1031 exchanges come in many different types. A Delayed Exchange typically involves selling the relinquished property and replacing it with another like-kind property later. Taking into account an Exchangor’s unique needs is possible by tailoring a business. There are various exchanges, from simultaneous “swaps” of like-kind Triple net properties to improving land owned by the exchanger.
For various reasons, a reverse 1031 exchange involves purchasing the replacement property before renouncing or selling the old one. An exchange in reverse 1031 requires more planning than an exchange in forwarding 1031. Exchange Accommodator Titleholders (EATs) must become established because the exchanger cannot possess both properties simultaneously.
Several types of properties qualify for 1031 exchange replacement.
How Does an Exchange for DST Real Estate Work?
A professional real estate firm acquires an institutional-quality DST property for inclusion in a DST 1031 exchange.
Accredited investors can purchase beneficial interests in the trust with cash investments or proceeds from 1031 exchanges after the faith is acquired.
The Delaware Statutory Trust sponsors manage the property for the duration of the trust’s life, generally three to ten years. Investors receive all sales proceeds after the DST property is sold and can choose to pay taxes on the profits or perform another 1031 Exchange into any investment property.
The IRS and U.S. Treasury released guidance on Opportunity Zones in October 2018, with more to come. As a result of a recent update to the guidelines, the following criteria must apply to qualify for a deferral:
- Within 180 days, you must report your capital gains in a qualified opportunity (QOF).
- Property in qualified opportunity zones must account for at least 90 percent of the fund’s assets.
- It is necessary to hold an equity interest in the QOF, not a debt interest.
Investors looking to buy net lease properties can meet these three requirements. Many net lease assets will not qualify due to the requirement of “substantial improvements” within 30 months of the purchase date. Even though some net lease investors are responsible for the roof and structure of their properties, they may not have to improve either.
In general, QOFs invest directly or actively in development and rehabilitation projects. A fund like that will be actively involved in the improvements of properties or the construction of new properties, and we are investing actively.
Investing in net lease properties is passive. In an Opportunity Zone, your fund may acquire an interest in a McDonald’s or Dollar General on a net lease. It is the lessee’s responsibility to maintain and upkeep the real estate under terms of triple net properties, not the investor’s responsibility. If the fund isn’t directly involved in property upgrades or improvements, it doesn’t meet O-Zone guidelines.
Timelines and rules for NNN properties
The 1031 Exchange is a property swap between two owners who own similar (like-kind) properties. Nevertheless, finding someone with the exact property you want and who wants the actual property you own is scarce. The result is that most trades are delayed, including Starker trades (named after the first tax case to allow them) and three-party trades.
When you “sell” your property and “purchase” a replacement property on behalf of yourself, you need an intermediary (middleman) who retains the cash after you “sell” the property. Swaps are transactions between three parties.
In addition to the identification period, there are two significant timelines associated with 1031 exchanges: 45 days and 180 days. Below, we will discuss each one in more detail.
The identification period begins on day 0 as well. Following escrow closing on the relinquished property, you must identify and purchase a replacement property according to identification rules.
1031 exchanges are significant because of the 45-Day Rule. There is no exception to this 45-day limit. If you are one day late, you may lose your opportunity at a Section 1031 Exchange and have to pay tax on depreciation recapture and capital gains.
To comply with this Rule, you must purchase a new property within 45 days of selling your old one. Then, you will not be able to do a 1031 exchange.
Choose carefully which investment property to purchase since you can only buy one during this period. To qualify for a 1031 exchange, you cannot accept the investment property you just sold.
If you sell your property and reinvest the proceeds into a “like-kind” replacement property, you have 180 days to do so.
It is impossible to defer capital gains taxes if you fail to follow this Rule.
Investment opportunities in NNN properties are hard to come by elsewhere, and the market will likely prosper in the coming years. It is still essential for investors to perform their due diligence if they hope to get the best returns on their investments. Feel free to contact our professionals if you have any questions. You can also fill out the form below and download the list.