The gain that would have been recognized in a taxable sale is deferred until the replacement property is sold in a taxable transaction. In most deferred exchanges, taxpayers engage a “qualified intermediary” to prepare an exchange agreement and hold the net sales proceeds from the relinquished property in an exchange escrow account pending acquisition of the replacement property. Taxpayers may structure a series of exchanges, compounding the benefits of tax deferral, thereby building wealth over time.
The taxpayer may exchange real property for any other real property located in the United States or its possessions for productive use in a trade or business or for investment.
All days are calendar days, regardless of whether the day falls on a holiday or weekend.
Taxpayers may structure a series of exchanges to compound the benefits of tax deferral, thereby potentially building wealth over time.
A Delaware statutory trust (DST) is a private real estate investment vehicle that allows investors to participate in a Section 1031 exchange and receive passive income as well as potential for appreciation from real estate ownership. This equation provides the potential for superior risk-adjusted returns.
A Delaware statutory trust (DST) is a distinct legal entity created as a trust under the statutory law of Delaware. In a DST, each owner is treated as owning an undivided interest in the real estate for tax purposes. Capital Square’s DST offerings comply with the requirements of IRS Revenue Ruling 2004-86. This means that each owner’s beneficial interest is treated as a direct interest in real estate for tax purposes.
The DST structure has proven to be superior to other fractionalized ownership structures. Lenders view the trust as a single borrower rather than having up to 35 individual borrowers in a tenant-in-common, or TIC, structure. DST programs qualify for favorable financing from conduit lenders, banks, life insurance companies and government agencies. In addition, because investors are not on title in a DST structure, investors need not form special purpose entities to hold their ownership and lenders look solely to the DST sponsor for any liability on loans. This means that DST investors have no personal liability whatsoever on DST loans.
Asset Protection – Limits rights of creditors (creditors of a DST investor cannot attach trust assets).
Liability Protection – DST investors of the trust have the same liability protections that Delaware law provides to stockholders of a Delaware corporation (generally, no personal liability).
Confidentiality – Provides privacy for the beneficial owners.
Contractual Flexibility – Provides maximum contractual flexibility.
DSTs provide a number of benefits to investors, including:
To qualify for a DST, trustees may not:
Simple Process and reasonable filing fees:
Flexible tax treatment:
Preservation of Capital
Buy Stable Assets for Cash Flow
Diversify to Reduce Risk
Add Value- When Appropriate
Trust but Verify with Property Audit
Patient, Long – Term Thinking
Think Outside the Box
Sometimes referred to as an accommodator, a qualified intermediary facilitates Internal Revenue Code Section 1031 exchanges. Treasury Regulation §1031.1031(k)-1(g)(4)(iii) defines a qualified intermediary as a person who:
Taxpayers can avoid actual or constructive receipt of the proceeds of sales by using a qualified intermediary and following the regulatory safe harbor. A qualified intermediary cannot be related to the taxpayer or have a financial relationship with the taxpayer within two years of closing on the exchange.
INCOME – Real estate investments generate income from rent paid by tenants.
INFLATION HEDGE – Real estate has served as an effective hedge against inflation, as lease rates and underlying property values typically keep pace with (or exceed) the rate of inflation. Capital Square targets properties with long-term leases that have built-in rent escalations to compensate investors for future inflation.
TAX BENEFITS – Section 1031 permits gains to be deferred on the sale of investment/business property. Additionally, real estate provides material tax benefits unavailable for other investments.
APPRECIATION – Real estate typically appreciates over time, resulting in gains that can be deferred in future exchanges or realized upon sale.
DEPRECIATION DEDUCTIONS – Real estate provides material tax benefits, such as depreciation deductions, that are not available with other investments. In fact, depreciation is one of the most compelling benefits to real estate investors because depreciation is a non-cash deduction (in other words, you don’t pay for it). Real estate owners are allowed to reduce their taxable income by a deduction for depreciation (the theoretical wear and tear on a property, even though properties tend to appreciate in value over time). This is a non-cash deduction – real estate owners pay nothing for the benefit, which can provide greater overall return of their investment by sheltering from taxation otherwise taxable income.