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

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:

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:

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.


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

Group of business people discussing and working together during a meeting at outdoor cafe

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