Three Notable Problems with 1031 Exchanges
There are many rules and regulations that govern the completion of a 1031 exchange, which often make the process nerve racking for investors. Fortunately, there are many resources available to investors, including the Realized guidebook on the 1031 exchange process. Below are three common challenges of 1031 exchanges and potential solutions for each.
What Is A TIC And How Are They Used For 1031 Exchanges?
“TIC” is an acronym referring to Tenant-In-Common (TIC) investments in properties by multiple 1031 exchange investors. Tenants-In-Common, is a legal term that describes a form of ownership by more than one party in real estate, or any asset. In this case, the term “tenant” means a co-owner of a property, and not someone that rents the property. The distinguishing features of the tenants-in-common ownership form are: All tenants (co-owners) hold an individual, undivided interest in a property; Ownership may be held in unequal shares; Each ownership interest may be separately sold or mortgaged; and Upon death of a tenant, the interest of the deceased will pass to their heirs.
History of the 1031 Exchange
If you're just learning about 1031 exchanges, a good place to start is section 1031 of the Internal Revenue Code (IRC), which states that if an investment property is exchanged for a “like-kind” investment property, taxes on capital gains can be deferred. For this reason, a 1031 exchange is an excellent wealth-building strategy, leaving investors with more equity to reinvest in more valuable properties.
Investment Properties That Don't Qualify For a 1031 Exchange
When you sell an investment property for more than what you paid for, you will likely incur a capital gain and have to pay taxes on it at the time of sale. However, Internal Revenue Code Section 1031 provides an exception to this rule if you reinvest your capital gains into a similar property. This type of transaction is referred to as a “like-kind exchange," allowing you to defer the taxes you would have otherwise had to pay. Fortunately, the exchange rules are fairly broad and allow investors a great deal of latitude in their choices.
Tenants-in-Common vs. Delaware Statutory Trusts
The IRS has blessed two legal structures that allow multiple, unrelated 1031 investors to invest in the same replacement property. They are Tenants-in-Common (TIC) ownership and Delaware Statutory Trusts (DST). Though both structures permit groups of investors to pool their equity to acquire replacement properties on a tax-deferred basis, the similarities largely stop there.
Two Big Challenges of 1031 Exchanges
Every year, hundreds of thousands of investors subject themselves to the anxiety that comes with the challenge of completing a 1031 exchange. That anxiety, however, is avoidable. In this post, I’ll lay out the two major exchange challenges investors often face, and how to overcome them. The key to avoiding anxiety is to plan ahead, before you sell a property.
How to Determine Cash Flow
While talking about a real estate investment the other day, I fielded the question: “What is cash flow in real estate?” It's a great question. No doubt, one of the hallmarks of investing in real estate is the ability to generate current cash flow. When I began explaining the concept, it dawned on me that there are several definitions for the term in real estate, depending on who is asking and answering the question. So in this post, I’ll dig into a few ways it can be calculated, and how real estate investors use it to evaluate potential real estate investments.
What is a Cap Rate?
In commercial real estate, a property’s capitalization rate, or "cap rate" is used by investors to understand the relationship between the price or value of the property and the net operating income it produces. It's a mere rule of thumb used by investors to compare different real estate investments, much the same way the price/earning (P/E) ratio is used to compare stocks.
1031 Exchange into Delaware Statutory Trust, 3 Easy Steps
Delaware Statutory Trusts (DSTs) are a popular option for many 1031 exchange investors. Through DST “Replacement Property Interests,” or RPIs, investors have the opportunity to co-invest in institutional-quality properties that may otherwise be out of reach. The appeal of RPIs is that they offer the flexibility to fit almost any exchange. Investing in one is a quick and simple process, and investors are forever free from any landlord duties.
Non-Real Estate 1031 Exchanges
Did you know that 1031 exchanges aren’t just for real estate? In fact, you can exchange much more than you might think. For example, a farmer could exchange a herd of cows for another type of livestock, and in doing so defer capital gains tax. How is this possible?
