Searching for the right investment property isn’t the only challenging task for a real estate investor. Every property investor needs to identify the right opportunities in order to take advantage of any possible advantages. Accredited property investors looking for ways to reinvest their sale proceeds can explore programs like the Delaware Statutory Trust. For these types of investments that qualify as 1031 exchanges, the services of a qualified intermediary is required. There are a couple of factors to consider when choosing a qualified intermediary for your 1031 like kind exchange investment transactions.
Before going further into what a qualified intermediary is and how to choose one to facilitate your property sale or purchase, here’s a little background on what the 1031 exchange is.
Suppose you own an investment or business property, and you decide to sell it. If this sale results in a capital gain, the gain would be subject to tax. However, with the provision of the IRC Section 1031, there is an exception to this capital gain tax that allows you to defer the tax on any capital gains. This deferral is effective if you reinvest the proceeds from the sale in a like-kind property. This is generally referred to as a like-kind exchange. There are specific rules that guide the 1031 property exchange transactions.
To qualify as a like-kind exchange, a sale and purchase transaction needs to meet certain requirements. These include:
Timing Rules: The investor needs to identify the replacement property, also known as the reinvestment property within 45 days of the sale of the relinquished property.
Additionally, the investor needs to receive the replacement property by the earlier of 180 days after the original property has been sold and transferred or the due date of the investor’s tax return for the taxable year in which the relinquished property is transferred.
Like-Kind Property Rules: The like-kind exchange gets its name from the rule that requires the exchange of the properties to be of like-kind in terms of nature and character. This also translates to the values of properties being exchanged as any perceived gain from the difference in values of exchanged properties may lead to taxes.
Qualified Intermediary Rules: A facilitator is required to make the exchange of property and sale proceeds as this cannot be done directly by the investor who intends to sell off a business or investment property. This requirement is an important aspect of the like-kind exchange and here’s what you need to know about using a qualified intermediary.
Real estate investors looking to diversify or expand their portfolio have the opportunity to invest through 1031 like-kind exchanges. This type of property investment provides tax advantages for investors who re-invest sale proceeds from a property sale into another property that qualifies as like-kind in nature.
A qualified intermediary is an independent party to a 1031 exchange transaction, they usually have no formal relationship with the seller of the investment property or the owner of the new property to be invested in. Qualified intermediaries are sometimes called facilitators or accommodators. They are independent parties in a 1031 exchange transaction —possessing no affiliations or personal relationship with the parties involved in a 1031 exchange.
A qualified intermediary is generally not the taxpayer or termed a disqualified person. The capacity of a qualified intermediary requires a written agreement with the investor, called the exchange agreement. This agreement specifies certain guidelines and restrictions on the investor’s rights to receive, pledge, borrow or obtain the benefits of the money or property held by the intermediary before the exchange of properties is completed.
The exchange agreement between the tax paying investor and the qualified intermediary also specifies the rights assigned to the qualified intermediary. All parties involved in the exchange agreement would be notified of the assignment in writing on or before the date of the transfer of the relinquished property.
An agent of the tax paying investor is not allowed to act in the capacity of a qualified intermediary for a like-kind property sale transaction. The capacity of an agent includes responsibilities and services on behalf of the taxpayer. This translates to roles such as an investment banker, employee, attorney, accountant, broker, or real estate agent within a 2-year period to the date of the transfer of the first of the relinquished property or properties.
This limitation excludes agent related services as regards exchanges of property intended to qualify for non-recognition of gain or loss under section 1031 and routine financial, title insurance, escrow, or trust services for the taxpayer by a financial institution, title insurance company, or escrow company.
Without the use of a qualified intermediary, property sale and purchase may not qualify as a 1031 like kind exchange. This is so because, if the investor actually or constructively receives sale proceeds in the form of cash or other property before receiving the replacement property, any gains realized may become subject to tax. The proceeds from the sale of the relinquished property are secured in a qualified escrow or qualified trust to ensure that the investor does not receive any payments that may disqualify the transaction.
The qualified intermediary acts in a capacity to prevent this from occurring. The qualified intermediary facilitates the sale by receiving the proceeds from the 1031 exchange and transferring it to the seller of the replacement property.
Here are a few services a qualified intermediary may perform:
Purchases the replacement property from the seller and transfers the replacement property to the investor.
Partners with other professionals such as accountants and lawyers to make sure that the exchange agreement meets all requirements and that the rights for all parties are clearly stated.
Ensures that the 1031 exchange is executed in the time frame that makes it qualify for deferred tax gains. Effectively communicates on important deadlines and expectations.
Prepares documentations such as trust or escrow agreements, reports, notice of assignments and other exchange agreements.
In addition to the above, the qualified intermediary will facilitate the exchange and receive the relinquished property from the investor before transferring the relinquished property to the buyer.
The qualified intermediary also secures the proceeds from the sale on behalf of the taxpayer until it is required to use as payment for the replacement property.
There are important factors to consider when choosing to engage a qualified intermediary. Careful selection in this process would prevent any errors or complications in the 1031 property exchange transaction. Some of these factors are as follows:
Expertise and Professionalism: 1031 exchanges are complex transactions with equally complex tax and accounting implications. You need a qualified intermediary with adequate level of experience to facilitate all kinds of like kind exchanges within the specific requirements that enable a transaction to qualify for tax deferment advantages. A good, qualified intermediary should keep all parties abreast of any important timelines or changes that may affect the property exchange.
Compliance: There are no widely known licenses or regulations for someone or an entity to act in the capacity of a qualified intermediary. As an investor, you need to carry out due diligence to ensure all legal requirements and procedures are met appropriately. You have the responsibility to ensure the qualified intermediary you engage for your property exchange agreement acts within the confines of any compliance and legal requirements.
Trust and transparency: You should be informed about the details involved in your 1031 exchange process. Use a qualified intermediary that is transparent and trust worthy. Also, due to the highly complex nature of 1031 like-kind exchange transactions, it is recommended to employ the services of a financial advisor and an accountant to provide advice on tax implications or any part of the transaction that may disqualify your capital gains from being deferred.
Funds Security: As an investor, you need to make sure that the proceeds from the property sale as well as the replacement property deed and title are safe. Sometimes it may be necessary to obtain insurance to cover for any losses due to fraud or theft. The proceeds involved in 1031 exchanges are usually of high value thus security should be an important aspect of the transaction.
Stax Capital provides property investment opportunities such as Delaware State Trusts (DSTs) that qualify for capital gain tax deferral under the 1031 like-kind exchange. We engage professional and independent third parties who provide guidance on legal and tax implications for 1031 exchange transactions. With extensive years or experience and expertise, the team partners with you to make sure your financial and investment goals are achieved.
As an investor looking to diversify into real estate or expand your investments in properties, you may be wondering what the benefits of Delaware Statutory Trusts might be.
Investing in real estate involves active responsibilities to ensure properties are well maintained and managed. It also requires direct involvement to ensure that expected rental returns are monitored and realized.
Delaware Statutory Trusts as an investment vehicle may provide ways to gain possible benefits of alternative real estate investments while being less involved in time consuming management. Here’s what you need to know about DSTs and how beneficial it may be to you as a property investor.
A Delaware Statutory Trust (DST) is a legal entity usually formed for business investment purposes and is used as an instrument through which property is purchased and managed for the beneficial interest of owners.
It is considered a separate legal entity from its beneficial owners, under the Delaware law. This offers a limited liability status to the investors who own beneficial interest in the trust, one of the notable benefits of Delaware Statutory Trusts.
The operations of a DST would generally involve individual duties in the capacity of a sponsor, lender, trustee(s), managers, interest owners etc. A DST is usually bound by a governing instrument such as a trust agreement which would categorically specify any rights, obligations, liabilities or management responsibilities for all parties involved, as well as the general business conduct and underlying governance of affairs of the trust.
As an investor and beneficial owner in a DST, you would have undivided beneficial interest in the property or properties of the statutory trust. Except otherwise stated by a trust agreement, you become entitled to receive income and distribution from the DST. The profits and losses you would share from the statutory trust would be proportionate to your total undivided beneficial interest in the DST.
DSTs are often managed by a trustee or trustees on behalf of the beneficial owners who have interest in the trust property or properties. Usually, the trustee is responsible for distributing cash less any reserves to you as an investor based on your interest in the DST.
For federal tax purposes, the classification of a DST as a business or a trust is dependent on the power awarded to trustees to carry out activities such as acquiring and disposing of property, making structural modifications to the property, renegotiating leases or debt, investing cash for profit or collecting and distributing income.
One of the most popular benefits of Delaware Statutory Trusts is that investments through interests in the trust may qualify for a tax-deferred like-kind exchange (subject to all other conditions and requirements being met).
In order to access possible benefits of Delaware Statutory Trusts, you have to be an accredited investor. As an accredited investor, you can purchase interest in the DST directly or by depositing your 1031 exchange proceeds into this investment vehicle.
An accredited investor may be an individual or entity identified to be financially sophisticated and authorized to invest in unregistered securities or private capital markets that are usually deemed to carry more risks than traditional investments. Classification of an accredited investor is based on annual income, net worth, asset value and/or professional investment knowledge.
The Security Exchange Commissions (SEC) considers accredited investors as individuals with income exceeding $200,000 for two most recent years and expected to at least remain in this income band for the current year; for couples with joint income, this amount is $300,000.
Also, individuals with single or joint net worth (for couples) exceeding $1,000,000 can be classified as accredited investors. Your net worth is considered as the fair market value of all assets excluding primary residence minus total liabilities excluding primary residence mortgage up to its estimated fair market value.
For entities, an accredited investor status may be awarded to certain organizations with total assets in excess of $5,000,000. Such organizations may include but are not limited to banks or any savings and loan association, a registered broker or dealer, an insurance or investment company or a business development company. It could also be an entity owned completely by accredited investors.
In 2020, the SEC modified its classification of accredited investors to include individuals who have defined measures of sufficient experience and professional knowledge or possess certain recognized qualifications and certifications. This increases the pool of investors who may qualify to invest in unregistered assets and have access to the benefits of Delaware Statutory Trusts.
There are potential benefits of Delaware Statutory Trusts. If you are an accredited investor, here’s how investing through DSTs may be beneficial for you.
The 1031 exchange: One of the major benefits of Delaware Statutory Trusts is that they qualify as 1031 like kind exchanges for property investment. The 1031 exchange allows investors to defer capital gains if they invest in like kind properties.
With DSTs, there is the potential to locate properties that are like kind within the given 45 days rule, also, it may be easier to exchange and transfer ownership of a DST property investment within 180 days from the sale of your replaced property.
Freedom from property management: Properties purchased for real estate investments usually require periodic maintenance and management. Taping into the benefits of Delaware Statutory Trusts can take away the pressures and hassles of dealing with property management issues directly.
A trust agreement would normally delegate the property management responsibility to trustees or an assigned manager who oversees that the trust’s properties are professionally managed and maintained.
Institutional quality investments: Investors are allowed to purchase fractional units of a much larger scale investment property through DST investments. This offers access to institutional quality property investments that would ordinarily not have been accessible due to cost and other complexities. When considering the benefits of Delaware Statutory Trusts, being able to invest in institutional properties at low minimums – usually $25,000, is a huge plus.
Potential passive income: DSTs can be effective for wealth management when utilized correctly. With this investment vehicle, you may have the opportunity to build wealth through real estate properties. DSTs could potentially provide passive income for investors who need to take a step down from active involvement in real estate investments. Also, the possibilities for wealth generation make up one of the important benefits of Delaware Statutory Trusts.
Portfolio diversification: One of the benefits of Delaware Statutory Trusts is, it offers an opportunity for portfolio diversification. When you meet the accredited investor requirements, DSTs could be your introduction into real estate investing, giving you a wider range of investment possibilities in a different asset class.
As an experienced property investor who also meets the requirements of an accredited investor, through DSTs you could have access to multiple property types and ranges.
Flexibility: Except if the governing instrument of a statutory trust specifies otherwise, the beneficial interest you purchase in a DST can be easily transferable. You can freely transfer your ownership to a different party after all requirements have been met and fulfilled.
Lenders who provide financing for the properties under the trust deal directly with the trust and not with investors, therefore, you do not need to qualify for a loan under a DST. This makes it relatively easier to access funding and financing.
Also, when you become entitled to receive income distribution from a DST, you would be entitled to all remedies that a creditor of the DST has in terms of the distribution.
Limited Liability: Given its separate legal identity status, owners and trustees have limited liability as regards properties invested. What this means for investors is that they do not have interest in any specific property and creditors are not able to seek remedies on DST properties.
As an investor, the potential benefits of Delaware Statutory Trusts may include being protected under a limited personal liability similar to that of private corporations’ stockholders.
The potential benefits of Delaware Statutory Trusts are usually accompanied with possible risks. Similar to any other investment platform or asset, there may be risks involved in DST investments. The major downsides to DST investments include having minimal or no control in investment or management decisions, fewer opportunities to sell off investment ownership interest due to an illiquid market, and no guarantee of investment principal or returns.
It is recommended that investors who want to explore the potential benefits of Delaware Statutory Trusts utilize the expertise of professionals such as financial advisors and tax experts.
DSTs can be leveraged as alternative investments that diversify investment portfolio. While this investment platform may provide a huge potential for benefits, you need to also consider the risks and complexities that come with DST investments. The benefits of Delaware Statutory Trusts include the opportunity to invest in like kind exchange properties, flexibility of property investment and limited liabilities associated with the trust.
Stax Capital specializes in alternative investments through Delaware Statutory Trusts, providing you opportunities to manage your wealth and explore capital gains tax deferral options available via the 1031 like kind exchange vehicle. The team at Stax Capital partners with you to explore potential benefits of Delaware Statutory Trusts.
In life, success can come in different ways. One of the biggest successes a person can achieve is building something that will benefit not only you but also the generations that follow. Doing so ensures that with each generation, the path to success is much easier. This can be accomplished by using DSTs.
Over the years, real estate has proven to be arguably the best sector for multigenerational wealth. However, as much as it is lucrative, it comes with its own set of challenges regarding property management. This is why investors choose to use Delaware Statutory Trusts (DSTs). These are investment vehicles that allow people to become passive real estate owners.
More importantly, they allow investors to diversify and reduce risk as investors benefit from anonymity and lawsuit protection. Due to the enticing nature of DSTs, the sector has been growing significantly in recent years. In 2017, DST investments totaled $1.97 billion, which would rise to $2.57 billion in 2018.
Ordinarily, after selling property, you are required to pay taxes. One of the key advantages of DSTs is that they enable you to capitalize on Section 1031 of the IRS code. Under this code, real estate investors can defer capital gains taxes. This is achieved by reinvesting the proceeds of the sale into one or up to three properties of equal or greater value. Doing so allows you to build wealth for you and your beneficiaries without incurring tax costs.
However, the IRS has very strict rules that must be followed in order to qualify for tax deferral. As a result, the process is complex, stressful, and time-sensitive.
Do you want to build wealth through a DST? Read on to find out the key steps you should be following to protect and grow your portfolio.
For real estate investors, tax-deferred 1031 exchanges are a tremendous opportunity. However, as with all other investments, it carries risk. If you make any mistake in the process, the 1031 exchange may fail. At times, due to these restrictions and eagerness of investors, the replacement property purchased may not be suitable for your goals.
Before you go down this path, it is important to first determine if it is suitable for you. Some of the things to consider include liquidity needs, the structure of property ownership, market conditions, potential tax liability, financial and lifestyle aspirations, and debt considerations.
To get a clear picture of the sector, and determine whether it's right for you, schedule an appointment with an investment consultant experienced in 1031 DST Exchanges.
The whole idea of building wealth through DST exchanges is based on the premise that property appreciates in value, and you will turn in a profit after the sale. Along with the profits, you can also use the potential capital gains taxes to reinvest.
If you are just starting, you will have to identify a suitable property to buy. Ideally, you should look for an undervalued property or one that you can remodel and sell at a profit. There are also other strategies you can use depending on your goals.
Once you feel the property is ready and can turn in a good profit, have it listed for sale. In the listing paperwork, your realtor will include your desire for a 1031 exchange.
As you know, there are strict measures to follow for a 1031 exchange to be successful, and there is a timeline. After selling your property, you have 45 days to identify one or a maximum of three replacement properties.
Three requirements should be met for a 1031 exchange to be eligible. These are:
Also, to ensure that the purchase can be linked to the sale, you only have 180 days to make the purchase to complete a 1031 exchange. Therefore, once you put your property up for sale, begin the search for replacement properties as time will be of the essence.
The primary goal of a 1031 exchange is to avoid capital gains taxes to boost your reinvestment kitty. With a fixed timeline for achieving this and rigid requirements, it is imperative to have a comprehensive transition plan in place.
Creating such a plan will reduce the chances of mishaps occurring along the way that will put the exchange at risk. And, even if something were to come up, you will be better prepared.
Considering that your goal is to build wealth for your beneficiaries and the complexities of 1031 exchanges, you should have a reliable team to help you with the process. Such a team should comprise at least an estate planning attorney, a CPA, and a financial advisor.
Each brings experience in different fields that are crucial for a 1031 exchange. To ensure everything goes according to plan, always consult with your team before making key decisions.
Once you find a suitable buyer for the relinquished property, enter into a contract with them. This will free you up to proceed to the next steps of the process.
As per IRS requirements, for a 1031 exchange to take place, a qualified intermediary must be involved. The intermediary's role, also known as 'accommodator' or 'facilitator,' is to ensure that it is the proceeds from the relinquished property that will fund the purchase.
After the sale, it is the qualified intermediary will receive the funds. They will hold on to the funds until a suitable property is identified. For the process to be eligible, you must open an exchange with a qualified intermediary before the relinquished property is sold.
Remember, after selling the relinquished property, you will only have 45 days to identify a replacement property. After this period elapses, there will only be another 135 days to close the deal. Even if everything seems to be going smoothly, ensure that the transaction is completed as soon as possible.
After the 1031 exchange process is completed, notify your tax advisor. This will ensure that they can prepare property tax forms accordingly. If a 1031 exchange spills over into the next tax year, wait until the process is over to file your annual taxes. However, you should file for an extension for filing taxes.
There are very little costs involved with 1031 exchanges, especially if you factor in the taxes you will save. Being a real estate transaction, you can expect the usual cost involved with buying and selling property.
The only unique cost you will incur is that for paying the qualified intermediary. Costs associated with qualified intermediaries include legal reviews and brokerage fees. All such costs involved with the exchange should be defined before the process begins.
Deferral of taxes is the primary benefit that comes with 1031 exchanges. Some of the taxes you will be able to defer include:
However, tax deferral is not the only benefit you will get from 1031 exchanges. Others include:
Other than being an efficient investment vehicle, DSTs are great tools for managing beneficiaries. To begin with, you will have full control as to who gets what and at which proportion. Should anything change over time, you can make adjustments as you deem fit. This includes adding new beneficiaries or removing others.
Thanks to the flexibility and high degree of control, it is easy to divide beneficial interests, which can even be issued for minors. However, in the case of minors, a legal representative must be appointed.
Another key benefit of DSTs comes in the form of asset protection. The compartmentalized approach to owning property ensures that risks do not spill over to other assets. Also, your personal assets will be protected, and you will also be protected from lawsuits.
Should things go as plan, you can generate significant wealth for you and your beneficiaries using a DST. However, there are crucial elements that will come into play. First, you need to have clear objectives and a well-defined strategy for achieving them. This should be accompanied by a sound investment partner to help you make the right choices.
Are you looking for quality investments to increase your nest egg? Stax Capital is a company specialized in alternative investments. Reach out to us today to learn more about the investment opportunities available.
This website is for informational purposes only. This website does not provide investment advice or recommendations, nor is it an offer or solicitation of any kind to buy or sell any investment products. Securities offered through Stax Capital, Member FINRA & SIPC. Stax Capital is located at 7960 Entrada Lazanja, San Diego, CA 92127. Contact us toll free at 844-427-1031. Private Placements and Direct Participation Programs are speculative investments and involve a high degree of risk. An investor could lose all or a substantial portion of his/her investment. Investors must have the financial ability, sophistication/experience and willingness to bear the risks of an investment in Private Placements and Direct Participation Programs. Private Placements and Direct Participation Program offering materials are not reviewed or approved by federal or state regulators. Investors should not place undue reliance on hypothetical or pro forma performance summaries. Investors must conduct their own due diligence and should rely on the advice of their own financial, tax and legal advisors prior to making any investment decisions.
The contents of this website are neither an offer to sell nor a solicitation of an offer to buy any security which can only be made by prospectus. Investing in real estate and 1031 exchange replacement properties may not be suitable for all investors and may involve significant risks. These risks include, but are not limited to, lack of liquidity, limited transferability, conflicts of interest and real estate fluctuations based upon a number of factors, which may include changes in interest rates, laws, operating expenses, insurance costs and tenant turnover. Investors should also understand all fees associated with a particular investment and how those fees could affect the overall performance of the investment. Neither Stax Capital nor any of its representatives provide tax or legal advice, as such advice can only be provided by a qualified tax or legal professional, who all investors should consult prior to making any investment decision. Pursuant to SEC rule 501 of Regulation D, prior to engaging in substantive discussions regarding DST specific investments, investors must first be qualified as an accredited investor, by way of meeting certain income or net worth requirements.
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There are substantial risks in the DST Investment program. This type of investment is speculative, is illiquid, and carries a high degree of risk – including the potential loss of the entire investment. See the “risk factors” in the Private Placement Memorandum for a complete discussion of the risks relevant to DST offerings. Investors have no control over management of the Trust or the property. There is no guarantee that investors will receive any return. Distributions may be derived from sources other than earnings. The property will be subject to a Master Lease with an Affiliate of the Sponsor. The property will be subject to the risks generally associated with the acquisition, ownership and operation of real estate including, without limitation, environmental concerns, competition, occupancy, easements and restrictions and other real estate related risks. The properties may be leveraged. The Manager, the Master Tenant and their Affiliates will receive substantial compensation in connection with the Offering and in connection with the ongoing management and operation of the property. The Manager, the Trust, the Master Tenant and their Affiliates will be subject to certain conflicts of interest. An investment in the Interests involves certain tax risks.