Is a 1031 Exchange Allowed into a Qualified Opportunity Zone?

The '1031 Exchange' or the 'Like-Kind Exchange' is a provision outlined in the 26 U.S. Code § 1031 that has a history dating back almost a century. Initially established as a means for farmers to comprehend land boundaries, the code now serves as a tool for investors to defer capital gains taxes on real estate investments. By permitting the exchange of a property into other like-kind investments, the 1031 Exchange offers a means to defer tax implications.

The Qualified Opportunity Zone Program (QOZP) was introduced as a component of the Tax Cuts and Jobs Act of 2017 with the goal of promoting investment in lower-income communities by offering tax benefits for capital gains generated from asset sales. While both the 1031 Exchange and the QOZP provide tax deferral for asset sales, they differ significantly in their objectives and requirements.

Therefore, it is not possible to utilize the 1031 Exchange to invest in a Qualified Opportunity Zone. This is because the 1031 Exchange requires a like-kind exchange between assets, and exchanging real estate property for a Qualified Opportunity Fund does not fit the definition of like-kind. Furthermore, the significant disparities between the two programs make a direct exchange from one to the other challenging to achieve.

Major Differences

Upon a more in-depth analysis, it becomes clear that there are several significant differences that make exchanging real property for a Qualified Opportunity Fund (QOF) not feasible.

Qls vs. QOFs. One of the key differences is the treatment of gains and forward rolls. In a Qualified Opportunity Zone investment, the investor places their capital gains into the fund, whereas with a 1031 Exchange, the investor must retain their original investment, capital gains, and debt. On the other hand, in a QOZ investment, the investor has the freedom to retain their original basis and use it as they see fit.

These differences highlight the distinct nature of the two programs and why it is not possible to directly exchange real property for a Qualified Opportunity Fund.


Timelines and Deadlines. Another key difference between the two programs lies in the timelines and deadlines involved. Although both programs have deadlines, they are significantly different.

In the case of a 1031 Exchange, the investor has a 45-day window to identify a replacement property and must complete the like-kind exchange within 180 days. On the other hand, a QOZ investor must invest their gains into a Qualified Opportunity Fund within 180 days.

However, if an investor is unable to find an appropriate like-kind property within the 45-day deadline for the 1031 Exchange, they may still invest the capital gains from the asset sale into a Qualified Opportunity Zone as long as they do so within the 180-day window for realizing the gains.

Holding Periods and Step-Ups. Another key aspect to consider is the difference in step-ups and holding periods between the two programs. Qualified Opportunity Zone investments often come with a tax advantage that is tied to a specific timeline.

Specifically, if an investor holds their investment in a Qualified Opportunity Fund for a minimum of 10 years, they will not be taxed on the portion of the property gain generated by the fund. This is because the investor will receive a step-up in basis on the property, effectively increasing it to the fair-market value.

This feature is unique to the Qualified Opportunity Zone Program and highlights the advantages that can be gained through investing in a Qualified Opportunity Fund. The ability to receive a step-up in basis and avoid paying taxes on the portion of the property gain further underscores the difference between the 1031 Exchange and the Qualified Opportunity Zone Program.

Clear Your Investment Path: Understanding Your Target Investment

Both the 1031 Exchange and the Qualified Opportunity Zone Program provide tax-deferral benefits to investors, but they differ greatly in terms of their purposes and requirements. As a result, exchanging real estate property directly into a Qualified Opportunity Fund is not feasible. It would be an unfair comparison to attempt to compare these two distinct investment opportunities.

It's important to note that neither program is inherently better than the other. The most suitable option for an investor will depend on factors such as their portfolio structure, timing, and investment goals. The key is to have a clear understanding of the distinct differences between these programs, so that investors can make informed decisions that align with their investment objectives.

Investing in Qualified Opportunity Zone (QOZ) properties and real estate securities is not without its challenges and hazards. These investments are vulnerable to various risks, including reduced liquidity, empty rental units, fluctuations in market conditions and competition, lack of historical performance, fluctuations in interest rates, the threat of new market entrants causing a decline in rental prices, risks associated with owning and managing commercial and multi-family properties, short-term leases in multi-family properties, financing risks, potential tax implications, general economic uncertainties, development-related risks, extended holding periods, and the possibility of losing all of the invested principal.

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:

Opportunity Zone Disclosures:

Maximize Benefits of a 1031 Exchange: Tax Straddle Strategy

It is a requirement of a 1031 Tax Deferred Exchange that the purchase of the replacement property must occur within 180 days of the sale of the relinquished property in order to defer capital gains tax on the profits. However, if the 180-day period extends into the next tax year, it raises the question of in which tax year the capital gains tax will be due.

Specifically, if the 180 days "straddles" two years, the question arises as to whether the capital gains tax is due in the year the relinquished property was sold or the following year.This flexibility allows the seller to align the payment of capital gains tax with their personal financial situation and goals.

Basics of a 1031 Tax Deferred Exchange

The 1031 Tax Deferred Exchange provision in the IRS Tax Code incentivizes real estate investment by allowing investors to defer capital gains taxes while acquiring more valuable properties and rental income. Through a series of purchases and sales, an investor can swap one property for multiple or vice versa. However, it is important to note that the tax entity that sells the property must be the same as the one that buys it.

The Internal Revenue Service (IRS) specifies precise requirements that an exchange must follow in order to be eligible for a 1031 exchange. Any violation of these guidelines could result in capital gains being paid by the investor.

Investors must adhere to a tight timetable after selling the initial property, sometimes referred to as the "relinquished property," in order to complete a 1031 exchange. After 45 days, an investor has 180 days to find a "replacement property" and close on it. Both dates are determined starting on day zero, which is the day the property was given up for sale.

As long as their decision complies with one of three criteria outlined by the IRS, investors are free to choose as many properties as they want. The properties can be of different types, for example, a primary residence can be sold and replaced with a commercial property or a multi-family building can be exchanged for a single family home to be used as a vacation rental.


The rundown:

●     In a 1031 exchange, the property sold (referred to as the "relinquished property") and the property bought (referred to as the "replacement property") must be of "like-kind."

●     A Qualified Intermediary (QI) is used to handle the proceeds from the sale and purchase of the properties. The QI is a third party that is specifically established for this purpose, and no money from the sale goes to or is handled by the seller.

●     Within 45 days of selling the "relinquished property," the seller must submit a list of up to three potential "replacement properties" or properties valued at up to 200% of the sale price of the relinquished property to the QI.

●     From this list, the seller must choose the “replacement property” or properties to purchase.

●     The seller has 180 days from the closing of the "relinquished property" to close on the "replacement property."

●     The purchase price of the "replacement property" must be equal to or higher than the sale price of the "relinquished property in order to fully defer all taxes

●     If all profits from the sale of the "relinquished property" are used for the purchase of the "replacement property," and all debt replaced, if any, no capital gains tax is due (deferred).

●     If the seller does not utilize all of the profits from the sale of the "relinquished property" for the purchase of the "replacement property," capital gains tax is only due on the portion not used.

“The Tax Straddle Strategy”

In the case of a 1031 exchange where the sale of the "relinquished property" closes after early July, the 180-day period in which the closing of the "replacement property" must occur may fall into the next calendar year. If the closing does not occur within this 180-day period, the exchange is considered to have failed.

The proceeds from the sale of the "relinquished property" are returned to the seller from the Qualified Intermediary and capital gains tax is due on any profits from the sale of the "relinquished property". However, the IRS allows the seller to choose in which tax year they will be subject to tax, either the year of the sale or the year of the failed purchase, as the 180-day period "straddles" two tax years.

The ability to choose when to pay capital gains taxes can be a significant advantage for the seller in a 1031 exchange. In the event of a failed exchange, where the closing of the "replacement property" does not occur within the 180-day period, the seller has the flexibility to make a strategic decision that aligns with their financial goals.

They can either pay capital gains taxes for the year of the sale of the "relinquished property" or choose to defer the taxes and use the proceeds for any purpose for an entire calendar year, before paying the taxes in the year of the failed exchange. This flexibility allows the seller to potentially invest or save the proceeds for a year, or even to use them for other real estate investments, before paying taxes on the profits of the sale of the "relinquished property”.

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:

Unlock the Door to REIT Investments With a 1031 Exchange

Wondering if you can sell your investment property and invest in a Real Estate Investment Trust (REIT) through a 1031 exchange? The answer is yes, but the process is complex and requires specific steps. Some real estate experts may argue that it's not possible as the nature of real property and REIT investments are different.

However, with a bit of planning and understanding of 1031 exchanges and REITs, it is possible to make the transition. Learn how to navigate the complex path and make your investment property to REIT transition a success.

Understanding the Differences: Real Property vs Securities

When you sell an investment property, you're disposing of a physical asset that the IRS classifies as "real property." The Internal Revenue Code Section 1031 allows investors to exchange these properties for similar assets, or “like kind”, held for investment or business purposes. This can be done to defer capital gains taxes, as long as the proceeds from the sale of the original property are reinvested in one or more similar properties within a specific time frame. This process is commonly known as a 1031 exchange.

A Real Estate Investment Trust (REIT) operates in a different way, however. REITs invest in real estate properties and hold them in a portfolio. Instead of buying the properties themselves, investors buy shares in the REIT. The cash flow generated by REITs comes from dividends, rather than rental income.

Since REITs are considered securities, they cannot be considered "like-kind" assets under the 1031 exchange regulations. That's why it's not possible to directly exchange your investment property for REIT shares. However, there are still ways to complete a 1031 exchange into a REIT, but they require a bit more planning and complexity.


Explore the Option of Transitioning from Property Ownership to REIT Investment through a Delaware Statutory Trust (DST) and UPREIT Conversion.

If you're considering investing in a REIT, one way to do it is through fractional ownership of a DST and subsequent conversion into an Umbrella Partnership Real Estate Investment Trust (UPREIT). Many REITs offer this option, where DST investors can convert their interests into Operating Partnership (OP) units. This conversion is done through a partnership which enables you to defer capital gains taxes, unless you decide to convert your UPREIT OP units into REIT shares later on.

It's important to consider that this type of exchange may have advantages and drawbacks. Potential benefits could include:

●     Offers liquidity opportunities by allowing conversion of UPREIT OP units into REIT shares, albeit with a taxable event

●     Provides diversification options to help balance out economic volatility by creating a portfolio of assets

●     Facilitates efficient estate planning by potentially enabling transfer of UPREIT OP units to heirs with potential elimination of capital gains taxes(unless converted to REIT shares)

An important aspect to keep in mind when considering UPREIT conversion is that it marks the end of the 1031 exchange process. It's not possible to exchange UPREIT OP units back into real property, In order to maintain the deferral of capital gains taxes, your investment must remain in the form of UPREIT OP units.

Understanding the Process

Here's a step-by-step breakdown of the UPREIT process from the perspectives of both the sponsor and the investor:

●     The sponsor typically places an institutional-grade asset, whether from a REIT or a new acquisition, into a newly formed Delaware Statutory Trust (DST).

●     During the syndication period, the DST offers 1031 exchange and other investors a predetermined amount of equity. Investors acquire beneficial interests in the trust and begin earning distributions similar to a standard DST investment.

●     After a hold period of typically two to three years, which satisfies the IRS safe-harbor guidelines for investment properties, the sponsor executes a Section 721 UPREIT on the property held under trust.

●     Investors then exchange their DST beneficial interests for operating partnership (OP) units in an entity that's owned by the REIT.

●     After a predetermined lockout period, investors have the option to redeem their OP units for common stock in the REIT or for cash, subject to the terms laid out by the REIT.

The Final Word:

Exit strategies can be challenging for real property and DST investors. The UPREIT structure provides an opportunity to achieve greater liquidity and diversification of portfolio, but the process can be lengthy and complicated. Additionally, the loss of the ability to defer capital gains tax liabilities through 1031 exchanges may not be worth it for some investors. It's recommended to seek guidance from an expert with knowledge of DSTs, UPREITs and REITs before making a decision to divest real property assets for shares in a REIT.

During syndication, DST provides 1031 exchange investors and others with a set amount of equity. They obtain a beneficial interest in the trust and begin receiving distributions similar to other DST investments. After a few years, the sponsor executes a Section 721 UPREIT on the property, and the investors exchange their DST beneficial interests for OP units owned by the REIT.

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:

Trading Up Could Result in Depreciation

The term "useful life" of real estate is what is meant when people talk about depreciation. Depreciation is a mechanism that might potentially lessen the amount of taxable income you make from investment real estate. In general, a residential rental property will have a depreciation schedule of 27.5 years, while a commercial property will normally be deemed to have a schedule of 39 years. What happens, therefore, if you have been the owner of your investment property for a good number of years and you have exhausted all of the depreciation that you were able to claim on your income property?

Performing a 1031 exchange could provide you with the opportunity to get a new depreciation schedule from an asset that has already been fully depreciated, which could in turn lead to a reduction in the amount of income that is subject to taxation. However, simply engaging in a 1031 exchange is not sufficient on its own; for the 1031 exchange to be valid, the newly acquired property must have a higher value than the property that is being sold.

For instance, if you sold a property worth $500,000 that had been fully depreciated and then purchased another property for the same amount, you would not gain a new depreciation schedule because the previous cost basis would transfer to the newly acquired property. This would prevent you from gaining a new depreciation schedule. If, on the other hand, you sold your home for $500,000 and then bought another property for $1,000,000 afterward, then you would have increased your cost basis and would be eligible to deduct the newly acquired higher cost.

Delaware Statutory Trusts, sometimes known as DSTs, have the potential to be an excellent answer for those who are interested in engaging in a 1031 exchange but would also wish to "trade up" their cost basis and depreciation schedule. Perch Wealth is able to provide accredited investors with direct share transactions (DSTs) that include pre-existing, non-recourse financing.


This may make it possible for the accredited investors to plan how they want their exchange to be structured and may also make it possible for them to discover a way to legally shelter more of their income by increasing their cost basis. We are also able to provide investors with debt-free DSTs, which can be included in a diversified investment portfolio, or if investors simply want to remain debt-free on their real estate assets. These debt-free DSTs can be used for a variety of purposes.

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:

The IRS: 7 Deadly Sins of DSTs

In order to postpone and possibly prevent paying capital gains tax on the sale of other investment real estate holdings, investors frequently turn to DSTs, or Delaware Statutory Trusts. A DST enables investors to use a 1031 exchange into a DST that is actively managed by a qualified third-party, as opposed to a standard 1031 exchange from one wholly-owned property to another. As opposed to owning real estate that needs their active management, this enables the investor to play a more passive, supporting role.

In a diverse portfolio of institutional-grade real estate, investing in a DST may offer investors a fantastic, hassle-free option to generate monthly passive income.

However, DST investments follow the same stringent guidelines as conventional 1031 swaps. The IRS (ruling 2004-86) proposed the "seven deadly sins" of DSTs in order to explain the laws and standards governing DSTs. These regulations set strict parameters on how DSTs must function and restrict the trustees' authority.

Each of the seven deadly sins of DSTs is described in detail in this article.

  1. After a DST offering closes, neither current nor new investors are allowed to contribute funds to the DST in the future.

In contrast to other real estate syndications or funds, a DST offering that has closed may not issue capital calls or ask for additional contributions from investors. For this reason, investing in a DST entitles you to a pro rata portion of property ownership based on the amount of your initial investment. Any further investments might alter ownership proportions, which consequently might reduce someone's ownership part. There are no more contributions accepted after the DST offering closes since doing so might affect investors' claims to the DST assets.

  1. The Trustee of a DST is not permitted to take out additional loans or modify the conditions of current loans.

The sponsor of a DST is obligated by law to declare the loan amounts connected with the assets held in that DST prior to accepting investments. This enables potential investors to assess a portfolio's debt-to-income ratio as part of their due diligence process since the kind, interest rate, and terms of debt can affect investment returns. This choice precludes the sponsor from taking on additional debt or refinancing into a new mortgage that may otherwise affect the beneficiaries' interest because DST investors have very little control over investing decisions.

However, there is an exception to this rule. In the event of a tenant's bankruptcy or insolvency, the DST sponsor may be allowed to renegotiate loan conditions or take on extra debt, but only after extensive paperwork and scrutiny.

  1. A DST is unable to reinvest the money it receives from selling its real estate.

The IRS forbids a sponsor from reinvesting the earnings from the sale of the DST into new investment property, unlike real estate investment trusts, or REITs. Instead, the numerous DST beneficiaries must get a portion of the sale revenues. The DST's investors can then take their portion of the sales profits and either cash out completely or roll the winnings into another DST (via a new offering with the same sponsor or a different sponsor altogether). The capital gains of those who choose the latter will be liable to both state and federal taxes at that time.

  1. The DST sponsor's ability to make capital upgrades is restricted, with the exception of those related to (a) routine repair and maintenance; (b) small, non-structural capital improvements; and (c) those mandated by law.

Any DST sponsor's ability to make enhancements is subject to IRS restrictions. The justification is that historically, certain sponsors have chosen to engage in enhancements that ultimately jeopardize the investment of the beneficiaries. This clause aims to safeguard investors from regrettable capital upgrades.

  1. The DST may only reinvest cash reserves retained between distribution dates in short-term debt obligations.

The majority of DSTs have sizeable cash reserves on hand since DST sponsors are unable to acquire further funds or incur new debt once the offering closes. If necessary, these cash reserves might be used to fund more investments. However, the IRS only permits DST sponsors to invest cash in short-term loan commitments that can be quickly liquidated prior to the DST's next distribution date in order to prevent the use of cash in a speculative manner (such, for example, the above-mentioned fruitless capital improvements) (and therefore, is considered a cash equivalent).

One benefit of this clause is that it enables the DST sponsor to quickly implement strategic capital enhancements that raise the DST's value without jeopardizing the beneficiaries' investment.

  1. Co-investors must receive monthly distributions of all funds, minus any necessary reserves.

Only "required" reserves can be kept on hand by a DST to pay for property management, urgent maintenance, repairs, and other unforeseen costs. If not, all cash earnings and sales proceeds from DST property must be distributed to investors on the dates agreed upon. This "deadly sin" aims to stop sponsor theft of funds and ensures that the DST beneficiaries consistently receive their rewards.

  1. After the offering has ended, the DST sponsor is not permitted to renegotiate current leases or sign new ones.

The IRS forbids the sponsor from signing new leases or revising existing leases once a DST has ended. This is due to the fact that lease terms may significantly affect income and, consequently, investors' returns.

Using a Master Lease structure is one way for DSTs to "get around" this clause, if you will. The DST rents real estate to a "master tenant" under a master lease, who is then free to sign new leases or renegotiate existing ones with sub-lessors. The master lease offers some predictability to DST investors while giving the master tenant some latitude to modify leases for the property's advantage. This guarantees that the sponsor won't make dangerous leasing choices and places the onus on the master tenant to uphold the terms of the master lease.

In the event that a tenant files for bankruptcy or becomes insolvent, the sponsor may engage into a new lease or renegotiate the terms of the existing lease for that tenant.


DSTs could appear to be too controlled at first glance. The seven deadly sins of DSTs were merely implemented to safeguard investors, in actuality. Both the sponsor and the investors must strictly abide with these regulations. As a result, before investing in a DST, investors will want to thoroughly investigate any sponsor. Look for sponsors in particular who have the confidence to discuss the seven deadly sins of DSTs. It will be a good indication of the sponsor's expertise and aptitude if they can explain the nuances of these regulations.

Call us right away if you need assistance with a 1031 exchange. Investing your capital gains into a DST is a procedure that our staff would be pleased to help you through. Investors will discover that doing so is a terrific strategy to postpone paying capital gains tax while also switching from active to passive, diversified real estate investing.

General Information

This is neither a buy-side nor a sell-side solicitation of securities. The material presented here is purely for informational purposes and shouldn't be used to guide financial decisions. Every investment has the chance of losing some or all of the money. Future outcomes cannot be predicted based on past performance. Prior to investing, consult a financial or tax expert.

1031 Risk Disclosure:

* There is no assurance that any strategy will be effective or achieve investment goals; * Property value loss is a possibility for all real estate investments over the course of ownership; * Tax status may change depending on the income stream and depreciation schedule for any investment property. All funded real estate investments have the risk of going into foreclosure; adverse tax rulings may prevent capital gains from being deferred and result in immediate tax liability;
1031 exchanges are illiquid assets since they are frequently issued through private placement offerings. There is no secondary market for these investments. * Reduction or Elimination of Monthly Cash Flow Distributions - Similar to any real estate investment, the possibility of suspension of cash flow distributions exists in the event that a property unexpectedly loses tenants or suffers significant damage; * The impact of fees and expenses - The costs of the transaction could have an influence on investors' returns and even surpass the tax advantages.

Understanding a "Like-Kind" Exchange's Holding Period

Every investor must adhere to rigorous deadlines in order to effectively conduct a 1031 exchange. However, investors frequently inquire as to whether a property must be held for a specific period of time in order to be eligible for an exchange. Although the IRS hasn't stated a holding time specifically, a few factors could shed light on the matter.

During the 1031 Holding Period

How long an investor keeps a piece of property is known as the holding period. IRC Section 1031 does not specify the length of the holding period, as was previously indicated. Instead, it depends on the investor's goals.

No gain or loss shall be recognized on the exchange of property held for productive use in a business, according to the IRS.

"Even though properties vary in grade or quality, they are still of the same sort if they have the same nature or character.

Whether they are renovated or unimproved, real estate properties are often of a like kind. An apartment building would often be similar to another apartment building, for instance. However, real estate within the United States is not comparable to real estate outside.


Recognizing Intent

The goal of Section 1031 is to make it possible for investors who have owned their property for a long time, particularly those who did so for income-producing purposes, to exchange it for another property that would serve the same function.

Since not all real estate is owned for the same purpose, not all of it is eligible. A primary residence is the most frequent case that should be considered. A primary residence does not qualify for an exchange since it is not "kept for productive use in a trade or industry or for investment." On the other hand, because they are held as investments, residential complexes, office and medical buildings, shopping malls, and single-tenant assets typically qualify.

In order to achieve a 1031 exchange, developers must overcome additional obstacles. Purchasing land, constructing a property, and then selling it for a profit frequently disqualifies a transaction from a 1031 exchange since a property must be held for investment purposes. In this case, the property was held for profit-making purposes rather than as an investment.

If investors are unsure whether the property will satisfy Section 1031, they should think about holding it for at least one year, if not two.

Even while the IRS has never explicitly said that there must be a minimum hold period, there have been instances where the IRS refused to allow an exchange because the owner's intent was ambiguous.

Investors who are unsure of their eligibility may choose to follow the two-year advice in general. However, as always, consult with a tax expert to receive their opinion on your specific case. The IRS referred to the two-year holding term in Private Letter Ruling 8429039 from 1984. The letter was written in response to a request for an exchange from an investor who wished to sell his property. Until 1981, the subject property served as the investor's primary residence. The investor leased out the property in 1983. The IRS granted the investor's request for a 1031 exchange in 1984, noting that keeping rental property for at least two years satisfies the holding period test required by Section 1031. But since a private letter ruling only applies to this specific instance, it may only be regarded as a general recommendation for 1031 exchanges.

The one-year holding consideration, on the other hand, was first proposed by Congress in 1989 as a requirement for a property to be eligible for a 1031 exchange. However, because this suggestion was never included in the Tax Code, it is not necessary. Instead, in order to determine whether a property would be eligible under Section 1031, tax professionals have referred to this idea.

The fact that the investment will appear on one's taxes as an investment property for two filing years if it is held for at least a year is another factor for the one-year holding period.

Nevertheless, these factors are but that—factors. In the past, the IRS has made choices on like-kind exchanges that do not support these ideas. For instance, in the case Allegheny County Auto Mart v. C.I.R. from 1953, the court allowed an investor to complete a 1031 exchange even though they had only owned the property for five days. However, in other cases, like Klarkowski v. Commissioner from 1967, an investor was still ineligible even after six years of ownership.

Is a vacation home acceptable?

Those who own property as a vacation home can often sell it and buy a new property via a 1031 exchange, however this is typically how commercial investors talk about 1031 exchanges. The vacation home must, however, have tenants, and it must be managed like a company. In addition, if the vacation home is purchased as the replacement property, the investment-related use of the property must continue. The property can usually not be turned into a primary residence within five years of the exchange.


Additional 1031 Exchange Timelines That Are Important

Investors must be aware of and abide by the deadlines specified in Section 1031 in order to be eligible for a like-kind exchange.

There is no time limit on how long an investor has to sell an asset after it is put on the market. They can market it for one day or five years and sell it on or off the open market. In reality, they have the option to list the asset before deciding otherwise. Any gains are unrealized until the property is sold. A timetable doesn't begin until the property actually closes, and the investor may be liable for paying taxes on the realized gains.

An investor has 45 days to choose their replacement property and 180 days to close after the initial property, or surrendered property, closes. The 180-day period begins on the same day as the property's closure. With very few exceptions, every exchange that doesn't take place by these dates has all gains subject to taxation.

Speak with a Professional You Can Trust

Speaking with a trained professional is highly advised for anyone considering selling their real estate and buying a new property via a 1031 exchange. Many 1031 swaps have distinct looks. In addition to providing insight on the potential exchange, 1031 experts can lead investors to other 1031 exchange investment opportunities that might otherwise go unnoticed.

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:

The Importance of a QI in Your 1031 Exchange

A qualified intermediary (QI) is required for all 1031 exchanges. Given the importance of the QI in an exchange, it is imperative for real estate investors to identify one they can trust and rely on. Achieving this, however, can be difficult – how does an investor know whether a particular QI is credible? Here is a brief tutorial on how to select a reputable QI for a 1031 exchange.

What is a QI?

A QI, also known as an accommodator, is an individual or entity that facilitates a 1031, or like-kind, exchange as outlined in Internal Revenue Code (IRC) Section 1031. The role of a QI is defined in the Federal Code as follows:

A qualified intermediary is a person who -

(A) Is not the taxpayer or a disqualified person, and

(B) Enters into a written agreement with the taxpayer (the “exchange agreement”) and, as required by the exchange agreement, acquires the relinquished property from the taxpayer, transfers the relinquished property, acquires the replacement property, and transfers the replacement property to the taxpayer. (26 CFR § 1.1031(k)-1)

An individual does not need to meet any eligibility requirements or acquire a license or certificate to become a QI. However, the Internal Revenue Service (IRS) does stipulate that anyone who is related to the exchanger or has had a financial relationship with the exchanger – such as an employee, an attorney, an accountant, an investment banker or broker, or a real estate agent or broker – within the two years prior to the sale of the relinquished property is disqualified from acting as the exchanger’s QI.

Why is having a QI important in a 1031 Exchange?

Every 1031 exchanger must identify a QI and enter into a written contract prior to closing on the relinquished property. Once selected, the QI has three primary responsibilities: prepare exchange documents, exchange the properties, and hold and release the exchange funds.

Preparing Exchange Documents

Throughout the exchange, the QI prepares and maintains all relevant documentation, including escrow instructions for all parties involved in the transaction.


Exchanging Properties

A 1031 exchange requires the QI to acquire the relinquished property from the exchanger, transfer the relinquished property to the buyer, acquire the replacement property from the seller, and transfer the replacement property to the exchanger. Although the QI also transfers the title, the QI does not actually have to be part of the title chain. 

Holding and Releasing Exchange Funds

For an exchanger to defer capital gains, all proceeds from the sale of the relinquished property must be held with the QI; any proceeds held by the exchanger are taxable. Therefore, the QI must take control of the proceeds from the sale of the relinquished property and place them in a separate account, where they are held until the purchase of the replacement property.

Exchangers must meet two key deadlines for the exchange to be valid. The first comes at the end of the identification period. Within 45 calendar days of the transfer of the relinquished property, the exchanger must identify the replacement property to be acquired. The second comes at the end of the exchange period. The exchanger must receive the replacement property within 180 calendar days of the transfer of the relinquished property. These deadlines are strict and cannot be extended even if the 45th or 180th day falls on a Saturday, Sunday, or legal holiday.

What should investors consider when choosing a QI?

Since a QI is not required to have a license, investors should conduct due diligence to ensure they select an individual who can properly manage the 1031 exchange. Unfortunately, the IRS does not excuse any errors committed by a QI, and, as a result, investors may be required to pay taxes on the exchange due to these mistakes. Here are a few things investors should consider when selecting a QI.

State Regulations

While the federal government does not regulate QIs, some states have enacted legislation that does. For example, California, Colorado, Connecticut, Idaho, Maine, Nevada, Oregon, Virginia, and Washington have all passed laws overseeing the industry. Many of these states have requirements for licensing and registration, separate escrow accounts, fidelity or surety bond amounts, and error-and-omission insurance policy amounts.

Federation of Exchange Accommodators

The Federation of Exchange Accommodators (FEA) is a national trade association that represents professionals who conduct like-kind exchanges under IRC Section1031. The FEA’s mission is to support, preserve, and advance 1031 exchanges and the QI industry. Association members are required to abide by the FEA’s Code of Ethics and Conduct.

In addition, the FEA offers a program that confers the designation of Certified Exchange Specialist® (CES) upon individuals who meet specific work-experience criteria and pass an examination on 1031 exchange laws and procedures. Holders of this certificate must pass the CES exam and meet continuing education requirements. The “designation demonstrates to taxpayers considering a 1031 exchange that the professional they have chosen possesses a certain level of experience and knowledge.”

Knowledge and Experience

As mentioned, a QI’s mistake in a 1031 exchange can result in a taxable transaction. Investors who are in the process of selecting an accommodator should review each individual’s qualifications – including knowledge and experience in the industry – before making a final decision. Investors should inquire whether the individual is full- or part-time; how many transactions and how much in value the individual has facilitated. Additionally, it is important to know whether the individual has any failed transactions and, if so, why.

Knowledge about 1031 exchanges is critical. Not only should potential QIs know the basics, but they should understand the ins and outs of the 1031 exchange process. For example, QIs should know what qualifies as a like-kind property. Likewise, they should know about Delaware Statutory Trusts (DSTs), one of the most commonly overlooked alternative 1031 exchange solutions. Unfortunately, many QIs are not familiar with DSTs. Finding a knowledgeable and experienced QI is crucial for investors who want to successfully defer capital gains while continuing to meet their overall financial objectives.


How should an investor go about selecting a QI?

To find a QI in good standing, investors should seek referrals. Word of mouth can be a great way to find a credible QI. Investors can ask for a referral from a certified public accountant (CPA) with 1031 exchange experience, a real estate attorney, a reputable title company, or even the other party in the exchange.

When vetting a potential QI, investors need to ask questions that will reveal the individual’s depth of knowledge and experience – beyond just the basics. For instance, the FAE requires potential QIs to work full-time for at least three years before they can even sit for the CES exam. Three years is a good baseline to start from when judging a QI’s experience; five to 10 years is a solid amount.

Finding a QI is one of the most critical parts of a 1031 exchange, as the transaction cannot be completed without one. Investors must ensure that their QI is experienced and thoroughly understands the various tax codes involved. Investors also need to ensure that the QI has not been financially connected to them within the past two years and is not a relative, employee, or agent. The IRS does not take these factors lightly; failure to comply with what is presented here may lead to hefty penalty fees – or the IRS may prohibit the exchange from occurring altogether.

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:

The Benefits of DSTs for Real Estate Investors

What exactly is a DST (Delaware Statutory Trust)?

For authorized investors who want to make fractional real estate investments, a Delaware Statutory Trust, or DST, is a frequently used structure.

The main benefit of investing in a DST is that it qualifies for a 1031 Exchange, which enables investors who are selling a property to postpone paying capital gains tax by putting the profits into a DST, which the IRS has determined is an investment of "like kind."

National real estate corporations typically "sponsor," or bring to market and make available to accredited investors, DST offers. These offerings can be made available through third-party securities broker-dealers. The property(ies) to be offered under the trust are purchased by DST sponsors.

The DST support will do an expected level of effort on the property, at times secure long haul obligation that is non-response to financial backers, and organizes all lawful desk work to guarantee that the trust meets all requirements for 1031 trade purposes. The DST support will then make the asset(s) accessible to certify financial backers on a partial proprietorship premise, and will gather a charge for organizing, directing, and dealing with the speculation in the interest of financial backers.

The Historical backdrop of DSTs

In the mid 2000s, a portion of the country's biggest land supports and their lawyers pushed the IRS to lay out rules that would permit Spasms, or "occupant in like manner" land (a co-possession structure depicted in more detail beneath) to fit the bill for 1031 exchanges. Thus, interest in Spasms soar. Before long, financial backers were gone up against with a portion of the difficulties introduced by Spasms, for example, requiring consistent agree among financial backers to pursue particular kinds of choices connected with the property.

Around this equivalent time, the idea of financial planning through a DST built up some decent momentum. DSTs gave more adaptability than Spasms and tended to a portion of financial backers' interests especially around the consistent assent arrangements.

It was nothing unexpected, then, that financial backers and supporters encouraged the IRS to take on comparative 1031 trade rules for DSTs. Accordingly, in 2004, the IRS gave Income Deciding 2004-86 that permitted the utilization of the DST construction to get land where the useful interests of the trust would be treated as immediate interests in trade property for the reasons for a 1031 trade. This was proclaimed as a significant triumph for the partnered land industry.

The two Spasms and DSTs were broadly spent until the Incomparable Downturn in 2008. At the point when land values plunged, so did their notoriety. Spasms were influenced more than DSTs. Scarcely any singular financial backers needed to assume on the liability of co-claiming submerged land with so many others. Basically with DSTs, individual financial backers were not obligated for any advance reimbursement - the DST support was. As the economy improved, interest in land partnership got back. Today, DSTs are many times considered the favored strategy for partial land proprietorship given the intricacies related with Spasms.

The Contrast Among Spasms and DSTs


For long-term land financial backers, DSTs are a somewhat new idea. Most long-term financial backers are rather acquainted with Spasms, or occupant in like manner land speculations. The two Spasms and DSTs permit individuals to put partially in land. Both can be utilized related to 1031 exchanges. All things considered, it is no big surprise certain individuals befuddle Spasms and DSTs. Notwithstanding, there are a few critical contrasts between the two.

An essential distinction has to do with the degree of contribution of financial backers. The co-proprietors of a Spasm are normally more engaged with the everyday administration of the land, including property the executives. DSTs are genuinely latent interests in which the support regulates the arrangement for financial backers' sake.

One reason the executives of Spasms can be so unwieldy is that choices require consistent assent of co-proprietors on any significant choices. As a matter of fact, this is one of the moves that prompted the production of DSTs. The consistent assent expected by Spasms was a side road for some financial backers and made difficulties for some who had previously put resources into Spasms.

One more distinction among Spasms and DSTs is the manner by which they hold title to the property. Spasm co-proprietors each hold a fragmentary portion of the title to the property. Alternately, the DST holds genuine title to the land resource - individual financial backers don't. This has suggestions in accordance with funding. At the point when obligation is utilized to fund the property, either securing or enhancements, the singular co-proprietors of a Spasm subsequently convey risk for that obligation. This additionally implies that banks need to endorse every borrower exclusively, which can demonstrate oppressive for most loan specialists and accordingly, can make land held in Spasms hard to back. DST financial backers don't convey obligation straightforwardly, since the resource is held solely by the DST for the financial backers' sake in a trust structure.

Spasms and DSTs additionally contrast as far as the quantity of financial backers permitted to partake. Spasms are restricted to 35 financial backers (or "co-proprietors") versus DSTs which are covered at 499 individual financial backers.

At last, in light of the fact that DSTs consider more financial backers to take part, the base speculation is by and large lower than what is expected by Spasms. Numerous Spasms expect basically a $500,000 venture versus a DST which typically permit speculations as low as $100,000 (or once in a while less).

How do Financial backers Utilize DSTs?

There are two different ways a financial backer can exploit the advantages DSTs offer. The first, and most well known way, is to contribute utilizing 1031-trade reserves. The other choice is an immediate money interest into a DST.

o Reinvest 100 percent of net deals continues, otherwise called value, into the substitution property;
o Get an equivalent or more noteworthy measure of obligation on the substitution property;
o Recognize potential substitution property(s) in the span of 45 days of offer; and
o Close on the substitution property(s) in something like 180 days of the deal.
Meeting these rules can be troublesome, especially in the present cutthroat housing market.

DSTs offer an option in contrast to "entire property" 1031 exchanges.

All things considered, financial backers can move the returns of the offer of their property into a DST. The financial backer will then, at that point, hold relatively partial possession in the property (or properties) claimed by the DST. DSTs are now settled ("pre-bundled," maybe) and prepared to acknowledge financial backers, which permits somebody offering their property to move rapidly as per the IRS' 1031 trade rules by and large. All reasonable level of investment on the land is as of now complete. Besides, the returns from the offer of the financial backers' property will fit the bill for similar capital increases charge deferral, under current regulation, as though they had contributed through an entire property 1031 trade.

In some cases, financial backers will consolidate systems by putting resources into both entire property and a DST. This is many times the situation when a financial backer tracks down a reasonable substitution property (or properties) yet has overabundance cash staying from the offer of their other resource. The financial backer can take the leftover deals continues and put that capital into a DST to make use advantage, under current regulation, of the 1031 trade benefits.


Expected Advantages to Putting resources into DSTs

There are numerous expected advantages to putting resources into a DST, a few of which are framed beneath:

Instead, the sponsor is only the lenders. Real estate held in DST is also easy to invest because the lender guarantees only the sponsor, usually a large company with a good reputation with a track record, not just anyone. invested, as in TIC.

- Access to industry-grade assets: Direct investors in real estate often have limited access to assets of the same caliber simply because of the costs and expenses associated with investing in real estate. Those looking to invest at the corporate level can do so by investing through DST given its minority ownership principle. Through DST, an individual investor can hold a small share of a high-quality asset that would have a high barrier to entry. - Diversification: There are many DST real estate investments available to investors from different DST sponsors, including multi-family, security, corporate and NNN rentals. And not only can you invest in one type of DST, like many families, but you can do it in many different regions of the country, so that even if one region of the country will - there is a breakdown in its area. economy, there are greater opportunities than elsewhere, or at least those opportunities are reduced by various changes. Conclusion
As you can see, there are many reasons for an investor to consider investing in real estate through DST. The DST model offers great flexibility, opportunity and investment diversity for those looking to take advantage of the benefits associated with a traditional 1031 exchange. Additionally, investors can close DST investments quickly – often within days. So whether you're a seasoned investor looking to put your money to work for the first time, or someone with a deadline to cash out from a 1031 sale, investing in a DST can be a great option.

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: