Frequently Asked Questions

  • A property owner or investor who expects to acquire replacement property subsequent to the sale of his existing property should consider an exchange. To do otherwise would necessitate the payment of capital gain taxes in amounts which can exceed 20%-30%, depending on the appropriate combined federal and state tax rates. In other words, when purchasing replacement property without the benefit of an exchange, your buying power is dramatically reduced and represents only 70%-80% of what it did previously.

  • A Replacement Property is considered identified before the end of the 1031 Exchange 45-day identification period only if the following requirements are satisfied. However, any Replacement Property you receive before the end of the identification period will in all events be treated as identified before the end of the identification period. A Replacement Property is identified only if it is designated as Replacement Property in a written document signed by you. This document must be sent before the end of the identification period to a person (other than yourself or a related party) involved in the exchange.

  • While a like-kind exchange does not have to be a simultaneous swap of properties, you must meet two time limits or the entire gain will be taxable. These limits cannot be extended for any circumstance or hardship except in the case of presidentially declared disasters.

    • The first limit is that you have 45 days from the date you sell the relinquished property to identify potential replacement properties. The identification must be in writing, signed by you and delivered to a person involved in the exchange like the seller of the replacement property or the qualified intermediary. However, notice to your attorney, real estate agent, and accountant or similar persons acting as your agent is not sufficient.

    • Replacement properties must be clearly described in the written identification. In the case of real estate, this means a legal description, street address or distinguishable name. Follow the IRS guidelines for the maximum number and value of properties that can be identified.

    • The second limit is that the replacement property must be received and the exchange completed no later than 180 days after the sale of the exchanged property or the due date (with extensions) of the income tax return for the tax year in which the relinquished property was sold, whichever is earlier. The replacement property received must be substantially the same as property identified within the 45-day limit described above.

  • Opportunity Zones do not change the rules for DSTs, they are two separate tax-deferral strategies. Both allow investors to defer capital gains, but they operate under different IRA requirements. Opportunity Zone Funds (QOFs) must invest in designated economically distressed areas, white DSTs have no location requirement but must meet strict property eligibility standards. In short, Opportunity Zones provide an alternative to DSTs, and the right choice depends on your individual investment goals.

    Opportunity Zone investments offer several advantages, including:

    • Tax incentives: Investors may qualify for a 10% set-up in basis after 5 years and a 15% step-up after 7 years.

    • Community Impact: Capital supports economically distressed areas, helping to drive local growth.

    • Flexible Capital Sources: Gains from real estate, business sales, stocks, cryptocurrency, REITs, and bonds can all be deferred through Opportunity Zone investments.

    DST investments also offer distinct advantages, including:

    • 1031 Exchange Eligibility: DSTs qualify as like-kind replacement properties, allowing investors to defer capital gains taxes.

    • Access to Institutional-Quality Real Estate: Investors can participate in large-scale commercial properties that would be difficult to purchase individually.

    • Passive Ownership: Professional managers handle day-to-day operations, so investors receive income without direct landlord responsibilities.

    • Portfolio Diversification: DSTs can include multiple properties across sectors or regions, helping spread risk.

  • Beneficiary: The person or entity who will receive benefits from a life insurance policy, qualified retirement plan, annuity, trust or will upon the death of an individual.

    Debt: An obligation owed by one party (the debtor) to a second party (the creditor)

    Like-kind property: Two assets that are considered to be the same type, making an exchange between them tax deferrable

    Liquidity: The ease and speed with which an asset or security can be bought or sold

    Maturity: The date on which a debt security comes due for payment and on which an investor’s principal is due to be repaid

    Partnership: A contract under which two or more individuals manage and operate a business venture

    Principal: The original amount invested in a security, excluding earnings; the face value of a bond; or the remaining amount owed on a loan, separate from interest

    Property: Anything over which a person or business has legal title. Property can be held in common or privately owned

    Risk: The change an investment will be lost or will provide less-than-expected returns

    Tax Deferred - A condition of certain plans and accounts under which the funds in the plan or account along with any accrued interest, dividends or other capital gains, are not subject to taxes until the funds are withdrawn

    Three Property Rule - Refers to one of the rules that limit how many properties the taxpayer may identify; in this case, the taxpayer may identify up to three replacement properties and may acquire one, two or all three of those

    Title - A legal document that serves as evidence of ownership of an asset or security

    Trust - A trust is a legal arrangement that creates a separate entity which can own property and is managed for the benefit of a beneficiary. A living trust is created while its grantor is still alive. A testamentary trust is created upon the grantor’s death - usually by another trust or by a will. Using a trust involves a complex set of tax rules and regulations. Before moving forward with a trust, consider working with a professional who is familiar with the rules and regulations