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: 

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:

Should I Invest in Self-Storage?

Residential property investing is the most simple and understandable for many investors making their initial forays into the real estate market. After all, the majority of people have rented out or bought a home at some point in their lives. They are aware of how residential structures work.

However, a residential-only mindset could let an investor miss out on other, more lucrative prospects. Self-storage is one of those chances; it's a booming asset class with an estimated $48 billion in market value and rising.

In this post, we give an introduction to the self-storage market and go over key advantages and disadvantages that investors should think about when evaluating a self-storage potential. Learn more by reading on.

What Is Self-Storage?


Simply described, a self-storage facility is an area that can be rented out to outside parties to use as secure, convenient storage for their goods. This space is typically divided into many units.

There is a great need for self-storage. Self-storage is used by people for a wide range of reasons, such as to complement their current storage, to store belongings during home renovations, for archiving and decluttering needs, during different life transitions, and when they are moving.

Self-storage is often divided into the following three "classes":

Class A self-storage: These facilities are the most expensive, offer the most up-to-date amenities (such as climate control), are professionally maintained, and have recently been built (within 10 to 15 years). They also often have low vacancy rates. Class A self-storage is conveniently located and frequently paired with similar businesses like UPS or U-Haul rentals.
Class B self-storage: These facilities are older (often over 15 years old), well-maintained, but may not have 24/7 on-site management. They also offer fewer amenities and, in general, charge low- and middle-income renters average rates. These homes will typically be close to major thoroughfares, though not always in desirable areas.
Class C storage facilities: these tend to be older, in less convenient locations (typically off the beaten path), with few or no amenities, and with insufficient security. In order to provide investors with a reasonable return, these properties frequently have the lowest rent and may need considerable property upgrades.
There isn't a "best" or "worst" self-storage class. Depending on an investor's risk tolerance and planned business plan, any one could be a profitable investment. Over time, a value-add focused self-storage sponsor can frequently bring Class B/C properties up to par with Class A facilities.

The Self-Storage Industry's History


Over the past 50 years, the self-storage market has undergone significant transformation, notably in terms of the layout and quality of services offered by these facilities. Self-storage facilities were once plain, lengthy warehouses with sporadically located garage doors leading to partitioned areas where people would store their goods. There may or may not be a fence around the property, but security at these places was often not very strong.

Self-storage structures were frequently designated for oddly shaped parcels of land or other abandoned pieces of property that people struggled to develop for other purposes. They served as the last-ditch development when no other plans could be made to make money.

Rewind to the present day. The self-storage sector is not just a side gig. It's a desirable asset class right now. Self-storage facilities are no longer hidden on remote properties. Self-storage facilities are now found in well-known cities, next to popular establishments like supermarkets and big-box retailers.

The value of self-storage facilities has also increased as a result of their modernization. Self-storage facilities of today are frequently multi-story structures with variously sized climate-controlled units. They have strong security measures, such as automatic gates. Many are combined with related services, including U-Haul trucking facilities, to give people looking to relocate and subsequently store their belongings a one-stop shop.

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The Benefits and Drawbacks of Self-Storage Real Estate Investing


Investor interest in self-storage is beginning to grow at an unprecedented rate because to historically low interest rates and the asset's solid fundamentals. Self-storage is undoubtedly not a risk-free financial decision. Just like with other asset type, there is risk. Before making a decision, potential investors should be aware of the advantages and disadvantages of the self-storage real estate sector.

The following are some of the most important benefits and drawbacks to think about:

An asset with low maintenance.


Modern technology has made it possible for owners to manage self-storage facilities with comparatively little oversight (for example, lighting and security systems). Furthermore, relatively little maintenance is necessary because each unit is essentially just a core and shell. The majority of these properties have limited landscaping and few, if any, common areas that need to be maintained. Self-storage is one of the simplest and least expensive types of real estate property to maintain over time.

An asset class with potential for stability and cash flow.


Self-storage facilities have the ability to generate reliable, regular monthly cash flow. Due to the short-term nature of the leases, it is simple for an owner to evict a tenant for failure to pay rent, and once done so, the unit can be swiftly released, which is especially true if a facility has a wait list. Since the majority of tenants are not bound by lengthy, fixed-rate leases, owners can slightly raise rents when demand rises—even by $2 to $5 per month. Cash flow can also be increased through administrative costs, late fees, and retail sales.

Potential for income stream diversification.


While the base fee for individual units will always be a self-storage operator's main source of income, those with conveniently positioned facilities can make use of their building or property to expand the range of goods and services they provide. For instance, self-storage companies with large amounts of land may provide covered but chilly outdoor storage on the extra area, which can be utilized for items that someone would typically keep in a garage or shed. Operators may also collaborate with a business like U-Haul to offer rental vehicles or vans. To diversify their sources of income and try to boost overall cash flow, owners may additionally run a gas station, janitorial service, or other industrial service at their self-storage facility.

Pro: Historically resistant to recession.


When the economy is doing well, more people move, spend money on home improvements, and shop more, all of which boost demand for self-storage. People downsize, move in with roommates, and occasionally are kicked out of their residences during economic downturns. The demand for self-storage also often rises in each of these circumstances. Self-storage has always been an asset type that is recession resistant due to its diverse demand drivers.

Financing that is inexpensive.


Due to the fact that many real estate owners also run their own self-storage facilities, financing for the purchase and any required modifications can be highly alluring. Numerous banks offer low loan-to-value, non-recourse loans. Another appealing option for owner-operators is SBA financing. A significant portion of these loans' interest-only periods help to keep costs down while the facility's owner works to stabilize it.

Short-term leases are an issue.


Self-storage leases often go from month to month. Due to the potential for significant turnover, an operator must continually market the property to enable timely release of units in the event of turnover.

Cons: There is a chance of an oversupply.


Self-storage facilities can be developed quickly and readily during periods of very strong demand because they are generally inexpensive to construct and operate. However, whenever demand declines, there may be an oversupply that drives down rentals across the board. Any potential investor should take into account both the current and anticipated (i.e., permitted) competition in close proximity to the facility they are considering to purchase.

Con: Hyper-local conditions drive demand.


Self-storage investors frequently choose a facility based on "planned" new dwelling construction, which is a typical error. For instance, a self-storage developer might enter a neighborhood carrying a sign that reads, "1,000 new housing units, coming soon!" There is no assurance that those housing units will ever be built, though. Even if pre-permitted, new development of those units could be halted by any changes in the economy. Similar to this, an operator might exaggerate demand from a nearby employer (such as a naval installation), but if that employer closes, self-storage demand might vanish over night. To protect their investment, potential investors will want to ensure that there is adequate existing demand and that this demand is varied.

Negative: Not completely hands-off.


Many individuals mistakenly believe that self-storage facilities are self-sufficient. Although there are many ways to cut operational expenses, these properties still require active management to be successful. Continuous upkeep and repairs are required to keep the building in good operational condition. Before investing in a self-storage facility, every investor will want to have a sound business strategy in place.

Does self-storage fit your needs?


Consider investing in the self-storage sector for a variety of reasons, some of which we have listed above. Self-storage is still a very dispersed asset type. Mom-and-pop business owners who are about to retire still own a lot of facilities. This presents an opportunity for anyone trying to break into the market, particularly for those who approach future operations and facility maintenance with a more professional perspective.

Self-storage is not without risk, though. This asset class has a number of subtleties that are frequently only discovered through actual experience. Anyone thinking about investing in self-storage might want to test the waters by doing so with a seasoned sponsor who can maximize returns for investors, such a Delaware Statutory Trust (DST).

Are you prepared to discover more about the possibilities for investing in self-storage? To find out how to begin, get in touch with us right away.

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:

Are There New Rules for 1031 Exchanges in 2022?

Every year, concerns about the future of 1031 exchanges surface among investors. The ability to defer capital gains through a 1031 exchange has long been a point of contention among politicians. For those wondering whether changes to this real estate investing tool have been made recently, the answer is no. Rather, interest in 1031 exchanges has grown among investors throughout the country, and new questions have emerged. Here is a glimpse at the most common questions asked by today’s curious investors.

What happens when a 1031 exchange property is sold?

A 1031 exchange allows investors to trade one investment property (“relinquished property”) for another (“replacement property”) and defer capital gains taxes they would otherwise pay at the time of sale of the relinquished property. According to the Internal Revenue Service (IRS), the two properties must be “like-kind,” which under Section 1031 of the Internal Revenue Code is defined as any property held for investment, trade, or business purposes.

What are unrealized capital gains?

When investors and real estate professionals discuss unrealized capital gains, they refer to the gains made on an asset that has not yet been sold. If capital gains are unrealized, they are not taxed. Instead, these gains exist only on paper. Only when an investor disposes of the asset must taxes on capital gains be paid. 

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When can an investor use a 1031 exchange in real estate?

A 1031 exchange can be used anytime properties are exchanged as long as the properties meet the IRS’s definition of like-kind. Properties commonly traded in a 1031 exchange include commercial assets, such as apartment buildings, hotels and motels, retail assets and single-tenant retail properties, offices and industrial complexes, senior housing, farms and ranches, and vacant land. Additional trades that qualify as like-kind include investments in Delaware Statutory Trusts (DSTs) and residential properties held for investment purposes.

Can an investor avoid capital gains by buying another house?

Property owners commonly ask if they can sell their home and buy another house using a 1031 exchange. Unfortunately, the answer is no. Per the IRS, primary residences and vacation homes do not qualify for a 1031 exchange; only residential properties held for investment purposes for at least 12 months will qualify.

Can an investor take cash out of a 1031 exchange?

For capital gains to be deferred, the total value of the relinquished property must be replaced, including both an investor’s equity and debt in the property. Therefore, if an investor sells a $1 million asset and has 50% leveraged, the investor will need to purchase a replacement property for $1 million and either leverage a loan for the $500,000 or pull from personal capital. Any cash taken out from the transaction is taxable.

Exceptions to the rule, however, do exist. One exception involves investing in a DST. A Delaware Statutory Trust is a legally recognized real estate investment trust that allows investors to purchase fractional ownership interest. When exchanging into a DST, investors can determine how much they want to invest and how much debt they want the DST sponsor to assign to them. A property owner could take out cash via a sale through this investment.

How does a 1031 exchange work?

A 1031 exchange requires investors to follow a strict timeline outlined by the IRS. Missing a deadline in the 1031 process generally results in taxes due on the relinquished property.

The timeline for a 1031 exchange starts when the relinquished property closes. The property owner has 45 days to identify their replacement properties and 180 days to close. The replacement properties must meet one of three rules defined by the IRS.

Do I need an intermediary for a Section 1031 exchange?

Yes! The IRS requires that 1031 exchanges use a qualified intermediary (QI) or exchange facilitator. After the sale of the relinquished property, all proceeds are held with the QI, who will release the funds for the acquisition of the replacement properties. If funds are held with the seller or any other party that does not qualify as a QI, the sale will not qualify for a 1031 exchange, and the seller will be responsible for paying capital gains.

How does a 1031 exchange work in a seller financing situation?

While seller financing is permitted in a 1031 exchange, it is not commonly used.

Seller financing reduces the immediate capital available for an exchanger; however, this does not exempt them from IRC section 1031 that states an investor must replace the entire value of the relinquished property. Therefore, an investor must identify how they will purchase their replacement properties when offering seller-financing. The most obvious solution is to offer short-term financing. This, however, does not solve most buyers’ problems. Instead, the exchanger can work with a qualified intermediary (QI) to sell the promissory note received from the buyer to cover the funds for the exchange. The exchanger can purchase the note or sell the note to the lender or a third party. Whatever option is used, all funds need to be with the QI by the end of the 180 days to prevent the proceeds from becoming taxable. Once proceeds are available, the investor can trade into a chosen like-kind property.

Can an investor still file a 1031 exchange after closing on a property?

No, a seller cannot file a 1031 exchange after closing a property because all proceeds from the sale must be placed with a QI. Therefore, if the exchange is not preplanned, the proceeds cannot be distributed appropriately for a 1031 exchange. Investors interested in a 1031 exchange should identify a QI before selling their real estate.

Can investors avoid capital gains tax if they reinvest?

A 1031 exchange allows property owners to defer capital gains when they reinvest and follow the rules outlined by the IRS. Reinvestment gives investors access to the numerous benefits offered by a 1031 exchange, including portfolio diversification and deferment of capital gains. Additionally, reinvestment via a 1031 exchange resets the depreciation schedule on the investment, providing investors access to additional tax advantages.

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What are the hottest markets for real estate investing in 2022?

The hottest market for real estate investing depends on an investor’s investment strategy. Is the investor risk-averse and looking for only stabilized assets in primary markets? Or are they willing to take on some risk for higher returns and invest in a value-add asset or a secondary or tertiary market?

To best understand which asset and market are best for you, contact a qualified 1031 exchange specialist. The team at Perch Wealth can guide you through the process and introduce you to 1031 qualified properties that are in line with your financial and investment objectives.

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:

Should I Invest in Housing and Elderly Care?

Recent data from the US Census Bureau reveals that all baby boomers will be 65 by 2030, bringing the number of seniors in the country from 56 million to over 73 million. With a 30% increase in this population, we face an unexpected housing challenge: the demand for senior housing will far outstrip supply.

As a result, the sector is expected to grow over the next decade, creating an opportunity for investors. However, not all investments in the sector are created equal. In this article, we look at various aspects of housing and elderly care and identify the critical characteristics that investors should consider when investing in this asset.

What is the housing and elderly care industry?

Investments in senior housing vary according to the level of care the facility provides to its residents. Here is a quick snapshot of the various types of investments:

Independent living is generally for healthy and active people. Most communities offer private homes with additional services such as personal and community social activities and 24-hour security. Residents can enjoy the feeling of traditional independent living without worrying about home ownership responsibilities such as maintaining the property or paying bills.

Assisted living, also known as residential care or personal care, is designed for patients who are generally healthy and independent, but who may need help with activities of daily living (ADL). On-site staff are available to assist with activities such as bathing, dressing, and administering medications. Additionally, the staff generally help with laundry, cleaning, meals, and transportation. Many of these facilities also offer social activities. Memory care centers serve patients with cognitive disabilities. Staff are generally available 24/7 to assist residents in their daily lives, including those provided in assisted living facilities. Additionally, memory care centers can provide certain activities and therapies to improve memory and offer supervision to prevent residents from wandering.

Specialized nursing homes offer the most in-depth care, including residential medical treatment for the elderly. These communities are designed to provide 24/7 medical care to those who may have a chronic illness or need ongoing care from a healthcare provider. Skilled nursing home staff includes skilled nurses, most of whom provide care similar to that found in a hospital setting.

It is important to note that this is a general scheme of the differences between the structures. However, the exact services and care provided vary from facility to facility and may overlap in some cases.

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What should people consider when investing in the housing and elderly care Industry?

Investments in senior housing and care facilities have increased over the years, attracting more attention from institutional and accredited investors. However, being a relatively less popular asset class, many investors today are unsure what to consider when evaluating an investment opportunity. To help provide guidance, here are some characteristics, in addition to the type of assistance a property provides, to consider when looking at an investment overview.

1- How is the investment income supported?

Residents seeking senior housing must pay for their level of care. In some cases, insurance, Medicare, or Medicaid will cover associated expenses; however, most properties require a private payment. Here's what might be covered:

For those facilities that require private payment, residents have to pay out of their own pockets. For long-term care, some facilities may also review prospective residents' finances to determine if they can afford the facility.

Identifying which one is accepted in a facility can help provide guidance on an investment opportunity. While Medicare and Medicaid can guarantee a higher employment rate; meanwhile, private payment structures are generally better maintained. Although this is a hypothesis, it can give an idea of ​​the investment.

Real estate is all about location, and investors need to consider how a property's location and demographics will affect its ability to attract and retain residents. For long-term stable investments, investors should identify a location that is experiencing positive population growth, particularly among the population over 50. They should also identify a place that has the right demographics to support the facility and has surrounding services that can help residents. 

The assessment of these factors is also related to the mix of taxpayers. Facilities in vulnerable communities may have less favorable demographics; however, they tend to accept Medicaid, which provides a supported income stream. Meanwhile, communities in high demand, such as coastal California, tend to rely on private pay. While they offer goods they value highly, keeping residents can be more difficult during an economic downturn.

In determining whether an investment is good, investors should consider who manages the property. Performing proper due diligence on a trader's experience and finances can offer insight into an asset's long-term potential. For example, today's major carriers include Genesis HealthCare and HCR Manor, along with the largest national carrier, Brookdale Senior Living, which will provide more security to an investor than a single carrier.

Ultimately, investors must take a data-driven approach to determining whether a specific investment in housing and aged care is the right investment for them. Understanding the pros and cons of each investment opportunity, as well as how these above characteristics can affect performance, can provide insight into whether or not to consider an investment. How can I invest in the housing and aged care sector?

Those interested in investing in have more options

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Investors can invest directly in a new or existing development through direct acquisitions. Like other investments, this option requires the largest share of an investor. Unless they identify a property that is an absolute triple network, they will need to consider the management involved in the investment. There are also passive investment opportunities. Non-accredited investors can invest directly via shares. For example, they could buy stock in an existing aged care and housing company, such as Ensign Group, or invest money in a real estate investment trust (REIT). Meanwhile, accredited investors have the option of investing in a Delaware Statutory Trust.

Are you interested in learning more? Contact our team to discuss how to invest in the aged care and housing sector today.

(855) 378-3443