People choose a variety of different investments in their lifetime in order to capitalize on profit potential. Some popular investment opportunities include bonds, stocks, and mutual funds. However, many investors are particularly keen to deal in real estate.

Real estate investments can range from purchasing one house to owning multiple properties under a DST 1031. Property investment is something you can see, touch, experience, and control in a certain palpable way. This is why many people prefer real estate. Also, it has the potential to produce a lot of profit.  

What is a 1031 Exchange and how does the process work?

A 1031 exchange is an exchange of property investments. When meeting the particular requirements of the code, you will be able to defer capital gains taxes and thus keep more of your profit. The rule applies to DST 1031 properties of like kind.

The process begins with the sale of a real estate investment. The earnings of this sale must be given to a qualified intermediary, an objective third party who can act on behalf of the exchange. The new DST investment must then be chosen within 45 days of the previous property’s sale. Finally, investors can purchase the new real estate with the earnings from the sale of the previous property. Closing must happen within 180 days. 

The benefit of a 1031 exchange is that you can switch out your real estate investments without having to deal with cash and, later, taxes. This process is one hundred percent legal and approved by the IRS as long as guidelines are carefully followed. With a 1031 exchange, your DST investment can be traded in order to afford you control and ease of operation. 

What are the guidelines for a 1031 Exchange?

First and foremost, the two properties that are going to be exchanged must be within the same general category. In other words, they must be of like kind. The IRS categorizes properties of like kind as similar in nature, even if they vary in quality. It is also important that the intention of the investor is the same between both DST 1031 properties. Exchanges are meant to assist investors who are utilizing their property for investment in business or trade rather than just resale for profit. 

Another guideline for 1031 Exchanges is that the new DST 1031 property must be chosen within 45 days of closing the previous property. This is a hard and fast rule, with no room for extensions or forgiveness. In identifying a new property, the investor may choose up to three potential investments and give this list to the qualified intermediary. There does not need to be a formal request to the IRS at this point. The third party is authorized to hold this document on their behalf. The only qualification is that the qualified intermediary receives the document within the 45-day timeline.  

After identifying potential property investments, the investor must choose one from the list and purchase it within the 180-day closing deadline. This rule allows no exceptions. 

Another rule for 1031 Exchanges is that the investor must remain the same between the properties exchanged. This not only means consistency in ownership, but it also requires consistency in titles, spelling, names. All documents must match in this regard in order for the exchange to be valid. 

While it is essential that the exchanged properties retain the same title, these titles cannot be used at the same time. Investors may not have both property titles in their names within the same period of time. Therefore, it may be necessary to have a temporary placeholder during property transactions.

Lastly, the new property investment must be of greater or equal value to the old property. This is the primary method of deferring all capital gains taxes. 

We would like to remind you that even though we have researched this information and believe it to be accurate and true to nature, you should remember that every form of investment, which includes real estate is speculation by its nature.  This involves a risk of significant losses. Also, non-publicly traded private placements of securities can be liable to a necessary period of holding. They are designed for investors that are accredited already and will not need a liquid investment.