Planning a 1031 exchange could be an arduous task. From complex calculations to keeping a watch on the dates, you need to be prepared for these extravagant responsibilities. However, if you work in tandem with your Qualified Intermediary (QI) and make some smart moves, you can shed your burden significantly. Before we delve into this, let’s recap what we know about this unique investment strategy.
A 1031 Exchange is a tax deferral tool.
Think of a 1031 exchange as a source to curb capital gains taxes. The IRS lets you defer capital gains taxes on property sale using Section 1031 of IRC if you reinvest the entire proceeds. To qualify for a 1031 exchange, you need to sign a 1031 contract with your QI and list your investment property for sale. Once the property is sold, the IRS asks you to identify a replacement property within 45 days. This is where investors commit mistakes. Though the 45 days look enough on papers, they aren’t in reality.
How to close your 1031 identification before the deadline?
There are only two ways to get through the 1031 identification process. The first one requires planning in advance. Start making a list of 1031 properties that you’re interested in before signing the contract. This will make your job easier. Shortlisting a couple of 1031 properties can help in closing the deal early. Start from the office of a local broker. You may find one such list there if you are riding high on luck. In case you don’t, look out for big real estate firms. Your QI should be helping you in the entire process.
Another way is to invest in DSTs or TICs. There are always some chances of you not finding replacement property when required. In such a situation, you can invest in a DST and save your 1031 exchange.
A DST investment qualifies as a 1031 exchange replacement property.
You might not have heard about DSTs. A DST or Delaware Statutory Trust is a private governing trust that owns, operates, manages, and sells investment properties. A DST usually has an attractive real estate portfolio that lets you invest in comparatively bigger and better properties. A DST can have a hundred or even more investors. Due to its large structure, a DST investment starts as low as $100K.
When you invest in a DST, you actually invest in real estate and not in the trust. This enables a DST investment to qualify for a 1031 exchange. DSTs distribute the profit among its shareholders monthly. Therefore, by investing in a DST, you ensure a regular flow of income for a long time. You can find 1031 exchange DST properties for sale the same way you look for 1031 properties. It is the best way to get rid of the burden of property identification when doing a 1031 exchange.