What is a 1031 property exchange?
Section 1031 of the IRS Code allows an investor who is selling business or investment real estate to complete a tax-free exchange by purchasing replacement like-kind property. This allows deferral of up to 100% of the taxes otherwise due on the sale.
The IRS defines like-kind as any real property held for business or investment purposes. This includes, and is not limited to, raw land, farmland, rental, and commercial properties. Like-kind property cannot include a primary residence. IRS Section 1031 cannot apply to the exchange of stocks or bonds.
Benefits of a 1031 property exchange
- Unlimited deferral of capital gains and depreciation recapture
- Wealth preservation
- Greater income
- Efficient estate planning
Tax on the sale of real estate
Gains on the sale of property are typically taxable at both federal and state levels. Taxes due may be avoided utilizing a 1031 exchange:
These are general taxes and guidelines related to 1031 exchanges.
Completing a 1031 property exchange - 4 step process
What is a DST?
A Delaware Statutory Trust (DST) holds title to multiple properties for multiple owners.
For tax purposes, each DST investor is treated as owning an undivided fractional interest in real estate. IRS Revenue Ruling 2004-86 provides guidance on the use of a DST for property ownership.
Benefits of a DST
- Qualifies as a 1031 tax-free exchange
- Passive ownership
- Property diversification
- Tax-advantaged rental income
- Less cost than a whole property purchase
If you are an Accredited Investor, and would like more information about the opportunities and services available from AEI, please contact your financial advisor, or for a financial advisor referral you may contact AEI Investor Services at 800-328-3519.