1031 exchanges enable you to reduce or eliminate taxes on the sale of business or investment real estate. If you want to sell one business or investment property and purchase a “like-kind” replacement property within 180 days of the sale, structuring these two transactions as a Section 1031 exchange can enable you to avoid capital gains tax and depreciation recapture tax. Using a qualified intermediary (QI), such as NES Financial, converts the sale and the purchase into an exchange and creates the opportunity for tax deferral. If you are struggling to to find replacement property, a DST interest might help.
We’ve written before about the potential benefits of exchanging into a DST (Delaware Statutory Trust) interest, instead of acquiring one entire real property, for the purposes of completing your Section 1031 exchange.
However, even if you don’t plan to invest in a DST interest, we believe it might be prudent to identify a DST interest as a replacement property, if you’ve identified one or more properties that you’re interested in buying, but still have “room” to identify more properties under the 1031 replacement property identification rules.
The reason is simple: You can use the DST interest as a backup option if some or all of your intended replacement property deals fall through.
Within the first 45 days after you relinquish your original property, you may identify up to three potential replacement properties (or in the alternative, any number of properties so long as the value does not exceed 200% of the relinquished property value), and then use any of them (or even more than one of them) to complete your exchange within the 180-day window. If at least one of the three candidate properties is a DST interest, this can serve as a kind of “insurance policy” in case your first-choice properties cannot be acquired.
And there’s an additional benefit to listing a DST interest as a candidate replacement property: Even assuming your first-choice or second-choice property closes successfully, if you have exchange proceeds left over or otherwise have not invested enough in replacement property to fully defer the gain on the sale of your property, you will owe capital gains tax. In this scenario, if you’ve also identified a DST interest as a candidate property, you may be able to invest the deficit amount in the DST interest, thereby fully reinvesting in qualified replacement property and avoiding taxes. This can be particularly useful where the deficit amount is not enough, by itself, to purchase a desirable property, but is enough to buy a partial interest in a DST owning a desirable property.
* * *
What can we help you exchange?
At NES Financial, we’ve put together an industry-leading track record of 1031 success, across tens of thousands of transactions and more than 25 years in the business. Our general counsel developed significant 1031 guidance while working at the IRS National Office. And we’ve built a cutting-edge administration platform, called eSTAC®, from the ground up to maximize your transaction security and transparency.
If you’d like more information about our services, please don’t hesitate to contact us.