Most Suitable Replacement Options For 1031 Exchange

Real estate investors seek opportunities to invest in big income-producing assets that come with no landlord responsibilities. Managing an investment property can prove to be a hectic job as you need to invest a significant amount of money and time. Landlords are not burdened too much when the property is new. However, with time it needs repairing and maintenance work regularly. Because of rising maintenance expenses, you may think of selling your old property and investing the proceeds in other assets. However, it may not be the best decision. Instead, you can search for various buying options and invest in NNN or DST properties and enjoy management-free investment.

Keep track of the deadlines – 

The IRS has straightforward rules when it comes to deadlines – you cannot miss it. Here are two deadlines that you need to adhere to during your 1031 exchange.

45 Days Identification Period – The day you sell your old investment property, you are left with 45 days to identify a replacement property. Basically, your 1031 exchange begins this day, so it’s Day Zero. You can identify three or more replacement options before the end of the 45th day (Identification Period). You must mention the address and other details of the replacement properties on a paper and send it to the IRS before the deadline. 

180 Days Exchange Period – Once you identify replacement options, you must acquire it and complete your 1031 exchange. You get 180 days to complete a single exchange. Your exchange period includes the time given for property identification. You must complete your exchange on or before midnight of the 180th day. You cannot ask for an extension from the IRS if you miss the deadline.

Your Qualified Intermediary performs all the tasks. 

A Qualified Intermediary (QI) is a person responsible for handling and completing 1031 exchanges. The IRS says a 1031 investor must work with a QI in every exchange they do. Sometimes, locating a 1031 exchange property becomes challenging. There have been cases in the past when investors could not complete their exchange due to failing to identify a potential replacement property. Every year, a significant number of 1031 transactions lose validity because of this. Therefore, to help investors close their exchange successfully without losing the opportunity in the middle, the IRS has made the participation of Qualified Intermediaries mandatory in 1031 exchanges.

How to choose an experiencing QI?

  • Experience – You would want an experienced person to take charge of your 1031 exchange. Having a knowledgeable, qualified intermediary by your side means less trouble in your exchange. Choose a person who has facilitated more 1031 exchanges than others. 
  • Network – In real estate business, contacts are the biggest source of revenue. If your QI has ample contacts, you can get hold of a replacement property easily. Talk to your QI and evaluate their network before hiring. 
  • Services – Though a Qualified Intermediary’s role is to facilitate 1031 exchanges, they can help you with other stuff too. From preparing the documents to performing all due diligence, your QI can do a number of things. Check out the services offered by the Qualified Intermediary you want to hire. 
  • Service Charge – You would not want to pay a hefty amount to your Qualified Intermediary. Look out for different QIs and compare their fees. There is no fixed fee, and you may expect huge fluctuations in the money they charge. 

Little-to-no landlord responsibilities with net leased investment – 

A triple net or NNN lease is a single-tenant lease agreement that requires the lessee to pay all major operating expenses in addition to the base rent. What we see under a gross lease is that the tenant pays the property rent, which the landlord uses to pay off operating expenses. On the other hand, a triple net lease asks the tenant to pay the property expenses instead of the landlord. These operating expenses include insurance fees, maintenance costs, and property taxes (together known as the ‘three nets’).  

Taking DSTs as 1031 replacement option – 

A Delaware Statutory Trust or DST is a private entity that owns, manages, handles, and administers income-producing properties. DSTs are established by filing a Certificate of Trust with Delaware Division of Corporations and governed by Chapter 38, Part V-Title 12 of annotated Delaware Code. A DST portfolio includes large income-producing assets. DST property shares are sold as real estate securities to 1031 exchange investors. DSTs are large entities, and you may find up to a hundred investors or even more in a single DST. 

Three significant benefits of DSTs – 

  • Zero Responsibility – When you invest in a DST, you don’t need to interfere in property management. DST properties have pre-arranged property or asset managers.
  • Low Investment – DSTs’ large structure enables it to accept small investments. You may acquire a DST property for a price as low as $100K. This creates an opportunity for small investors to own big income-producing assets along with other investors.
  • Diversification – There is no limitation on the number of DST properties you can purchase. You can split your 1031 proceeds and invest in as many DST properties as you like. If you want to add different grades of properties in your portfolio, a DST investment is what you should be eyeing. 

In addition to these benefits, DSTs offer other advantages too, including high cash flow, multiple tax advantages, pre-arranged and non-recourse financing, etc.

Talk to a 1031 expert to unfold different aspects of NNN lease and DST investment…

Discussing your situation with an experienced 1031 advisor can help you understand the complexity of DST and NNN investments. Besides, you can also address all your doubts before them and get assistance with almost everything related to your investment. A good 1031 exchange advisor can also help you understand different market trends and how your investment will work in the current market scenario.

Most Suitable Replacement Options For 1031 Exchange

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