The 1031 Exchange Roadmap

Advantages of a 1031 exchange include many things aside from the tax benefits. Investors can consolidate, diversify, move markets, or increase income potential on their current investment property.

Some people choose to do a 1031 exchange to acquire more income. For example, they can exchange vacant land for commercial or residential real estate. The investor is able to increase income potential by exchanging a property that is not generating any revenue, such as land, into real estate that has greater income potential like commercial and residential real estate.

Another advantage of doing a 1031 exchange is consolidation. Depending on the investor’s situation, they may not want to manage multiple properties. They can exchange their properties into one larger investment property that is easier to manage. Others are tired of managing properties and of being a landlord altogether. These investors can exchange from a residential or commercial property into a more manageable and less time consuming piece of land.

Some investors are looking to diversify. With a 1031 exchange they can exchange one property for multiple property types. For example, an investor can exchange their residential investment property into a commercial, residential, and vacant piece of land. This is one of the most attractive of the advantages of a 1031 exchange!

A 1031 exchange is great for investors who have multiple properties in other states or for investors who are moving markets. Instead of traveling from state to state to manage multiple properties, investors can exchange the out of state real estate into property that’s in one state. If the investor is moving markets, for example from one state to another, they can exchange their investment property in the current states for an investment property in another state.

Every situation is unique when considering the advantages of a 1031 exchange, and it is always advised that the taxpayer consult with his or her tax advisors before making any decisions!

Fractional Interests

In 2004, the IRS released Revenue Ruling 2004-86, which allows the use of a DST to acquire real estate where the beneficial interests in the trust will be treated as direct interests in replacement property for purposes of IRC Section 1031.

For 1031s, Fractional interest can be in the form of TIC or DST interests.  For a broad comparison of both forms of ownership, click here for DST vs TIC comparison

For more information, please contact us.

Keeping Pace with Inflation

Inflation has been called the silent killer of wealth. It’s rarely discussed and many retirement income strategies ignore it completely. But over time, the steady increase in the cost of living can have a profound negative effect on your standard of living in retirement.

How inflation destroys wealth

As this chart shows, even at a modest rate of inflation, your spending power could decline by nearly 40% over the next 20 years.inflationNo one knows what the future may hold for inflation, but we do know that the Federal Reserve aims to keep the rate between 1% and 3% per year, and it has reached double digits in the 1950s, 1970s and 1980s.

DST: Advantages and Disadvantages

Potential Advantages of DST 1031 Properties:

    • Defer 100% Of Capital Gains Taxes
    • Ability to Diversify 1031 Exchange Equity *
    • Management Free – No More Tenants, Toilets and Trash!
    • Multiple Asset Classes – Multifamily Apartments, Triple Net Leased Properties (NNN), All-Cash/Debt-Free Properties, Medical Properties, Pharmacies, Fast Food, Dialysis Centers, Etc.
    • Mitigate 1031 Exchange Closing Risk – Typically Close In As little As 1-3 Business Days.

Please note that diversification does not guarantee profits nor guarantee against losses.

Potential Disadvantages of Real Estate NNN, DST, TIC Properties and 1031 Exchanges:

    • No Guarantees For Distributions
    • No Guarantees For Appreciation
    • General Real Estate Risks
    • Real Estate and DST Properties are Illiquid Investments
    • Risk Of Lender Foreclosure
    • Risk Of A Loss Of Principal
    • Reliance On a Sponsor/Trustee To Make Management Decisions
    • Refinancing Risk
    • Economic Risk To The General Economy Of The United States
    • Economic Risk To The Local Economy A Property Is Located

For more information please contact us.

What is the “Jobs” Act?

Typically, when a company raises capital, it has to register its securities (basically the shares/interests that they are offering for sale).  Registration is expensive and takes a long time.  Most companies look for an exemption from registration. The most common exemption used by companies for this purpose is the private placement exemption, which basically meant the companies couldn’t publicly solicit or advertise.

The “Jumpstart Our Business Startups Act”, or the “JOBS Act” changed that.  The JOBS Act allows companies to publicly solicit for funds and advertise while still conducting a private offering.  However, it comes with a major catch.  The only investors allowed to invest must be “accredited investors”, and the company raising money has to verify that their investors are truly accredited investors.

A simple questionnaire is no longer sufficient – instead, companies must take further “reasonable steps” to prove their investors are accredited investors.  Failure to comply is a violation of federal laws and may subject the company to enforcement action and the obligation to return money raised.  That’s obviously bad for companies, but it’s also bad for investors who don’t know if the companies they invested in will suddenly have to return a portion of its capital to other disgruntled investors.

What is an “Accredited Investor”?

An “accredited investor” is a type of investor. Generally, sales of securities must be registered with the SEC unless an exemption is found. Some of the exemptions require sales to be made to accredited investors. Our application lists out the various categories of accredited investor.

The Securities and Exchange Commission also has a helpful page on accredited investors here: https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-bulletin-accredited-investors

For more information, please contact Paul McIntyre at pmcintyre@namcoa.com