Cost Segregation Studies Are the Ultimate Tax Planning Tools

Cost segregation studies are a strategic tax planning tool that allows businesses and individuals who have purchased, constructed, expanded, or remodeled any kind of real estate to increase their cash flow by accelerating depreciation deductions and deferring federal and state income taxes.

In the United States, the cost of real property is typically depreciated over a long period (39 years for nonresidential property and 27.5 years for residential rental property). However, not all components of a building have the same useful life.

A cost segregation study identifies and separates the costs of various assets within a property into different asset classes, each having its own depreciation schedule. This process allows taxpayers to depreciate certain components of the building over a much shorter period, typically 5, 7 or 15 years, instead of the standard 27.5 or 39 years.

Here is a general breakdown of how cost segregation studies work:

Person using laptop showing house icon energy efficiency hinting at cost segregation studies benefits for rental property

Engagement of Experts: To conduct a cost segregation study, taxpayers typically engage tax professionals, engineers, or specialists who have expertise in tax law, construction methodologies, and the specific IRS guidelines for cost segregation.

Property Analysis: The experts will conduct a detailed analysis of the property, including a review of the architectural drawings, building plans, and cost data. They will also conduct a site visit to understand how various components are utilized.

Cost Allocation: The costs of various components, such as wiring, plumbing, HVAC systems, carpeting, and specialty fixtures, are identified and allocated into the appropriate asset classes based on IRS guidelines.

Report Generation: A detailed report is generated that includes the methodology, documentation, and the specific asset reclassifications and cost allocations. This report will serve as documentation in the case of an IRS audit.

Tax Filing: The taxpayer will then use the results of the cost segregation study to file tax returns with accelerated depreciation deductions, which results in lower taxable income and thus reduced tax liability.

Cost segregation studies can be particularly beneficial for property owners who have recently constructed or acquired property, or made significant improvements. It is also worth noting that while these studies can offer significant tax benefits, they may also be complex and require careful consideration of various factors. Consulting with a tax or financial professional with experience in cost segregation studies is advisable before undertaking such an effort.

What Are the Potential Tax Advantages?

Closeup on notebook showing tax advantages cost segregation studies leading to tax benefits reducing income taxes

Cost segregation studies may offer several benefits in terms of tax savings and cash flow enhancement for property owners. Some of these benefits include:

Accelerated Depreciation: By breaking down a property into components with shorter useful lives, cost segregation allows for accelerated depreciation. This means that a larger portion of the property’s cost can be deducted earlier, which decreases taxable income in the initial years of ownership.

Increased Cash Flow: The reduction in current tax liability through accelerated depreciation results in potential for increased cash flow. This additional cash can be reinvested in the business, used to pay down debt, or deployed for other purposes.

Catch-Up Depreciation: For properties that have been owned for several years, cost segregation can still be implemented retroactively without amending prior tax returns. This is known as "catch-up" depreciation, and it allows taxpayers to claim the depreciation that could have been claimed in prior years in one lump sum in the current year.

Tax Planning and Timing Flexibility: Cost segregation studies can be used as a strategic tax planning tool, enabling business owners to time their deductions in order to optimize tax benefits based on current and expected future tax rates, or to offset gains in high-income years.

Improved Asset Management: A detailed cost segregation study can help business owners better understand the composition of their property, which can lead to more informed decisions about asset maintenance, disposition, or replacement.

Support in Tax Audits: A properly conducted cost segregation study can provide solid documentation and support during an IRS audit. It gives clear evidence on how the property's components have been classified and valued, which can be crucial in case of scrutiny by the tax authorities.

Potential Property Tax Reduction: In some cases, cost segregation studies can also help in reducing property taxes. Certain jurisdictions might allow lower valuation for certain property components, and a cost segregation study could help in identifying and documenting these.

Benefit from Bonus Depreciation: The Tax Cuts and Jobs Act (TCJA) of 2017 allows businesses to take 100% bonus depreciation on certain kinds of property. A cost segregation study can identify qualifying assets, allowing property owners to take full advantage of this provision.

While cost segregation studies offer numerous potential benefits, it's also important to weigh these benefits against the costs and complexities involved in conducting the study. Additionally, it is advisable to consult with a tax professional like Perch Wealth, with expertise in cost segregation to fully understand the potential implications and advantages for your specific situation.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Any information provided is for informational purposes only.
Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

Extending the Time Period of a 1031 Like-Kind Exchange

Extending the Time Period of a 1031 Like-Kind Exchange

A 1031 exchange serves as a valuable tool for investors aiming to defer capital gains taxes by selling an investment property and reinvesting the proceeds in another property. Due to the tax benefits it offers, the regulations surrounding 1031 exchanges are stringent. One notable aspect is the imposition of strict timelines by the IRS for completing these transactions.

To adhere to the guidelines, potential replacement properties must be identified within 45 days following the sale of the asset to be replaced, commonly known as the relinquished property. Furthermore, the acquisition of the replacement property must be finalized within 180 days of the sale, inclusive of the initial 45-day identification period.

Alongside these timelines, taxpayers are also required to fulfill additional stipulations set by the IRS to successfully complete a 1031 exchange.

Apart from the time constraints, there are additional requirements imposed by the IRS that taxpayers must meet for a successful completion of a 1031 exchange:

High stack of office documents symbolizing the requirements and paperwork for completing a 1031 like kind exchange emphasizing the tax benefits and regulations of such property investment strategies

Firstly, investors must refrain from accessing the proceeds generated from the sale of the relinquished property during the acquisition period. To ensure compliance with this "arms-length" status, it is necessary for investors to engage a Qualified Intermediary (QI) to facilitate the exchange. The QI assumes the following responsibilities:

  1. Holding the funds in a separate account that is not accessible to the investor.
  2. Receiving the formal identification of potential replacement properties as per IRS regulations.
  3. Overseeing the purchase of the identified replacement property.
  4. Maintaining comprehensive documentation of all transactions involved in the exchange process.

Another important requirement for a successful 1031 exchange is that the value of the replacement property must be equal to or greater than the value of the relinquished property. Additionally, the investor needs to identify potential replacement properties that fall into one of the following categories:

  1. The investor can identify up to three potential acquisitions without any limitation on the total value.
  2. The investor can identify more than three potential replacement properties, but the combined market value cannot exceed 200 percent of the original sale.
  3. The investor can identify any number of properties with any individual or combined value, but must subsequently acquire at least 95 percent of the identified value.

Lastly, in order to fully qualify for the 1031 exchange, the investor must not only replace the value of the relinquished property but also the debt associated with it. If the purchase price of the replacement property is lower than the sales price of the relinquished asset, the remaining amount, known as "boot," will be subject to taxation.

How to get an Extension for your Timeline

Gantt chart illustration for managing timeline extensions in a 1031 like kind exchange underscoring the strategic planning needed to maximize tax benefits in property investments

Obtaining an extension on the timeline for a 1031 exchange is generally not possible. The 180-day period allotted for completing the exchange is typically firm and cannot be extended. However, it is important to note that during the Covid-19 pandemic, the IRS did provide extended deadlines to accommodate the restrictions imposed by the crisis.

In certain circumstances, the IRS may grant an extension if the target property is located in an officially declared disaster zone. This extension allows taxpayers extra time to assess the suitability of the identified replacement property. The IRS follows the guidelines outlined in Revenue Procedure 2018-58 to determine eligibility for a disaster-related extension.

It is worth mentioning that a taxpayer may need to request an extension for filing their taxes if the exchange period overlaps with the regular tax filing deadline. For instance, if the exchange period concludes after the standard filing deadline, and the taxpayer has not successfully acquired the replacement property in time to meet the filing deadline, they can submit Form 4868 to request an extension for filing taxes.

Form 4868, also known as the Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, allows taxpayers to request an additional period of time, usually six months, to file their tax returns. This extension applies to the tax filing requirement and does not impact the 1031 exchange itself.

It is important to note that while requesting a tax filing extension may grant additional time for filing taxes, it does not extend the 180-day deadline for completing the 1031 exchange. Taxpayers must still abide by the original timeline for identifying and acquiring the replacement property to fully qualify for the tax benefits associated with a 1031 exchange.

In any case, it is advisable to consult with a tax professional or Qualified Intermediary to ensure compliance with all IRS regulations and to explore any available options for extensions or accommodations that may apply to your specific situation.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Any information provided is for informational purposes only.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication. 

1031 Risk Disclosure: 

Common Disqualifications for Properties in a 1031 Exchange

Non-negotiable Factors in a 1031 Exchange

A 1031 exchange comes with several in-stone requirements that must be met. Here are some key factors:

  1. Equal or Greater Value: The relinquished property must be exchanged for replacement property/properties of equal or greater value.
  1. Calendar Deadlines: Strict deadlines must be followed during the exchange process. These include identifying replacement properties within 45 days and completing the exchange within 180 days.
  1. Involvement of a Qualified Intermediary (QI): All funds and proceeds must be handled by a Qualified Intermediary, who acts as a neutral third party during the exchange.
  1. Property Eligibility: Not all properties qualify for a 1031 exchange. Eligible properties must meet certain criteria to be eligible for tax deferral benefits.

By understanding and adhering to these non-negotiable requirements, investors can navigate the 1031 exchange process successfully and maximize their tax benefits.

The Evolving Landscape of 1031 Exchanges

In the not-so-distant past, various types of personal or intangible properties, such as machinery, equipment, and collectibles, were eligible for 1031 exchanges. Even patents and copyrights could be exchanged.

However, with the implementation of the Tax Cuts and Jobs Act in 2017, many of these assets were disqualified from like-kind exchanges. Today, only "real property held for productive use or investment" qualifies for a 1031 exchange.

But it doesn't end there. Not all real estate falls under the umbrella of qualified like-kind exchange properties. The IRS specifies certain types of real estate that are ineligible for such treatment.

Navigating the Limitations: Real Estate Bought and Held Primarily for Sale

Are you considering venturing into the world of buying and flipping houses? That's an exciting endeavor. However, it's important to note that such properties cannot be included in a 1031 exchange. The IRS categorizes this type of real estate as "stock in trade" or "held primarily for sale."

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To determine if a property is held primarily for sale rather than for investment, certain parameters come into play:

  1. The original purpose and intent of purchasing the property.
  2. The extent of improvements made to the property.
  3. The frequency and continuity of sales made.
  4. Your primary occupation or business.
  5. Use of advertising, promotion, or other efforts to find buyers.
  6. Listing the property with brokers.
  7. Duration of the property's hold.

In essence, if your intention was to acquire a property, make improvements, and quickly sell it to another buyer, it does not qualify for a like-kind exchange. Additionally, selling an investment property within 12 months of acquisition can raise concerns with the IRS.

Exploring the Limits: Primary Residence

Wondering if you can include your primary residence—the place you call home most of the time—in a 1031 exchange? The answer is a firm "no." Although your home may appreciate in value, it doesn't fall under the category of real estate held for trade or investment.

There is a potential scenario where your home could qualify for 1031 exchange treatment: if you choose to convert it into a rental property instead of residing in it. However, even in this case, there are strict rules to follow. First, you cannot continue living in the property while renting it out. Second, you must plan to hold the house as a rental property for a minimum of two years to meet the qualifying criteria.

Beyond Borders: Foreign Real Estate

When it comes to a 1031 exchange, you have the flexibility to replace a property within the United States with another property located anywhere else in the country. This includes properties in the U.S. Virgin Islands and Guam, but excludes properties in Puerto Rico.

However, it's important to note that you cannot exchange U.S. property for properties in countries like Canada, Mexico, or any other foreign location outside the United States.

On the other hand, it is possible to exchange foreign real estate held for trade or investment for real property in any country other than the United States. It's crucial to familiarize yourself with the specific rules and regulations of each country regarding purchases, sales, and exchanges.

Before proceeding with an exchange, make sure to understand the deadlines and requirements set by the IRS. Additionally, ensure that both the property you wish to exchange and the property you intend to acquire meet the IRS qualification criteria. Failing to do so can result in unintended consequences during the exchange process.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Any information provided is for informational purposes only.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure:

Using a 1031 Exchange for Constructing an Investment Property: Is it Possible?

Investors in the real estate industry can utilize 1031 exchanges to defer the payment of capital gains taxes when they sell an investment property and use the proceeds to reinvest in another property. It is important to note that if you choose to complete a sale and purchase outside of a 1031 exchange, you will be liable to pay capital gains taxes on the difference between the adjusted basis and the sale price of the property.

Suppose you purchased a piece of land for $250,000, which included the acquisition costs, and spent $100,000 on improvements, making your adjusted basis $350,000. After holding the property for five years, you decide to sell it for $600,000. This means that you will owe capital gains taxes on the difference between the sale price and the adjusted basis, which is $250,000. Depending on your tax bracket, you could owe up to $50,000 in taxes.

If you sell an investment property and choose to conduct a 1031 exchange, you can reinvest the proceeds from the sale into a new property while adhering to the procedures and timelines that the IRS created for the transaction. By doing so, you can reinvest the entire amount of the sale, which in the example provided was $600,000, rather than just $550,000. However, there are several essential requirements you must follow to qualify for this tax-deferred exchange:

●     Firstly, you must use a Qualified Intermediary to manage the process. The QI creates an account to hold and manage the proceeds between the initial sale and the final acquisition.

●     Secondly, you must identify potential replacement properties within 45 days of the sale and complete the purchases, or purchases, within 180 days from the start. This means that you have 45 days to provide a written list of potential replacement properties to the QI and 180 days to complete the purchase(s) of the replacement property(ies).

●     Lastly, it's important to note that the value and debt levels of the replacement property must match or exceed that of the relinquished property. In other words, the replacement property must have a purchase price equal to or greater than the relinquished asset, and you must also swap an equal or greater amount of debt.

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Completing a 1031 exchange can be a complex transaction with strict timelines to adhere to, but the potential tax deferral can offer significant advantages. One of the benefits is the ability to use the exchange for subsequent investments, leading to a transfer when you pass away. At this point, the heir will inherit the property at its stepped-up value, eliminating any deferred taxes. This feature has the potential to create an excellent opportunity for investors to continue growing their investment portfolios while mitigating their tax liability.

Can I Build on the Property?

If you're considering building on a replacement property acquired through a 1031 exchange, there are specific guidelines you need to follow. If the replacement property's value equals that of the relinquished property, you can proceed with the exchange and make any desired improvements to the replacement property. However, if the replacement property's value is lower than that of the relinquished property, you'll need to make improvements to bring its value up to par.

The catch is that all the necessary improvements must be completed within the 180-day period allowed for the exchange. Additionally, you'll need to outline the planned improvements within the first 45 days after identifying the replacement property to be eligible for the exchange. It's essential to work with a qualified intermediary and seek professional advice to ensure you comply with all the rules and regulations of a 1031 exchange.

Can I Transact a 1031 Exchange into New Construction?

The 1031 exchange allows real estate investors to defer paying capital gains taxes by reinvesting proceeds from the sale of an investment property into a replacement property. However, one of the key requirements is that the value of the replacement property must be equal to or greater than the value of the relinquished asset. This requirement can make it challenging to use a 1031 exchange to build on a replacement property.

For instance, if an investor is selling a retail property and wishes to build a multifamily housing structure on vacant land, they must ensure that the value of the new asset is equal to or greater than the original property. If the new acquisition is of lower value until construction is completed, the investor must complete the construction by the end of the 180-day period. During this time, the title must be held by a qualified intermediary.

It is important to follow the rules and timelines of a 1031 exchange to avoid disqualification and to ensure a successful exchange. Investors should also work with a qualified intermediary to manage the transaction and help navigate any complexities. By doing so, they can leverage the potential benefits of a 1031 exchange and potentially defer paying capital gains taxes on their real estate investments.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Any information provided is for informational purposes only.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure:

Who Holds Funds in a 1031 Exchange?

The 1031 exchange, also known as the like-kind exchange, is a popular strategy among real estate investors that allows them to defer capital gains taxes on the sale of a property. By exchanging one investment property for another, the investor can leverage the appreciation in one property to invest in another. This is a flexible strategy that can help investors meet various financial and investment goals, such as upgrading, diversifying their portfolio, pursuing new geographic opportunities, and more.

However, if the transaction is not structured as a 1031 exchange, the investor will be required to pay capital gains taxes on the appreciation of the property they sold. This can significantly reduce the amount of funds available for reinvestment in a new property, limiting the investor's ability to take advantage of new opportunities.

By utilizing the 1031 exchange, investors can avoid paying capital gains taxes and retain more of their investment capital, providing them with the ability to strive to grow their real estate portfolio and achieve their investment goals.

For instance, consider the scenario where an investor sells a property they've held onto for a number of years, resulting in a $100,000 appreciation. This could lead to a substantial capital gains tax bill, potentially reaching as high as 40% or $40,000, based on their income level. By using a 1031 exchange instead of a traditional sale and purchase arrangement, the investor can keep that $20,000 for their next real estate investment.

How does it work?

To effectively utilize a 1031 exchange and defer payment of capital gains tax, careful planning is crucial. The IRS has strict guidelines and timelines for executing a 1031 exchange, with the 45-day identification period starting immediately after the sale of the initial property, referred to as the relinquished asset. Investors must consider their options for replacement properties within this time frame. There are three options for identifying replacement properties:

When it comes to 1031 exchanges, identifying potential replacement properties is a critical step in the process. To take advantage of the tax-deferred benefits, the investor must adhere to strict timelines set by the IRS. One of the ways to do so is by identifying up to three individual properties that can be purchased as replacement assets.

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The investor has the option to choose properties of any value, as long as they meet the requirement of replacing the value and debt of the relinquished property. This is important to keep in mind as it helps to ensure that the investor is not only deferring taxes but also maintaining the same level of investment.

By identifying up to three individual properties, the investor has a range of options to choose from and can choose the one that best suits their needs and goals. Furthermore, the investor is committed to purchasing at least one of these properties, thus ensuring that they are taking full advantage of the 1031 exchange process.

When it comes to 1031 exchanges, investors have the option of identifying more than 3 potential replacement properties, but the combined value of these properties cannot surpass 200% of the value of the asset that was sold. It's important to note that the investor must still purchase at least one of the identified properties.

This means that while the investor has the flexibility to consider a wider range of options, they must still ensure that the replacement properties are within the set financial limit in order to take advantage of the tax benefits of a 1031 exchange. This provides a balance between offering the investor a wider range of options while also ensuring that the transaction meets the requirements set forth by the IRS.

It is important to note that while the investor has the flexibility to identify an unlimited number of replacement properties, they must make sure that the total market value of the selected group of properties does not exceed 200% of the value of the sold asset. This ensures that the full value of the sold property is being replaced with the new investments.

Additionally, the investor must commit to purchasing at least one of the identified properties, ensuring that they are making a solid investment in a new property with the proceeds from the sale of their previous asset.

Who is Responsible for Holding the Funds During the 1031 Exchange Process?

Successful 1031 exchanges require the involvement of a Qualified Intermediary (QI), also known as an exchange accommodator. The QI holds a crucial role in the transaction, as they are responsible for holding and managing the funds during the sale and purchase process. They also receive the formal identification of replacement properties from the investor, and ensure the transfer of funds to the seller when a selection is made.

It's important to note that the QI must be an impartial third-party, and cannot be the investor or related to them, nor can they be an employee or agent of the investor. When choosing a QI, it is recommended to conduct research on their qualifications and expertise, as they should have extensive experience in executing 1031 exchanges, managing escrow, conducting sales, and preparing tax forms. The QI must also ensure that the entire transaction is completed within 180 days, including the 45-day identification period.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Any information provided is for informational purposes only.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure:

·      There’s no guarantee any strategy will be successful or achieve investment objectives;

·      All real estate investments have the potential to lose value during the life of the investments;

·      The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;

·      All financed real estate investments have potential for foreclosure;

·      These 1031 exchanges are offered through private placement offerings and are illiquid securities. There is no secondary market for these investments.

·      If a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;

·      Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits

Why the Private Placement Memorandum is so Important

Why the Private Placement Memorandum (PPM) for Delaware Statutory Trust 1031 Exchange Investors Is So Important

All Perch Wealth Delaware Statutory Trust 1031 Exchange real estate investments must be accompanied by a unique Private Placement Memorandum (PPM) as part of its due diligence and marketing presentations. However, even more importantly, Perch Wealth insists that all potential investors thoroughly read the contents of the PPM in order to get a full picture of the potential risks associated with the DST 1031 investment, and understand how the overall investment vehicle is structured.

It is crucial for all accredited investors to carefully read the entire Private Placement Memorandum, with a particular focus on the risk section, before making any investments. IRC Sections 1031, 1033, and 721 are complex tax codes, and for this reason, it is advisable for all investors to seek guidance from a tax or legal professional to understand how these codes may apply to their individual situations.

What Is A PPM?

A private placement memorandum (PPM) is a legal document that contains a comprehensive overview of an investment offering. It typically runs over 100 pages and includes information on risk factors, financing terms, property and market details, sponsor background, and financial projections. The PPM may also include exhibits such as the DST trust agreement, subscription agreements, third-party reports, lease agreements, and due diligence information like recent property appraisals.

The PPM serves to protect both the buyer and the seller of the unregistered security by providing detailed information about the investment, including industry-specific risks, to the buyer and protecting the issuer or seller from potential liability resulting from an unhappy investor. Additionally, the PPM includes a copy of the subscription agreement, which is a legally binding contract between the issuing company and the investor.

In summary, a PPM is a confidential legal document that serves as both a disclosure agreement and a marketing tool. It should provide a detailed and informative description of the investment, without using overly persuasive language. The PPM should include information on both the external and internal risks associated with the investment, as well as potential opportunities for investors.

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Why are Disclosures Required for 1031s?

The Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) consider DST 1031 exchange investments as "private placements" and "non-registered securities." As a result, DST investments can only be sold to accredited investors through a FINRA-registered Broker Dealer and registered representative such as Perch Wealth. Additionally, each DST 1031 exchange investment must be accompanied by specific disclosure information for investors to read and fully understand the investment vehicle before making a decision to invest.

Risk Factors When Investing

DSTs, like all real estate investments, come with various risks, including the potential for a complete loss of principal. Risks specific to DSTs include limited management control and the requirement for investors to assume the risk of total loss. Additionally, DSTs are typically illiquid investments. Other risks associated with real estate investments in general include natural disasters, market conditions, and early termination of leases.

As DSTs are passive investments, investors have limited control over their management. Therefore, it is crucial for potential investors to thoroughly research the company and its management team before making an investment.

The private placement memorandum (PPM) should provide detailed information about the company, including its experience in managing DST 1031 exchanges, the qualifications and experience of the management team, and testimonials from past clients. Experienced firms like Perch Wealth, with a focus on the DST 1031 market and a wide range of investment options, are highly sought after by investors.

Overview & Purpose on a PPM

The "overview and purpose" section of a private placement memorandum (PPM) gives investors an understanding of the sponsor company and how they plan to use the invested funds. This section should also include information about the sponsor's market knowledge, planned operations, and due-diligence results. This information should provide investors with a clear understanding of the sponsor's identity, investment goals, and strategies for achieving them.

PPM Conclusion

A private placement memorandum (PPM) (or similar disclosure document) is a vital component of any DST 1031 investment and it is essential for investors to thoroughly review the PPM before making a decision. While reviewing PPMs can be overwhelming, the industry has standardized the format of these documents to make it easier for investors to understand and compare different investments.

Working with an experienced DST 1031 exchange representative, such as Perch Wealth, can greatly assist investors in reviewing and understanding the important information in the PPM, and can be a valuable resource in making informed investment decisions.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Any information provided is for informational purposes only.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure:

At Which Age Are You Not Required to File Income Taxes?

The age at which you can stop filing income taxes depends on your income and earnings rather than your age. This article will discuss when you can expect to stop filing taxes, how retirement income may affect your tax liability, and ways to lower your tax burden. Understanding these factors can help you plan for a successful retirement.

The age you can stop filing income taxes.

The IRS does not have a specific age at which individuals are no longer required to file income tax returns or pay taxes. The requirement to file is based on income thresholds and not age. Social Security benefits may also affect your filing status, as those who only receive Social Security income may not be required to file.

However, it's important to note that the earliest age to collect Social Security is 62, so this may potentially be the age at which your filing status changes. Additionally, it's important to be aware of state tax laws, as they can vary and may require you to file taxes if you:

●     Own or rent property in a state

●     Earn income in a state during the tax year

●     Are a resident of that state

It's important to be aware that even if you don't have to file a federal tax return, you may still be required to file state taxes. Speaking with a tax professional, like a CPA, can help you understand your situation and what you need to be mindful of when filing taxes.

They can also help you to take advantage of any tax breaks or deductions that you are eligible for, which can help to lower your tax burden. It's also a good idea to stay informed about any changes to tax laws, as these can affect your filing status and tax liability.

Thresholds for income.

The IRS has set income thresholds that determine who is required to file a tax return. If your gross income falls below a certain amount, you may not be required to file taxes. Gross income is defined as all income received in the form of money, goods, property, and services that is not exempt from tax. These income thresholds are based on gross income and not age.

Based on the IRS rules for the 2021 tax year, if you are older than 65 years of age, you must file a federal income tax return under the following circumstances:

●     If you are single and your gross income is at least $14,250

●     If you are head of household and your gross income is at least $20,500

●     If you are married filing jointly, one of you is older than 65 and your combined gross income is at least $26,450

●     If you are married filing jointly, both of you are older than 65 and your combined gross income is at least $27,800

●     If you are married filing separately, and your gross income is $5

●     If you are a qualifying widow, and you earned at least $26,450

For tax-filing purposes, individuals are considered age 65 if they turn 65 by the end of the tax year. For the 2021 tax year, anyone born before January 2, 1957, is considered 65 or older for tax-filing purposes.

It's important to note that these are the thresholds for the 2021 tax year, and may be subject to change in future years. Therefore it's recommended to double-check them before filing each tax season to ensure you are aware of the current thresholds.

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Social Security Benefits Impact Filing Requirements.

When it comes to understanding how Social Security benefits impact your filing requirements, it's important to know that your gross income is the primary factor in determining if you have to file taxes. However, Social Security benefits may also play a role.

The taxes on Social Security benefits are determined by your combined income, which includes:

●     Your adjusted gross income

●     Half of your Social Security income

●     Your tax-exempt interest

If your combined income exceeds a certain threshold, a portion of your Social Security benefits may be subject to taxes. However, if your combined income falls below the threshold, you may not have to pay taxes on your Social Security benefits.

Retirement account withdrawals impact filing requirements.

When it comes to determining your filing requirements, another factor to consider is your retirement benefits. Depending on the type of retirement account you have, you may be required to take minimum required distributions, or you may choose to make other withdrawals from the account during the year.

It's important to note that whether these distributions and withdrawals are taxable and counted as gross income depends on the type of account you have. For example:

●     Withdrawals from a Roth 401(k) or Roth IRA are typically tax-free and do not count toward your gross income

●     Withdrawals from a traditional 401(k) or traditional IRA, on the other hand, will count towards your gross income and may increase your tax liability.

Reduce your tax liability?

Consider tax credits to lower your overall tax burden while filing. The Credit for the Elderly or the Disabled is a tax credit for senior citizens and ranges from $3,750 to $7,500 in addition to the standard deduction. This credit may help you move into a lower tax bracket or result in a refund.

Are Capital Gains Tax & Inheritance Tax the Same Thing?

In the United States, individuals and businesses are subject to various forms of taxation, including taxes on wages, earnings, goods, services, and property ownership. Two specific types of taxes that American citizens may encounter are capital gains tax and inheritance tax. Both taxes can result in an increased tax bill for the individual, but they are not the same thing.

Capital gains tax is applied to the profit made from the sale of an asset, such as property, stocks, or bonds. The tax is calculated based on the difference between the acquisition price and the sale price of the asset. The tax rate can vary depending on the length of time the asset was held and the type of asset. For example, capital gains tax on long-term investments, such as stocks held for over a year, are typically taxed at a lower rate than gains on short-term investments.

On the other hand, inheritance tax is applied when an estate is passed on to beneficiaries upon the death of the person who owned it. The tax is applied to the value of the estate, including cash, investments, and property. Unlike capital gains tax, inheritance tax is imposed on the beneficiaries rather than the estate.

In addition, this tax is not uniform across the US, some states impose Inheritance tax and some don't. Inheritance tax is generally imposed on estates who are not related to the estate owner, such as friends or distant relatives.

What is an estate tax?

Inheritance tax, also known as an estate tax, is a transfer tax imposed on an individual's right to transfer property at death. It is important to note that this tax is not imposed on the federal level in the United States, but rather by some states.

The term "inheritance tax" is not used in federal taxation, instead the term used is "estate tax". The estate tax is imposed by the IRS, and defined as a tax on the right to transfer property at death. Spouses are generally not subject to estate tax due to the unlimited marital deduction.

However, there are exceptions and some states impose state inheritance tax. Additionally, 12 states and the District of Columbia also impose an additional estate tax on top of what the federal government charges.

For example, if you live in Iowa, Kentucky, Maryland, Nebraska, New Jersey, or Pennsylvania, your heirs might have to pay a state inheritance tax. The threshold for the estate tax is $12.06 million in 2022 and $12.92 in 2023. Any estate above these values will typically be subject to the estate tax.

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What are capital gains taxes?

Capital gains tax is a type of tax that is imposed on the profit that is earned from the sale of a capital asset. Capital assets can include a wide range of items such as real estate, stocks, bonds, and other investments, as well as personal property that is used for investment purposes.

The profit from the sale of these assets is subject to capital gains tax. It is important to note that capital gains tax is different from estate or inheritance taxes, which are taxes imposed on the transfer of assets from one person to another upon death.

The amount of tax owed on capital gains is determined by several factors, including the individual's income tax bracket. The federal government has several different tax rates for capital gains, which vary depending on the type of asset sold and the length of time it was held.

Generally speaking, the tax rate for long-term capital gains (assets held for more than one year) is lower than the rate for short-term capital gains (assets held for less than one year). For example, the current average federal capital gains tax rate is 15%, however, it can be higher or lower based on your income level.

Additionally, some states also impose their own capital gains tax rates in addition to the federal taxes owed. These state capital gains tax rates can vary widely, so it is important to understand the laws in your state before selling a capital asset. Overall, Capital Gains Tax are taxes imposed on the profit that is earned from the sale of a capital asset, can vary depending on your income level, and some states may have their own rate as well.

Capital gains taxes and inheritance taxes may seem similar at first glance, but they are in fact very different types of taxes. Capital gains taxes are imposed on the profit earned from the sale of a capital asset, while inheritance taxes are imposed on the transfer of assets from one person to another upon death.

In Conclusion

It is important to understand the difference between the two, as well as the federal and state regulations surrounding both, as it can affect the amount of tax you owe. The laws and regulations regarding capital gains and inheritance taxes can vary from state to state, so it's essential to seek the advice of a tax professional who is knowledgeable about both federal and state policies and guidelines.

In summary, Capital gains taxes and inheritance taxes are different taxes, with different regulations and laws. To fully understand what you may owe, it's important to work with a tax professional well-versed in both federal and state policies and guidelines.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only and should not be relied upon to make an investment decision. All investing involves risk of loss of some, or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure:

The Asset Class of Senior Housing

Despite the fact that the birth rate in the United States has fallen to its lowest level in more than a century, there are still many seniors in need of high-quality housing that meets their unique requirements. Just behind the millennial generation in terms of size, the baby boomer generation is the second-largest. Our civilization is aging as a whole, necessitating more senior housing in the years to come. Over the decade beginning in 2020, the number of persons who will be 75 years old will increase astonishingly by 48.1%, more than double the growth rate from the previous ten years (Source: U.S. Census Bureau projections). The best moment to invest in the asset class of senior housing may be right now.

Senior housing is an enterprise.

Every single day, around 10,000 baby boomers reach the traditional retirement age of 65 (Source: Sen. Rob Portman (R-Ohio), in The Wall Street Journal, July 22, 2014). The next golden years are short-lived. Senior living is a given for many as they approach or attain octogenarian status, despite the fact that some baby boomers are choosing to stay in the comfort of their homes due to the rising cost of home care.

The unpleasant loss of autonomy that comes with aging is also a possible investment opportunity for astute investors. But no two senior housing complexes are alike in terms of their size, style, or value proposition. This unique company's degree of attention and concern is what makes it special. Operators who have the right policies, procedures, and systems in place draw customers as well as devoted personnel. The finest senior living facilities have strong personnel retention rates, which draw more residents and boost revenue.

The average number of units in senior home complexes exceeded 100 as of the beginning of 2021. (106 to be exact). A $34,725,000 average development cost translates to a $269,400 average cost per unit. (Source: CBRE's December 2018 U.S. Seniors Housing Development Costs Report) If you do the math, you'll find that the average cost per square foot in this industry is an amazing $317. As more baby boomers move into senior homes, this number will probably rise much further.

The Advantages of Senior Housing as a Class of Assets

Although it makes sense that the typical investor would be focused on finding the next hot growth stock, senior housing actually has the potential to outperform other asset classes in both the short and long term. According to the research, senior housing has done pretty well as an asset class even throughout economic downturns. As they get older, people frequently look for a social setting with readily available care.

Since more people are living longer than ever, they will stay in senior home for longer than in the past, driving up costs for every level of care. The several degrees of senior living are as follows:

Age 55+
Senior living
dementia care
competent nursing
The words "Senior living" or "senior housing" frequently conjure images of expert nursing in the minds of many people. However, it's critical to thoroughly comprehend the differences because each level of care demands unique operational capabilities and shouldn't be grouped together when determining the return on an investment in senior housing.

There are no two identical senior housing communities.

In terms of care quality and investment appeal, senior home facilities within a single market may range greatly from one another. In other words, each form of senior living facility has unique characteristics and subtleties that should be thoroughly considered and grasped.

Although occupancy rates for senior living vary across the sector, rents are comparatively stable and could rise as the housing crisis plays out in the coming years. In contrast to other types of real estate, senior housing assets have historically offered consistent rates of return.

Invest in Senior Housing with Advice from a Sector Professional

There will likely be more than a 22% increase in the number of Americans over 75 between now and 2025, according to projections. By 2025, more than a million people will have reached that age. As the decade ahead takes shape, it is evident that senior housing will not only be in demand but also perhaps be quite challenging to find (Source: U.S. Census Bureau projections).

The time is now to think about making an investment in this expanding asset class. Get in touch with Perch Wealth right away and invest under the direction of a senior housing industry expert who has in-depth knowledge of this sector, including the advantages and disadvantages of particular operators, to acquire a complete grasp of the potential risks and benefits. Seize the chance to diversify your investment portfolio and benefit from the growing senior housing market.

References

Dale Watchowski, Is Now a Good Time to Invest in Senior Living? (February 9, 2021),

Ecofin, Senior Living - Investing in a growing population (April 9, 2021),

Blake Peeper and Vanessa Gil, Pensions & Investments, Commentary: Senior housing in the post-COVID-19 world (November 17, 2020)

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only and should not be relied upon to make an investment decision. All investing involves risk of loss of some, or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure:

A QI's Contribution to a 1031 Exchange

For all 1031 trades, a qualified intermediary (QI) is necessary. Real estate investors must choose a QI they can rely on and trust given the significance of the QI in an exchange. However, doing so can be challenging because how can an investor tell whether a specific QI is credible? This quick guide will show you how to choose a trustworthy QI for a 1031 exchange.

A QI is what?

An individual or organization that facilitates a 1031, or like-kind, exchange in accordance with Internal Revenue Code (IRC) Section 1031 is referred to as a QI, sometimes known as an accommodator. According to the Federal Code, a QI's responsibilities are as follows:

A qualified intermediary is a person who: (A) Is not the taxpayer or a disqualified person; and (B) Enters into a written agreement with the taxpayer (the "exchange agreement") and, in accordance with the exchange agreement, obtains the property being exchanged from the taxpayer, transfers the property being exchanged, acquires the replacement property, and transfers the replacement property to the taxpayer. (26 CFR § 1.1031(k)-1)

A person can become a QI without having to fulfill any eligibility requirements or obtain a license or certificate. The Internal Revenue Service (IRS) does, however, specify that anyone who is related to the exchanger or who has had a financial relationship with the exchanger - such as an employee, an attorney, an accountant, an investment banker or broker, or a real estate agent or broker - within the two years prior to the sale of the relinquished property is disqualified from serving as the exchanger's QI.

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Why is a QI crucial to a 1031 Exchange?

Every 1031 exchanger is required to choose a QI and sign a formal agreement before closing on the property being given up. After being chosen, the QI's three main duties are to create the exchange documentation, swap the properties, and keep and disburse the exchange monies.

The Creation of Exchange Documents

The QI creates and maintains all pertinent paperwork throughout the exchange, including escrow instructions for all parties involved.

Trade of Properties

In a 1031 exchange, the QI is required to buy the exchanger's property that is being given up, give it to the buyer, buy the seller's property that is being replaced, and give it to the exchanger. Despite the fact that the QI also transfers the title, the QI is not technically required to be a link in the chain.

Exchange funds holding and releasingFor an exchanger to defer capital gains, all proceeds from the sale of the relinquished property must be held with the QI; any proceeds held by the exchanger are taxable. As a result, the QI must handle the sale funds of the property that was given up and put them in a different account where they will be kept until the replacement property is bought.

For the exchange to be valid, the exchangers must adhere to two crucial timeframes. At the conclusion of the identification phase, the first occurs. The exchanger is required to choose the new property to buy within 45 days after the transfer of the property being given up. At the conclusion of the exchange period, the second occurs. Within 180 calendar days of the transfer of the relinquished property, the exchanger must receive the replacement property. Even if the 45th or 180th day falls on a Saturday, Sunday, or legal holiday, these severe deadlines cannot be extended.

What factors should investors think about while selecting a QI?

Since a QI is not needed to hold a license, investors should do their research to make sure they choose someone who can manage the 1031 exchange effectively. Investors may be compelled to pay taxes on the exchange as a result of errors made by a QI because the IRS regrettably does not pardon any mistakes made by a QI. Here are some factors that investors should take into account while choosing a QI.

Statutes of the State

Although QIs are not governed by federal law, certain states have passed legislation that does. For instance, rules governing the sector have been passed in California, Colorado, Connecticut, Idaho, Maine, Nevada, Oregon, Virginia, and Washington. These states frequently have license and registration requirements as well as requirements for separate escrow accounts, fidelity or surety bond amounts, and error-and-omission insurance policy amounts.

Federated Exchange Facilitators

A national trade organization called the Federation of Exchange Accommodators (FEA) represents experts who carry out like-kind exchanges in accordance with IRC Section 1031. Support, preservation, and advancement of 1031 exchanges and the QI sector are the goals of the FEA. Members of the association must follow by the FEA's Code of Ethics and Conduct.

Additionally, the FEA has a program that awards the title of Certified Exchange Specialist® (CES) to those who meet certain requirements for work experience and who successfully complete an exam on 1031 exchange rules and processes. This certificate's holders are required to pass the CES exam and complete ongoing education requirements. To taxpayers thinking about a 1031 exchange, the designation "demonstrates that the professional they have selected possesses a certain level of experience and competence."

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Information and expertise

As previously stated, a QI error in a 1031 exchange could lead to a taxable transaction. Before making a selection, investors who are choosing an accommodator should carefully consider each person's credentials, including their knowledge and experience in the sector. Investors should find out if the person is employed full-time or part-time, and how many transactions and how much value the person has enabled. Furthermore, it's critical to understand whether the person has ever had a failed transaction and, if so, why.

Understanding 1031 exchanges is essential. Potential QIs should be familiar with the fundamentals as well as the specifics of the 1031 exchange procedure. For instance, QIs should be aware of what constitutes a like-kind attribute. They should also be aware of Delaware Statutory Trusts (DSTs), one of the most frequently disregarded alternatives to 1031 exchanges. Sadly, a lot of QIs are unfamiliar with DSTs. Investors who wish to successfully delay capital gains while still achieving their overall financial goals must find a qualified and professional QI.

How exactly should an investor choose a QI?

Investors should ask for recommendations to identify a QI in good standing. Finding a trustworthy QI might be a lot easier by word of mouth. Investors can request a recommendation from a real estate lawyer, a trustworthy title business, a certified public accountant (CPA) with experience in 1031 exchanges, or even the other party to the exchange.

Investors must probe potential QIs with inquiries that go beyond the bare minimum to learn more about their breadth of expertise and experience. For instance, the FAE mandates that prospective QIs work full-time for a minimum of three years before being allowed to take the CES exam. When evaluating a QI's experience, three years is a decent place to start; five to ten years is a good number.

One of the most important steps in a 1031 exchange is locating a qualified intermediary (QI), as the exchange cannot take place without one. Investors must confirm that their QI is knowledgeable about the numerous tax rules involved and has extensive experience. Additionally, investors must confirm that the QI is not a relative, an employee, or an agency and has had no recent financial ties to them. The IRS does not take these issues lightly; if the requirements outlined below are not met, there may be severe penalties assessed, or the IRS may even forbid the transaction from taking place at all.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only, and should not be relied upon to make an investment decision. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure: