Common 1031 Exchange and Delaware Statutory Trust (DST) Misconceptions
It's important to work with a Financial Advisor that is experienced with the 1031 exchange and DST strategy in order to properly review and identify how they may fit in your real estate investment portfolio.
FORT LAUDERDALE, FL, December 04, 2018 -- Even though 1031 Exchanges have been around for a long time (starting with the Revenue Act of 1921, originally legislated as "Section 202(c)"), many real estate investors still have misconceptions around them and the lesser known Deferred Sales Trust (DST) exchange strategy. We regularly get questions and have to clear up misunderstandings for clients, some of which originate from their accountants or attorneys that don't have experience with the exchange strategy. We've selected a few of the most frequent misconceptions and questions we see regularly to dispel here:
1. An exchange is all or nothing:
A lot of investors are under the impression that if they want to use the 1031 exchange strategy they must use all the proceeds from their investment real estate sale in order to qualify. While using all of the proceeds in the exchange is required to defer all capital gains tax liability, you can exclude a portion of the proceeds, just be mindful that you will be required to pay all capital gains first from that excluded portion.
2. Exchanges can be used for any property, including residential, vacation and "flipping":
Only investment real estate qualifies for a 1031 exchange, with that said, any property held for business purpose (i.e. Rental, business premises) for a period of one year qualifies. This excludes your personal and vacation home, as well as short-term home flippers from using the exchange strategy.
3. You can only exchange into another, similar, single property:
CPAs and attorneys that have limited experience with 1031 exchanges often think you have to exchange into another similar (i.e. multifamily rental to multifamily rental or retail to retail only) or single property. When identified correctly a 1031 exchange allows you to select several different replacement properties, regardless of type (as long as still considered qualified investment property), utilizing a DST or multiple DSTs can further expand the diversification and property types by taking advantage of the fractional ownership feature.
It's important to work with a Financial Advisor that is experienced with the 1031 exchange and DST strategy in order to properly review and identify how they may fit in your real estate investment portfolio. 1031 Exchanges and Delaware Statutory Trusts are powerful tools that are widely underutilized by real estate investors and, when used properly, can enhance a portfolio.
Disclaimer: Securities offered through registered representatives of International Assets Advisory, LLC, Member FINRA / SIPC. This material does not constitute an offer to sell nor a solicitation of an offer to buy any security. This material is not intended as tax or legal advice, IRC Section 1031, IRC Section 1033, and IRC Section 721 are complex tax codes, therefore, you should consult your tax and legal professional for details regarding your situation. DST 1031 properties are only available to accredited investors (generally described as having a net worth of over $1 million dollars exclusive of primary residence) and accredited entities only (generally described as an entity owned entirely by accredited individuals and/or an entity with gross assets of greater than $5 million dollars). If you are unsure if you are an accredited investor and/or an accredited entity please verify with your CPA and Attorney prior to considering an investment. There are material risks associated with investing in real estate, Delaware Statutory Trust (DST) and 1031 Exchange properties. These include, but are not limited to, tenant vacancies; declining market values; potential loss of entire investment principal; that past performance is not a guarantee of future results; that potential cash flow, potential returns, and potential appreciation are not guaranteed in any way; adverse tax consequences and that real estate is typically an illiquid investment. Please read carefully the Memorandum and/or investment prospectus in its entirety before making an investment decision. Please pay careful attention to the "Risk" section of the PPM/Prospectus. Apvl 11152018-03
At IAA Wealth Management we specialize in providing personalized wealth solutions across all aspects of financial planning. Our clients include high net-worth families, foundations, private institutions, and professional athletes. With experience in investments, retirement planning, institutional advising, education planning, tax-conscious investing, complex estate planning, risk management, and insurance, we are exceptionally equipped to help your financial plan succeed.
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1. An exchange is all or nothing:
A lot of investors are under the impression that if they want to use the 1031 exchange strategy they must use all the proceeds from their investment real estate sale in order to qualify. While using all of the proceeds in the exchange is required to defer all capital gains tax liability, you can exclude a portion of the proceeds, just be mindful that you will be required to pay all capital gains first from that excluded portion.
2. Exchanges can be used for any property, including residential, vacation and "flipping":
Only investment real estate qualifies for a 1031 exchange, with that said, any property held for business purpose (i.e. Rental, business premises) for a period of one year qualifies. This excludes your personal and vacation home, as well as short-term home flippers from using the exchange strategy.
3. You can only exchange into another, similar, single property:
CPAs and attorneys that have limited experience with 1031 exchanges often think you have to exchange into another similar (i.e. multifamily rental to multifamily rental or retail to retail only) or single property. When identified correctly a 1031 exchange allows you to select several different replacement properties, regardless of type (as long as still considered qualified investment property), utilizing a DST or multiple DSTs can further expand the diversification and property types by taking advantage of the fractional ownership feature.
It's important to work with a Financial Advisor that is experienced with the 1031 exchange and DST strategy in order to properly review and identify how they may fit in your real estate investment portfolio. 1031 Exchanges and Delaware Statutory Trusts are powerful tools that are widely underutilized by real estate investors and, when used properly, can enhance a portfolio.
Disclaimer: Securities offered through registered representatives of International Assets Advisory, LLC, Member FINRA / SIPC. This material does not constitute an offer to sell nor a solicitation of an offer to buy any security. This material is not intended as tax or legal advice, IRC Section 1031, IRC Section 1033, and IRC Section 721 are complex tax codes, therefore, you should consult your tax and legal professional for details regarding your situation. DST 1031 properties are only available to accredited investors (generally described as having a net worth of over $1 million dollars exclusive of primary residence) and accredited entities only (generally described as an entity owned entirely by accredited individuals and/or an entity with gross assets of greater than $5 million dollars). If you are unsure if you are an accredited investor and/or an accredited entity please verify with your CPA and Attorney prior to considering an investment. There are material risks associated with investing in real estate, Delaware Statutory Trust (DST) and 1031 Exchange properties. These include, but are not limited to, tenant vacancies; declining market values; potential loss of entire investment principal; that past performance is not a guarantee of future results; that potential cash flow, potential returns, and potential appreciation are not guaranteed in any way; adverse tax consequences and that real estate is typically an illiquid investment. Please read carefully the Memorandum and/or investment prospectus in its entirety before making an investment decision. Please pay careful attention to the "Risk" section of the PPM/Prospectus. Apvl 11152018-03
At IAA Wealth Management we specialize in providing personalized wealth solutions across all aspects of financial planning. Our clients include high net-worth families, foundations, private institutions, and professional athletes. With experience in investments, retirement planning, institutional advising, education planning, tax-conscious investing, complex estate planning, risk management, and insurance, we are exceptionally equipped to help your financial plan succeed.
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Fort Lauderdale, FL
United States
Voice: (954) 541-5154
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