Benefits of a 1031 Exchange

A 1031 exchange is one of the most powerful tools for real estate investment properties, allowing you to defer your capital gains taxes and keep more of your wealth working for you. When combined with strategic real estate planning, it can even help eliminate capital gains taxes entirely.

 

A 1031 exchange is a powerful vehicle that can take you far, however, a real estate plan sets your destination and maps out a route to get there.
 

  • 300+

    Successful 1031 Exchanges Completed

  • $10,000,000+

    Capital Gains Tax Deferred

1031 Exchange Rules and Guidelines

1031 Exchange Rules 
The “Identification Period” gives the investor 45 days from the date of sale of the relinquished property to identify potential replacement properties. The
 
“Exchange Period” allows the investor up to 180 days from the sale of the relinquished property to close on one of the identified properties.

Like-Kind Property

In a 1031 exchange, a wide range of real estate properties can qualify as like-kind, provided they are held for business or investment purposes.
 
Examples include vacant land, residential houses, condos, shopping centers, apartment buildings, theaters, Delaware Statutory Trusts (DSTs), office buildings, hotels or motels, and mixed-use properties.

Use of a Qualified Intermediary (QI)

The IRS requires a Qualified Intermediary to hold the proceeds from the property sale until they are used to buy the replacement property. The investor cannot take possession of the funds during the exchange.
 
 

Understanding 1031 Exchanges

Reinvestment Requirement


To fully defer capital gains taxes, you must reinvest the total exchange value of the relinquished property. This includes both cash proceeds and any debt into a replacement property of equal or greater value.

Variations of 1031 Exchanges
 
There are several types of 1031 exchanges, with the forward exchange being the most common. Other types include simultaneous exchanges, reverse exchanges, and partial exchanges, each governed by its own specific rules and requirements.
What Is Boot?
 
Boot occurs when the total exchange value of the replacement property is less than the relinquished property. This can happen if:

- Not all cash proceeds are reinvested.

- The debt on the replacement property is less than the debt on the relinquished property.

Why Boot Matters


Boot is taxable as capital gains because it’s not covered by the tax deferral benefits of a 1031 exchange.

 

Some people want to keep part of the proceeds from a 1031 exchange instead of reinvesting everything. This is allowed, but you’ll need to pay capital gains tax on the portion you keep.

Benefits of a DST

Passive Ownership:

No need to manage tenants, maintenance, or operations—the DST company handles everything.

 

Higher Income Potential:
DSTs often provide higher income potential compared to the Hawaii rental market. Many DST investments offer a 4-6% NET annual cash flow return, which is significantly higher than the average return on Hawaii real estate. 

 

1031 Exchange Friendly:

DSTs qualify as “like-kind” property, making them an easy option for reinvesting in a 1031 exchange.

 

Estate Planning Benefits:
DSTs are easy to divide among heirs, offering flexibility if some heirs want to sell their shares while others want to keep them. This makes estate planning simpler and more adaptable to individual preferences which can prevent family disputes.

 

Access to Institutional Properties:

DSTs offer access to premium real estate assets that individual investors are not able to afford.

Drawbacks of a DST

Lack of Control:

Investors have no direct say in property management, decisions, or the timing of the sale, as these are entirely handled by the DST company.

 

Illiquidity:

Your money is tied up for the cycle of the investment. This is typically 3-7 years and you won’t be able to access your funds until the cycle ends and the property is sold.

 

Accredited Investor Requirement:
To invest in a DST, you must qualify as an accredited investor. This typically means having a net worth of $1 million or more (excluding your primary residence) or an annual income of at least $200,000 ($300,000 for married couples) for the last two years.

 

Real Estate Risks:
DSTs carry the same risks as other real estate investments, including potential damage from fires, hurricanes, or other natural disasters, as well as market downturns that could impact property values or rental income.