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properties. This strategy allows investors to create customized and diversified portfolios, alleviate the daily landlord duties, reduce the financial burden by spreading costs across multiple investors, provide investors the potential for monthly income potential, and offers significant tax advantages. DST properties are typically institutional-grade real estate assets like net lease buildings, self-storage facilities, logistics and transportation centers, and multi-family apartments, offering investors the opportunity to own assets that would normally be financially out of reach for them.
BROKERS NEED A DELAWARE STATUTORY TRUST 1031 SPECIALIST TO HELP THEM ADVISE THEIR CLIENTS
1031 exchanges are often the “preferred solution” for investors who have sold their investment property. Because no matter who the investor is or what type of investment asset that has been sold, they will always face the same challenge at the end of sale of an appreciated property: a big tax bill. This tax event is called “capital gains” and is calculated by taking the difference between a property’s cost basis and the sale price, typically at a rate of somewhere between 15% and 28% for federal capital gains taxes. Add to that depreciation recapture rate of 25%, state capital gains tax, and the Medicare surcharge and the tax consequences could be devastating. In fact, many investment property owners decide not to sell because of the significant tax implications.
A DST 1031 OVER A STRAIGHT 1031 EXCHANGE?
At this point, the real estate broker will most likely recommend the seller enter a “1031 exchange”. This strategy is named after section 1031 of the Internal Revenue Code and allows a property owner to defer capital gains taxes on a profitable sale by
reinvesting the proceeds into another property of “like kind,” and there is no limit to how many times it can be done. In theory, there could be a successive series of exchanges that defer capital gains taxes indefinitely, which allows an investor’s income to potentially grow tax-free over a long period of time.
However, the rules of a 1031 exchange can be complicated and incredibly difficult (and potentially expensive) to accomplish without the advice of a true 1031 expert. Generally speaking, all 1031 exchanges follow these parameters:
• The replacement property must be “of the same nature or character” (e.g., “held for investment purposes”) as the relinquished one.
• The new property must be “identified” within 45 days of the close of the sale, and the purchase transaction must be completed within 180 days of the sale.
• The amount of money invested into the new property must be the same as the sale proceeds from the old property. If there is a difference, it is known as “boot,” and it becomes taxable.
• Exchangers must hold title to replacement property in the same way as the relinquished property.
• Any errors in the transaction or violations of the rules can cause the transaction to become a failed exchange (meaning any applicable taxes will be due).
Many brokers confess that identifying a replacement property and then successfully completing the exchange is exceedingly difficult to accomplish in the required timeline. Sometimes brokers can only present their clients with properties that are not
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