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.

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."


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:

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.


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.


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.


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.


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:

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.


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."


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. 


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.


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: