished property to Mr. C in liquidation of his ownership interest in ABCD, LLC, leaving the property being owned 75% by ABCD, LLC and 25% by MR. C as tenants-in-common,

(2) ABCD, LLC would sell its 75% interest in the Property and Mr. C would sell his 25% interest in the Property,

(3) Mr. C would keep his cash and pay tax on his sale transaction, and

(4) ABCD, LLC would engage in a 1031 exchange and purchase new replacement property.

 

Or, the same structure can be completed in a different order using a Swap and Drop. An example of a swap and drop transaction would be one in which:

(1) ABCD, LLC sells the Property and engages in a 1031 exchange by buying new replacement real property,

(2) ABCD, LLC then distributes a 25% interest in the new property to Mr. C in liquidation of his ownership interest in ABCD, LLC (resulting in the new property being owned 75% by ABCD, LLC and 25% by Mr. C as tenants-in-common), and

(3) Mr. C then sells his 25% interest in the new property, either to a third party or to the remaining members of ABCD, LLC, and pays tax on his sale transaction.

 

Structuring a partnership/LLC cash-out transaction is not simple or straightforward. It is important for anyone contemplating one to obtain the advice of an experienced tax professional familiar with structuring 1031 exchanges.

 

 

 

* Partnerships are excluded from effecting a 1031 exchange per IRC section 1031 (a)(2)(D). Consult your tax and legal counsel for more information about partnership owned property.

IREXA® Financial Services / Wealth Strategies collaborates with CPAs, attorneys, and other tax planning professionals to assist clients with tax mitigation strategies.  IREXA® and Great Point Capital, LLC are not tax professionals or attorneys. IREXA® only provides client tax mitigation strategies through, and with the approval of, the client’s professional counsel.

Securities offered through Great Point Capital, LLC, Member FINRA/SIPC, 200 W Jackson Blvd #1000, Chicago, IL 60606, telephone (312) 356-4872. IREXA® Financial Services / Wealth Strategies is not affiliated with Great Point Capital, LLC. 

 

Deferring Capital Gains Taxes

Capital Gains Tax

The 1031 exchange can be a powerful wealth-building tool available to taxpayers who have real estate investments. It has been a major part of the successful strategy of many real estate investors. At IREXA, we help you locate the right replacement property, then implement further investment strategies to mitigate your overall tax liability.

Since capital gains tax on your profits could run as high as 15% to 30% when state and federal taxes are combined, why not take the necessary steps to avoid this loss? A big tax bite could wipe out money you need for further investments. Review our current inventory here www.irexa1031.net.

Internal Revenue Code §1031, the tax-deferred exchange, allows a taxpayer to sell investment property and replace it with a like-kind property. Capital gains on the sale of this property are deferred as long as the IRS rules are followed. This is a wise tax and investment strategy as well as an estate planning tool. In theory, an investor could continue on investment property until death, potentially avoiding them altogether.

 

 

 

IREXA® Financial Services / Wealth Strategies collaborates with CPAs, attorneys, and other tax planning professionals to assist clients with tax mitigation strategies.  IREXA® and Great Point Capital, LLC are not tax professionals or attorneys. IREXA® only provides client tax mitigation strategies through, and with the approval of, the client’s professional counsel.

Securities offered through Great Point Capital, LLC, Member FINRA/SIPC, 200 W Jackson Blvd #1000, Chicago, IL 60606, telephone (312) 356-4872. IREXA® is not affiliated with Great Point Capital, LLC. 

Informed Investors Defer Tax Forever*

Capital gains tax on the sale of your investment property could run as high as 15% to 30% when state and federal taxes are combined. Why not take the necessary steps to avoid this loss? A big tax bite could wipe out money you need for further investments. With an IRC section 1031 exchange, the saying, “Nothing is certain but death and taxes,” is only half true for an informed taxpayer who is planning the sale of an investment or business property.

Depending upon the taxpayer’s situation, the type of property relinquished and the characteristics of the replacement property, other aspects of the 1031 exchange may be involved. Its completion may become complex and experts should always be consulted. This is not a task for a do-it-yourself investor.

tax savings, 1031 exchangesUsing the power of the 1031 exchange to build and preserve wealth and assets, generate cash flow from investments, restructure, diversify and consolidate real estate holdings is the right of every owner of investment property in the United States. American taxpayers should never have to pay capital gains taxes on the sale of their investment property if they intend to reinvest those proceeds in more investment property.

The 1031 Exchange can be a powerful wealth-building tool available to taxpayers. It has been part of the success strategy of financial advisors and real estate investors. Section 1031 of the Internal Revenue Code, the tax-deferred exchange, allows a taxpayer to sell income, investment, or business property and replace it with like-kind property. View 1031 replacement properties now.

*Capital gains tax on the sale of this property is deferred or postponed as long as the IRS rules are meticulously followed. This is a wise tax and investment strategy as well as an estate planning tool. In theory, an investor could continue deferring capital gains on investment property until death, potentially avoiding them altogether.

 

 

 

 

 

IREXA® Financial Services / Wealth Strategies collaborates with CPAs, attorneys, and other tax planning professionals to assist clients with tax mitigation strategies. IREXA® and Great Point Capital, LLC are not tax professionals or attorneys. IREXA® only provides client tax mitigation strategies through, and with the approval of, the client’s professional counsel.

Securities offered through Great Point Capital, LLC, Member FINRA/SIPC, 200 W Jackson Blvd #1000, Chicago, IL 60606, telephone (312) 356-4872. IREXA® is not affiliated with Great Point Capital, LLC. 

The Delaware Statutory Trust as a Real Estate Investment

Delaware Statutory Trusts (DSTs ) have emerged as form of ownership as an alternative to Tenants in Common (TIC).  Investors who hold highly appreciated real estate assets may be at a stage of their lives when they are seeking more passive investment opportunities. Passive, professionally managed ownership may allow them to concentrate on other opportunities in life that they have always been passionate and now have the time to pursue.

Passive Investment Characteristics

Rather than deal with the Terrible T’s consisting of toilets, trash, and tenants many long-time investors are in search of the Terrific T’s which give them time, travel, and teeing off.

To accomplish these goals, some seasoned investors have turned to real estate investment strategies such as buying real estate with ownership forms like, Tenants in Common (TIC) property or Delaware Statutory Trust (DST) property via an Internal Revenue Code (IRC) section 1031 exchange, thereby deferring tax on the relinquished property’s capital gain.

TIC 1031 and DST 1031 exchanges have long permitted investors to own institutional quality, professionally managed properties occupied by established tenants. They are offered on a turnkey basis with financing and management in place. Most investors have been able to accomplish these forms of ownership in a tax-deferred manner through a 1031 exchange.

Delaware Statutory Trusts 

Though the Delaware Statutory Trust (DST) is not a new investment vehicle, inherent weakness in the structure of the TIC form of ownership discovered during the Financial Crises of 2008, has made the DST a viable investment vehicle for passive 1031 exchange investors as well as direct investors.

DSTs are derived from Delaware statutory law as a separate legal entity created as a trust, which qualifies under IRC section 1031 as a tax-deferred exchange. In 2004, the IRS blessed DSTs with an official Revenue Ruling about how to structure a DST that will qualify as replacement property for 1031 Exchanges.

The Revenue Ruling (Rev. Ruling 2004-86) permits the DST to own 100 percent of the fee-simple interest in the underlying real estate with no IRS imposed limitation as to the number of investors who may participate as beneficial owners with a fractional interest in the property.

Investors who are familiar with TIC investment strategies may see some similarities to the DST concept; however, it is important to understand the differences. While a TIC may have up to 35 investors, each owning an undivided, pro-rata share of title to the property, a DST may have many more investors, with each investor owning a beneficial interest in the trust which, in turn, owns the underlying asset. A major benefit is that more investors means lower investment requirements. DSTs are only available to accredited investors.*

   Student Housing

How DSTs Work

The real estate sponsor firm acquires the property under the DST umbrella and opens up the trust for potential investors to purchase a beneficial interest. The investors may either have their accommodator deposit their 1031 exchange proceeds into the DST or the investor may purchase an interest in the DST directly.

DST investors may benefit from a professionally managed, institutional quality property. The underlying property could be a 300-unit apartment building, a 50,000 square-foot medical office property or a shopping center leased to investment-grade tenants. The possibilities are numerous.

Most DST investments are assets that the average individual accredited investor, but for the opportunity to buy in to a fractional share, could not otherwise afford. However, by joining with other investors, they can acquire this type of asset.

DST vs TIC Ownership

There are two benefits that the DST structure offers over the TIC concept.  One is that because a DST is not limited to 35 investors, the minimum investment may be much lower, often as low as $100,000.  The second advantage is that in a DST the lender makes only one loan to one borrower, the DST Sponsor.

In a TIC investment there may be up to 35 separate signers to the loan.  The DST gives the lenders greater security because the lender has fully qualified the sponsor, who is the underlying responsible party.

DSTs Pose Risks

DSTs are not without risks. As with any type of real estate investment, investors may be subject to high vacancy rates and loan defaults. DSTs are also not sole-ownership investments. A DST is a passive investment made up of multiple owners and ultimately controlled by the master tenant, the sponsor. It is important for investors who may be considering the DST strategy to consult with an experienced investment professional and to obtain competent legal advice and tax advice.

Upon thorough evaluation, the DST structure may be a viable investment alternative for qualified real estate investors. But only your tax adviser and lawyer can tell you if it’s right for you.

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*Accredited Investors are individuals whose net worth is more than $1 million and / or earn annual income of $200,000. Accreditation for entities means the entity’s assets are more than $5 million and / or each entity member must be an accredited investor as an individual.

IREXA Financial Services / Wealth Strategies provides Strategic Tax Planning to owners of real estate. We assist clients by planning for the future. Our goal: To help you keep more of what you make by only paying the taxes you are legally obligated to pay.

Robert L. Boggess, CCIM is the President/Chief Strategist with IREXA Financial Services / Wealth Strategies. Contact Bob at 206-548-1031, or rboggess@irexa.net.

 

IREXA® Financial Services / Wealth Strategies collaborates with CPAs, attorneys, and other tax planning professionals to assist clients with tax mitigation strategies. IREXA® and Great Point Capital, LLC are not tax professionals or attorneys. IREXA® only provides client tax mitigation strategies through, and with the approval of, the client’s professional counsel.

Securities offered through Great Point Capital, LLC, Member FINRA/SIPC, 200 W Jackson Blvd #1000, Chicago, IL 60606, telephone (312) 356-4872. IREXA® is not affiliated with Great Point Capital, LLC. 

1031 like-kind exchange, financial advisor, investing

Make the Most from Real Estate Investments with a 1031 Exchange

Defer Tax on Gain

You own commercial real estate with all of its rights and responsibilities. Perhaps you want to cash in on the equity you have built up in the last decade or you are through dealing with tenants. You’re ready to create income without having to work; that’s retirement. Some tactics that may maximize your return are: get out of the market as close to the top of the cycle as you can, defer taxes on capital gains, redeploy gains through an IRC §1031 Like Kind exchange, into property that provides passive income from a professionally managed property as well as diversification of your portfolio.

Market cycle

A real estate market cycle lasts about 10-12 years. As an example, in the greater Seattle area, we are at or near the top of the cycle. Consider the cycle characteristics: seller’s market, demand is high, inventory is low creating bidding wars and rising prices.  Your risk tolerance, time horizon, and opportunities factor into a decision to sell. As a commercial real estate professional in Seattle for over 30 years, I recognize that now is at or near the top of our cycle. If you are considering selling, it may be time.

Like-Kind exchange

You are re-evaluating how real estate fits into your portfolio and you know if you don’t take advantage of the 1031 exchange, a big tax bill may be due. But how do you find the same kind of property with the same level of debt to equity? And, how do you diversify if you have to buy the same kind of property? The rules seem daunting.

Let a Professional Manage Your Property

A Delaware Statutory Trust (DST) offers opportunities to convert the capital gains from your commercial property sale and diversify real estate holdings by purchasing an interest in one or more qualifying properties with similar equity and debt ratios. A DST is an alternative for replacement property for accredited investors seeking to defer capital gains taxes through the use of a section 1031 tax-deferred, like kind exchange.  Review our 1031 DST Properties here.

In a DST, investors own a fractional interest in one or many institution quality, professionally managed, commercial property such as retail malls, multi-family housing, and industrial properties in diverse geographical locations. The DST may provide cash flow income, tax benefits, appreciation, and reduced risk through diversification. A DST allows you to redeploy your money. You keep your hard-earned money working for you.

Investing can seem complicated and working through the intricacies of the Internal Revenue Code overwhelming.Complexity is the enemy of execution: inertia, decision fatigue, and less complicated alternatives may impede long-term strategy. That is why building a relationship with a proven, trusted financial advisor who understands the tax-saving benefits of investing and can walk you through your investment options is so important. An experienced reliable professional will find the most tax-efficient strategies to help you keep more of what you make to reach your financial goals.

 

 

IREXA® Financial Services / Wealth Strategies collaborates with CPAs, attorneys, and other tax planning professionals to assist clients with tax mitigation strategies. IREXA® and Great Point Capital, LLC are not tax professionals or attorneys. IREXA® only provides client tax mitigation strategies through, and with the approval of, the client’s professional counsel.

Securities offered through Great Point Capital, LLC, Member FINRA/SIPC, 200 W Jackson Blvd #1000, Chicago, IL 60606, telephone (312) 356-4872. IREXA® is not affiliated with Great Point Capital, LLC. 

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* IREXA® Financial Services / Wealth Strategies, Great Point Capital, LLC and Abacus Insurance Advisors, LLC do not provide legal or tax advice.

**Investing has risks; performance is not guaranteed.   Securities offered through Great Point Capital, LLC (GPC) (member FINRA/SIPC). Robert L. Boggess is an independent representative of Great Point Capital, LLC. IREXA®  Financial Services/Wealth Strategies is not an affiliated company with the Great Point Capital, LLC or CPAAcademy.org. No offer to buy or sell securities is being made. Such offers may only be to qualified accredited investors via private placement memorandum. Neither GPC nor IREXA® are tax advisors. Prospective strategies and products used in any tax advantaged investment planning should be reviewed independently with your tax and legal advisors. Investments are not guaranteed or FDIC insured and risks may include but are not limited to complete loss of principal investment. Risks detailed in a private placement memorandum should be carefully reviewed, understood and considered before investment. Changes in the tax code and other regulatory revisions could have a negative impact upon strategies developed and recommendations made.

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