14A — July 24 - August 13, 2020 — Financial Digest — Tax Issues/Accounting — M id A tlantic Real Estate Journal
www.marej.com
T ax I ssues /A ccounting
By Ryan Williams, Withum Delaware Statutory Trusts: 1031 Exchange Option
S
ucceeding as a landlord requires a lot of hard work, patience, and
landlords to consider in their transition from an active real estate investor making deci- sions to one in which they can still enjoy the benefits of real estate investment without the obligation to actively manage the investments. A 1031 ex- change is an extremely popu- lar tax savings technique. In order for a sale of real property to qualify, the follow- ing terms must be met: 1. The replacement prop- erty must be “like-kind”. The Tax Cuts and Jobs Act of 2017 (TCJA) limits like-kind prop- erty to investment or business real property, not personal
ing a new property: 1) Identify up to three properties regard- less of their market value, 2) identify unlimited properties as long as their cumulative value does not exceed 200% of the value of the relinquished property, or 3) identify as many properties as needed as long as at least 95% of the value of the properties is acquired. 6. The replacement proper- ty should be received and the exchange completed no later than 180 days after the sale of the exchanged property, or the due date of the income tax return (including extensions)
property. 2. The property being pur- chased must be of equal or greater value. 3. The proceeds from the sale of the original property must be held by a Qualified Intermediary throughout the transaction. 4. A taxpayer must not receive “boot”, or cash, in the exchange. The receipt of boot will cause a portion of the transaction to be taxable to the extent of boot received. 5. The replacement prop- erty must be identified within 45 calendar days. There are three options when identify-
for the tax year in which the relinquished property was sold, whichever is earlier. The first requirement may have favorable changes com- ing soon. The IRS has come out with a proposed regula- tion that would allow a tax- payer to include incidental personal property valued at up to 15% of the real prop- erty being exchanged to be included in the exchange and have the gain deferred. Reg. Section 1.1031(k)-1( c )(5) provides that property that is incidental to a larger item of property is not treated as property that is separate from the larger item of property if transferred together and the aggregate fair market value of the incidental prop- erty does not exceed 15% of the aggregate fair market value of the larger item of property. This change would prove huge for taxpayers, who in typical commercial real estate transactions, have incidental personal property transferred together with the real property. A DST is an ownership model through a separate legal entity that allows co- investment among multiple investors to purchase benefi - cial interest in either a single asset or across a portfolio of properties. Under Revenue Ruling 2004-86, the Internal Revenue Service ruled that a taxpayer may exchange real property for an interest in a DST without recognition of gain under Internal Rev- enue Code §1031, due to the interest being treated as an undivided fractional interest in real property. The following restrictions must remain in place for this exchange to remain 100% tax deferred: 1) There can be no future contributions to the DST by either current or new beneficiaries, 2) the trustee cannot renegotiate the terms of existing loans and cannot borrow any new funds from any party, unless a loan de- fault exists as a result of ten- ant bankruptcy or insolvency, 3) the trustee cannot reinvest the proceeds from the sale of its real estate, 4) the trustee is limited to making capital ex- penditures with respect to the property for normal repair and maintenance, 5) any reserves or cash held between distribu- tion dates can only be invested continued on page 20A
planning. When the time comes to leave the real estate i n d u s t r y , individuals may be hesi- t ant t o do so, knowing their real es-
Ryan Williams
tate has appreciated in value and that large tax bills will follow. A 1031 exchange into a Delaware Statutory Trust (DST) is a great option for
Made with FlippingBook Learn more on our blog