Section 1031 of the Internal Revenue Code (“1031 Exchange”) provides that real property held for rental, investment or use in a business (“relinquished property”) can be exchanged for “like-kind” real property also held for rental, investment or use in a business (“replacement property”) allowing the Investor to defer his or her Federal, and in most cases, state income tax liabilities. Put simply, this investment option allows the owner of investment property to sell it and buy like-kind property while deferring capital gains tax.

INTERESTS THAT
QUALIFY INCLUDE

  • Fractional (tenancy-in-common) interests

  • Single Family Rentals

  • Farms/Ranches

  • Offices/Commercial

  • Motel/Hotels

  • Multi Family Rentals

  • Raw Land

  • Leasehold interests of 30 years or more

INTERESTS THAT
DO NOT
QUALIFY INCLUDE

  • Personal residences
  • Construction or fix/flips for resale
  • Stocks, bonds, or notes
  • Interests in a partnership
  • Real Estate Investment Trusts (REITs)

TO SUCCESSFULLY COMPLETE AN EXCHANGE AND DEFER CAPITAL GAINS TAXES, INVESTORS NEED TO SATISFY THE FOLLOWING REQUIREMENTS:

UNDERSTANDING THE 1031 PROCESS

Exchanger complete exchange agreement and escrow accounts with QI

STEP 1

Relinquished
Property

STEP 2

Sales proceeds from the relinquished property are escrowed directly with the QI

Relinquished
Property

Exchanged Agreements
and
Assignments

Cash

Exchange closes on replacement property and completes the exchange

STEP 3

Cash

STEP 4

QI releases funds to purchase replacement property

THE 1031 EXCHANGE TIMELINE AND IDENTIFICATION PROCESS

Investors can identify a replacement property in a handful of ways. For example, the investor can simply choose three properties, regardless of the market value or he can practice the 200% rule. With the 200% rule, an investor can identify any number of properties, as long as the fair market value of the replacement properties does not exceed 200% of the fair market value of all of the Exchanged properties as of the initial transfer date. Lastly, the 95% rule is an option. This is where the investor chooses any number of replacement properties, if the fair market value of the properties actually received by the end of the Exchange is at least 95% of the fair market value of potential replacement properties identified.

1031 EXCHANGE TAX BENEFITS

As noted above, under IRC Section 1031, investment property owners can defer all taxes including those related to federal, state, depreciation recapture, and net investment income. For this reason, the 1031 exchange is one of the most advantageous tax strategies for preserving and growing wealth. You are freeing more capital for investment in the replacement property.

WHAT IS A DST?

DSTs are Ideal for investors who currently own and manage investment property but would like to trade that property for a passive investment and get out of property management — especially those entering their golden years. While many think a traditional whole property 1031 is the only option to avoid capital gains taxes, this is not the case and our experienced financial planners can walk you through your options. DSTs are relatively illiquid, long-term investments that investors hold onto for upwards of 10 years.

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