DST 1031 requirements for a successful exchange – experts’ advice

In many cases, the 1031 exchange strategy comes as a relief for real estate investors, since it allows them to defer some taxes and make it easier for them to make financial decisions. Those large capital gain taxes are not such a big of a problem anymore. Nevertheless, it is essential to keep in mind that in order for an exchange to be successful, the Delaware Statutory Trust 1031 must be performed following some specific rules and requirements and the most important ones are also mentioned below in this article.

 

#1 – Equal or greater price for the replacement property

 One very important rule for the 1031 exchange to be performed is for the two properties, the one you own and the replacement one you have found, to have equal value. It is also allowed for the replacement property to have higher value compared to the one you possess, yet not a lower one. In case this does not happen, you will not have the chance to enjoy the tax-deferred benefit.

#2 – The same tax payer

This rule is quite simple – the taxpayer who sells a property is one and the same with the taxpayer who buys. The same name should appear on the title of both the old and the new properties. One exception to this rule occurs in the case of SMMLC (Single Member Limited Liability) companies, because these ones are known to be in compliance with the code that refers to the 1031 strategy.

#3 – The 45-days rule

This rule is often misunderstood by many investors, although it is quite a simple one. The investor has a period of 45 calendar days during which they have to find one to three investment properties possible for replacement. The main reason why people fail in 1031 exchanges is that they believe the 45-period excludes holidays and weekend days, but they couldn’t be any more wrong. After this period ends, they have 135 more calendar (not working!) days during which they have to close the deal and finish the exchange. Keep in mind that in order to be able to buy a specific replacement property, the related party that owns that property must also initiate a 1031 exchange.

#4 – The like-kind rule

The like-kind rule is probably the most important ones when it comes to 1031 exchanges. This implies that the investment properties, the one you buy and the one you sell, must be “like-kind”. They must be similar in character or nature, regardless of their grade or quality for example. To better understand the concept, think of it this way: you are not allowed to exchange buildings for farming equipment, but only for other buildings or investment properties.

Obviously, there are other rules that you must follow the moment you engage in 1031 exchanges, yet these four are the most important ones you have to keep in mind. It is advisable that you go for professional help in case you feel it goes beyond your duties and need someone to guide you through the process.