The origin of 1031 Exchanges dates to 1921 and the related provisions which permit tax deferrals have been extensively used by many taxpayers to save taxes. While specific details have evolved over time, there are basic rules outlined below which apply to almost all 1031 Exchanges and 1031 Exchange Properties
Rule #1 – Both the property being sold and the property being acquired must be held for a period of an investment or used in a trade or business. The taxpayer’s primary residence will not qualify.
Rule #2 –The properties in an exchange must be “like-kind.” Fortunately, the IRS allows a very broad interpretation of what is permitted and any type of income producing real property can be exchanged including land to apartments, apartments to commercial, a single-family rental to a retail store, etc. Only real properties qualify and other forms of real estate ownership such as REITs, stocks, partnership interests, etc. do not qualify.
Rule #3 – Stated time limits must be strictly observed. From the day you close the sale of your income property, you have 45 days to identify the properties you might want to buy. The most common identification rule allows you to list up to three properties with no limitations. There are allowed options for identifying more than three properties if desired. You will then need to close the purchase of your replacement properties within 180 days of the date of the sale of your property (or 135 days after your 45 day identification period expires). Carefully note that days are measured as calendar days and include weekends and holidays. There is generally no exceptions and failure to follow these dates will result in a loss of all potential benefits.
Rule #4 – You are not allowed to take control or possession of any of the sales proceeds related to the exchange. Any funds that you receive will be subject to taxes and no longer eligible for a 1031 Exchange. The rules require that your sales proceeds be transferred to the account of an independent third party called a Qualified Intermediary or Accommodator who will complete the exchange on your behalf. Unfortunately, Qualified Intermediaries are not licensed or regulated and there have been past abuses when unsuspecting investors allowed their funds to be transferred to Qualified Intermediaries who misused and even lost funds. Fortunately, there any many reputable firms that provide Qualified Intermediary services and only those who have been properly qualified should be considered.
Rule #5 – The entity that holds the title to the sold property must be the same entity that purchases the replacement property. Any entity, such as individuals, corporations, trusts, partnerships, LLCs, etc. may do an exchange. For example, if Paul and Jan are married and hold joint title to an income property they are selling, both Paul and Jan must take title to the new replacement income property.
Rule #6 – To defer all of your capital gains tax, you must a) buy a property of equal or higher value than the one you sold b) you must reinvest all of the cash proceeds from the sale and, c) you must replace all of the debt on your sold property with either same or greater debt or invest added cash to offset the debt. As an example, if you sell a property worth $1 million that has $500,000 of equity and a $500,000 loan, you must replace the sold property with a property valued at $1 million or greater having at least $500,000 in equity from your sold property. You can add more cash at any time without negatively impacting the exchange.
These are the basic rules that apply to almost all 1031 Exchanges and 1031 Exchange Properties. However, the tax code governing the full range of 1031 Exchange options and complications that can exist runs to many hundreds of pages. All investors who wish to consider a 1031 Exchange are strongly advised to seek the advice of a qualified tax advisor before initiating the exchange process.
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BIO : Paul Getty
Paul Getty is a licensed real estate broker in the state of California and Texas and has been directly involved in commercial transactions totaling over $2 billion on assets throughout the United States. His experience spans all major asset classes including retail, office, multifamily, and student and senior housing.Paul Getty’s transaction experience includes buy and sell side representation, sourcing and structuring of debt and equity, work-outs, and asset and property management. He has worked closely with nationally prominent real estate brokerage and investment organizations including Marcus Millichap, CB Richard Ellis, JP Morgan, and Morgan Stanley among others on the firm’s numerous transactions.Paul Getty also maintains a broad network of active buyers and sellers of commercial real estate including lenders, institutions, family office managers, and high net worth individuals.
Prior to founding First Guardian Group/FGG1031,Paul Getty was a founder and CEO of Venture Navigation, a boutique investment banking firm specializing in structuring equity investments made by institutions and high net worth individuals. He possesses over 25 years of comprehensive worldwide business management experience in environments ranging from early phase start-ups to multi-billion dollar corporations. His track record includes participation in IPOs and successful M&A activity that has resulted in investor returns of over $700M.
Paul Getty holds an MBA in Finance from the University of Michigan, graduating with honors, and a Bachelor’s Degree in Chemistry from Wayne State University. He is a member of Institute of Real Estate Management (IREM), a Certified Property Manager Candidate (CPM), and a member of the US Green Building Council.Paul Getty holds Series 22, 62, and 63 securities licenses and is a registered representative with LightPath Capital Inc, member FINRA /SIPC .
Paul Getty is a noted speaker, author, and actively lectures on investments and sales and management related topics. He is author of The 12 Magic Slides ,Regulation A+: How the JOBS Act Creates Opportunities for Entrepreneurs and Investors , and Tax Deferral Strategies Utilizing the Delaware Statutory Trust (DST), available on Amazon and other retail outlets.
This material is not intended as tax or legal advice so please do speak with your attorney and CPA prior to considering an investment. This material contains information that has been obtained from sources believed to be reliable. However, FGG1031, First Guardian Group, LightPath Capital, Inc., and their representatives do not guarantee the accuracy and validity of the information herein. Investors should perform their own investigations before considering any 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.
Past performance is not a guarantee of future results: potential cash flow, potential returns, and potential appreciation are not guaranteed in any way and adverse tax consequences can take effect. The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities. All financed real estate investments have a potential for foreclosure. Delaware Statutory Trust (DST) investments are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments. Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions. Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits.
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. Securities offered through registered representatives of LightPath Capital, Inc. Member FINRA / SIPC. FGG1031, First Guardian Group, and LightPath Capital, Inc. are separate entities.
DST 1031 properties are only available to accredited investors (generally described as having a net worth of over one 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 five 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. You may be required to verify your status as an accredited investor. Member of LightPath Capital, Inc.