What You Need to Know About Delaware Statutory Trusts & 1031 Exchanges

When people are doing 1031 exchanges they're very nervous about finding, designating, and receiving the replacement property within the timeframes allowed. Remember, you've only got 45 days to identify in writing what you want to receive and 180 days to complete the purchase. Both of those deadlines run concurrently from the day after the closing of the relinquished property.

What is a Delaware Statutory Trust?

Sponsors or syndicators of real estate investments have derived a new way to fashion real estate called a Delaware Statutory Trust. What they typically do is acquire a number of high-grade commercial properties in a little portfolio and have those titled under the name of the trustee.

The advantage is that when people buy into those trusts the beneficial interests in the trust are deemed to be an allocated interest in the underlined real estate. So if I contribute 15% of the purchase price I would be deemed to be an owner of 15% of the underlying real estate.

Tenant-in-Common Ownership

The Delaware Statutory Trust model really derived as an evolution from the old tenant-in-common ownership. Tenant-in-common syndicators would sell fractional interests in specific property and give each of the owners a deeded fractional interest. But the tenant-in-common model did not work very well because oftentimes tenant in common decision making requires unanimous consent of all of the owners which can be very unworkable when there's a difficult situation for the owners to deal with.

Furthermore under the old tenant-in-common arrangements, they were capped at 35 co-investors. Under the Delaware Statutory Trust model it's much more flexible and the administration or ownership is taken care of by one figurehead owner (the trustee of the trust).

From a lender's perspective it's much easier for a lender to get their arms around a Delaware Statutory Trust model because they only have one mortgagor to deal with rather than a plethora of co-owners in a tenant-in-common arrangement. Oftentimes the institutional lender will loan money to the Delaware Statutory Trust and the beneficial owners are not personally liable for the debt which makes these Investments even more attractive if you have to offset debt on your old relinquished property with new debt on the replacement property. If you have to take out at it might as well be dead that you're not personally liable for.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

Back to Basics: What is a Deferred 1031 Exchange?

When we speak of a 1031 tax exchange - we are typically talking about a Deferred Exchange.

In a Deferred Exchange a taxpayer conveys (or sells) the old relinquished-property on day zero of the exchange timeline, and then has up to 180 days after that date (or the due date of the taxpayer's federal income tax return, including extensions, whichever occurs first) to receive the replacement property.

In legal terms, the conveyance must be part of an integrated, interdependent, mutual, and reciprocal-plan, intended to effectuate an exchange by the taxpayer of like-kind property pursuant to the 1031 rule.

To help you understand this process - observe this timeline which demonstrates that both the 45 day time-period and 180 day time-period run concurrently.

1031 Deferred Exchange Timeline

The replacement property must be received within the earlier of:

1. 180 days after the closing of the relinquished-property.

OR

1. The due-date for your tax return for the taxable year in which the transfer of the relinquished property occurs (including extensions).

Contact CPEC1031

A commercial real estate transaction can be complex and daunting for many. Having a trusted 1031 exchange company by your side throughout the process can help make things go a lot smoother. Give us a call to discuss the specific details of your commercial transaction. Our main office is located in the heart of downtown Minneapolis but we work with clients across the United States. No matter where your property is located, we can help you through the entire commercial real estate transaction.

1031 Exchanges Involving the Death of a Buyer or Seller

Let's assume that we've got an elderly taxpayer. They sell their relinquished property and unfortunately they die in the midst of the 1031 exchange. They may have had a replacement property teed up to purchase. The personal representative of the decedent's estate is going to have to make a decision. Do we continue on with the 1031 exchange and buy the teed up replacement property? Or do we just pull up the tent and take our money back on day 181?

Stepped-Up Basis

It may be most advantageous for the heirs to have the intermediary acquire the replacement property. The reason is that under Section 1014 when you receive property as an inheritance you don't receive it with the decedent’s old basis. You instead receive the property with a stepped-up basis. Upon receipt of that replacement property, you get the fair market value of that property as your basis - not the old basis of the relinquished property.

If the 1031 exchange were not completed by the personal representative of the decedent's estate, then on the decedent's final tax return, all income and gains recognized up to the date of death would have to be reported…including the income from the failed exchange.

Consider Your Estate Plan

Many people conducting exchanges particularly when they're older and elderly need to perhaps contemplate in their estate planning documents and give direction to the personal representative to complete the exchange if they, unfortunately, pass away during the middle of the exchange.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

The Tipping Point when it comes to Partial 1031 Exchanges

Many taxpayers don't want to continue into a replacement property of equal greater value and they're happy to do just a partial 1031 exchange. There’s a tipping point at which if you buy down too much in value you don't get much or any tax deferral. So it's important to work with your professional advisors - your CPA, your accountant, your financial planner - to find out where that tipping point is. It can be sort of dependent on how much remaining adjusted basis you have in the old relinquished property.

A Nifty Trick

A nifty trick that sometimes taxpayers will use, especially if they want to put some cash in their pocket is that they will complete the exchange into a new bigger better more expensive replacement property, they’ll reinvest all of their equity, they’ll offset the debt they had on the old property with new debt on the replacement property. Then in a subsequent, post-closing transaction, they’ll go back to the bank and refinance the replacement property to pull out some equity later in a subsequent transaction. By borrowing the money and having this offsetting liability that's not treated as income under the United States tax code. That is a debt that you have to pay back and therefore it's not considered income.

Twin Cities 1031 Exchange Company

At CPEC1031, LLC, we have been performing 1031 exchanges of real estate for over two decades. Our qualified intermediaries offer support to clients throughout Minnesota and across the country. Contact us today to learn more about the extent of our services and to set up a time to chat with our intermediaries. You can find us at our primary offices in downtown Minneapolis.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

How to Make Your 1031 Exchange Down Payment

What happens when you need to make a down payment on the purchase of your replacement property if you've already closed on the sale and your qualified intermediary is sitting on a big pile of your exchange funds? Essentially, you've got two options at your disposal.

Purchase Agreement

One option is to have a purchase agreement entered into with the seller of your replacement property and then specify that within 2 business days your qualified intermediary will wire transfer in the down payment or earnest money deposit for that purchase.

By giving yourself a couple of days you will have time to take that purchase agreement, give it to the intermediary, and have them prepare the necessary 1031 assignment documents and wire disbursement request forms. That allows the intermediary to step into your shoes as the buyer and provide notice to the seller of your assignment of the purchase agreement (to the qualified intermediary). Once that's done the intermediary can advance your earnest money deposit or for that matter the entire purchase price if you want them to and that money can be used to acquire your replacement property.

Earnest Money

Alternatively, if it's too much rigmarole to get you qualified intermediary to wire the money and you're out there making deals fast & furious, the other way to do it is to have you write your own earnest money check (out of your own pocket) and give it to the seller with your offer. That might make your offer more attractive or enticing and you can always get your deposit back by stating in the purchase agreement my deposit is just a deposit I don't want it to be applied towards the purchase price and at closing you can give me back my earnest money deposit because I'm coming in with a truckload of 1031 funds that I would apply towards the purchase price instead.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved