Since the Revenue Act of 1921, real estate investors and real property owners have taken advantage of Section 1031 Exchanges. These “like-kind” exchanges provide the opportunity to defer federal capital gains tax, net investment income tax, possible state capital gains tax and any tax levied on depreciation recapture. With a 1031 Exchange, real estate investors can reposition real estate while preserving their entire investment.
There are many 1031 Exchange replacement property options, but each property type carries its respective strengths and weaknesses. Any replacement property you select should align with your unique goals and objectives.
Delaware Statutory Trust (DST)
One of the most popular 1031 Exchange options is a Delaware Statutory Trust (DST). These trusts hold real property and allow investors to own an undivided fractional interest in high-quality institutional real estate that is acquired and managed by large professional real estate firms. By exchanging into several DST properties, a diversified portfolio of passive properties can be created. Only accredited investors may qualify for ownership in a DST.
Fee Simple Property
Fee-Simple Property is a broad category that includes all real estate owned outright by an investor. This option might appeal to investors who can appreciate the time and effort required for active real estate. Some investors intend to convert rental property into a primary residence or vacation home. Fee-Simple Property could help achieve this type of exchange.
Net Lease Property
Net Lease Property refers to real property with a long-term structured net lease. Single net lease, double net lease and triple net lease properties can reduce the burden of active property management because they are typically leased to high-quality corporate tenants. Some triple net properties can be found inside of a Delaware Statutory Trust for investors who want to own a fractional interest in a net lease property.
Tenants-in-Common (TIC) Property
Tenants-in-Common Property allows for fractional ownership. An investor may desire ownership in a large institutional property. A Tenants-in-Common structure could be a good choice. TIC properties come with added flexibility and responsibility. Investors can provide input as to how the property is managed, but they are also required to submit tax returns if leverage is employed and are subject to cash calls for repairs and upgrades.
TIC properties are different from DST properties since they can allow for refinancing after a 1031 Exchange and have higher investment minimums beginning most often at $1 million.