1031 Tax Deferred Exchange

Unknown to many real estate investors, some Alternative Investments are also available for 1031 tax-deferred exchange, which give investors the ability to trade up into high quality, management free replacement property.

A 1031 Exchange gets its name from section 1031 of the IRS tax code. This code section allows property owners to sell one or more of their investment properties, exchanging them for a “like kind” property of equal or greater value without paying capital gains tax or tax on the recapture of depreciation as a result of the sale of the investment property.

Years ago, the IRS released Revenue Procedures that allow real estate investors to safely realize the power of combining a 1031 tax deferred exchange with a Delaware Statutory Trust (DST) or a Tenants-In-Common (TIC) investment.  A 1031 - DST or TIC syndication presents the opportunity for an individual to join together with other high-net worth investors to own institutional quality real estate and defer the capital gains tax on the sale of their investment property.

By deferring capital gains tax and depreciation recapture into and out of the investment, you can thereby preserve significant wealth in your estate.  In addition to the income earned by the investors, depreciation can shelter as much as 50% to 60% of the cash-flow rental income from income taxation. By deferring payment of taxes, the investor retains capital longer to pursue personal income or investment goals.

What is an Accredited Investor?
What is an “Accredited Investor”?

Private Placements are non-public securities, which can be offered to “Accredited Investors” only. These offerings are presented to investors using a Private Placement Memorandum (PPM) rather than a traditional publicly registered securities offering document called a prospectus. The PPM outlines the terms of the offering along with the suitability requirements of the investor.

In accordance with Rule 501 of Regulation D of the Securities Act of 1993, listed below are the qualifications for an investor to be considered “Accredited” in order to invest in a Regulation D offering:

 Any natural person whose individual net worth or joint net worth with that person’s spouse exceeds $1,000,000 at the time of his or her qualification, excluding individual’s primary residence.

 Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years, and has a reasonable expectation of reaching the same income level in the current year.

 Any LLC, Partnership, or Corporation that was not formed for the specific purpose of acquiring the interests offered, with total assets in excess of $5,000,000.

 Any trust, with total assets in excess of $5,000,000 that was not formed for the specific purpose of acquiring the interests offered, whose purchase is directly by a sophisticated person who has such knowledge and experience in financial and business matters that he or she is capable of evaluating the merits and risks of the prospective investment.

 Any entity in which all the equity owners in a LLC, Partnership, or Corporation are “Accredited Investors” as defined.