While depreciation is a great deduction for real estate investors, it isn’t free. Eventually, the IRS will have to be paid back, which happens when the property is sold. That’s where depreciation recapture comes in. Investors should be aware that depreciation recapture is always lurking and waiting for the sale date. By being aware of this tax and the rate used, investors won’t be surprised when this expense shows up in the sale.
A 1031 exchange can be a strategic tool for real estate investors, allowing them to sell an appreciated property and reinvest the proceeds into a like-kind replacement asset. The like-kind exchange can help defer capital gains and depreciation recapture taxes if executed properly.
Delaware Statutory Trusts (DSTs) are investment vehicles that are formed under the unique statutory laws in Delaware and allow multiple participants to own fractional shares of one or more properties. The participants (known as trust beneficiaries) each have a proportional right to the income and appreciation from the property held in the trust. This passive income is a significant attraction for many investors, as is the ability to enter and exit a DST investment using a 1031 exchange.
On the surface, refinancing a 1031 exchange property might seem counterintuitive. After all, the reason for executing a like-kind exchange is to use the equity from your relinquished property to acquire a new investment – your replacement property. Refinancing also can involve cashing out on equity.
A Delaware Statutory Trust (DST) allows investors to put their money into a trust, which is then pooled with other investor funds. The trust then uses that money to invest in real estate. The trust’s real estate can generate income for the investors, also known as beneficiaries. That income must be reported to the IRS when tax time rolls around.
To ensure a successful 1031 exchange, following the in-stone deadlines provided by the IRS is essential. These deadlines include the 45-day identification period and the 180-day exchange period.