1031 Exchange Process in Brief

by Lisa taylor Tax consultant

DSTs or Delaware Statutory Trust is an option for 1031 exchange investors looking for replacement properties. DSTs offer the potential for monthly income to the investors and diversify with no on-going landlord duties. Investors can complete their 1031 Exchange with the help of DST investment professionals. Since 2004, when the IRS approved the Delaware Statutory Trust for 1031 exchange-qualified co-ownership, investors have purchased approximately $20 billion worth of real estate/replacement properties.

1031 DST Investors Have No Control

When the IRS endorsed the DST structure for exchanges, it stipulated that the 1031 investors could not have any operational control or basic leadership authority of the underlying properties. While most sponsors greet and even encourage investors in a DST to provide feedback or information, this should not be confused with control. The DST investors cannot take any action, whether it’s a small change like planting flowers or significant decisions like when to sell a property. Before discussing about DST the investor should know how 1031 Exchange actually works.

How a 1031 Exchange Works

The properties that are swapped under 1031 exchange can be both either a real estate investment or a business. The 1031 exchange is a strategy that helps the investor to defer the capital gain taxes on the sale of any commercial property. The investor sells the property and reinvests the proceeds to buy a like-kind property of equal or greater value. This allows the investor to avoid capital gains taxes and other taxes. The main requirement under this is that the taxpayer has to identify the property within 45 days and buy it within 180 days by the involvement of DST investment professionals.

The 1031 Exchange is the most preferred method used for real estate. There are 8 steps to explain the process of the 1031 exchange. However, a professional is required to complete the steps for an investor since it is an arduous process.

The 8 steps in the 1031 exchange process are as follows:

Sell Investment Property.
The next step is to give the capital gains to a Qualified Intermediary.
The Investor identifies the like-kind property within 45 days.
The Investor sends the duty letter to the qualified intermediary.
The investor negotiates for a price with the seller of the 1031 Exchange property.
Agree on a sales price.
Have your intermediary wire the capital gains to the titleholder or title company.
Fill up the IRS form.