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What Is A 1031 Exchange?

A 1031 exchange (IRS Code Section 1031) enables investors to defer capital gains taxes by reinvesting the proceeds from the sale of their investment property, known as the “relinquished property”, into a qualified “replacement property”. The investor much acquire a replacement property or properties that are of equal or greater value than their relinquished property (including any loan pay off), reinvesting all net proceeds (equity), and following the IRS required guidelines and time-frames.

Experience in Section 1031 exchange securitized real estate
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Who Is A Qualified Intermediary?

The U.S. Treasury adopted regulations in 1991 which govern Section 1031 “like-kind” Exchanges. An exchange must be facilitated by an independent third-party according to the US Treasury Regulation 1031(k)-1(g)(4)(iii). A Qualified Intermediary (“QI”) is required to handle the mandatory mechanics of a 1031 exchange for investors, and will hold the funds involved in a 1031 exchange during the period between the sale of the relinquished property, and the purchase of the replacement property or DST.

Since it became required, many thousands of investors have completed 1031 exchanges with the assistance of a professional QI, also known as a “QI”, or a “facilitator”, or an “accommodator”.

What Is A Triple Net (NNN) Lease?​

A Triple Net, or “NNN” lease is a special type of lease between a property owner and a tenant. NNN stands for “net, net, net”. In addition to the rental lease payments owed, the NNN tenant is responsible for the net property taxes, net insurance costs, and net of some building and maintenance expenses for the property they lease. Generally, these tenants lease anything from retail, to office, to fast food, to industrial properties.

Some investors prefer NNN leased properties because they do not have to deal with traditional property management issues and responsibilities. And, some tenants prefer them because they can lock in generally lower rents for a longer term than a traditional lease, often 10, 15, or 25+ years.

What Is A Delaware Statutory Trust (DST)?

In 2004, the IRS issued Revenue Ruling 2004-86, creating the DST investment structure. A DST is a separate legal entity which is created as a trust under Delaware statutory law, and enables a flexible approach to the ownership and operation of investment real estate. A group of investors can each individually purchase what is known as a “beneficial membership interest” in a DST, and that ownership is equivalent to real estate ownership for 1031 exchange and other tax purposes.

Individual DSTs are typically created by sponsor firms for the purchase of a single property, though some firms can bundle a portfolio of properties into a single DST. 1031 exchange investors can purchase an interest in one or more DSTs to satisfy their 1031 exchange requirements, giving them an option to go beyond traditional, sole-owned investment real estate. As with all real estate, there are many advantages (and disadvantages) to DST owned properties.