Real Estate Strategies

Our professionals specialize in providing corporate real estate guidance with the goal of maximizing value while minimizing taxes. With the goal of assisting clients with navigating real estate transactions in the most tax-efficient way possible, we help you develop, carry out, and track a comprehensive plan.

A common approach for tax deferral when selling real estate involves exchanging one property for another. Many individuals are unaware that the replacement property doesn't necessarily have to be under their direct management. Instead, it can be transformed into a real estate portfolio overseen by a professional money manager and a property management company, while still providing a steady income.

1031 Exchange

A common tool for real estate investors looking to grow their portfolios is a 1031 exchange. A 1031 Exchange is a tax strategy in the U.S. that lets investors sell a property and defer paying capital gains taxes if they use the sale proceeds to buy another similar property. The properties must be for business or investment, and a qualified intermediary is required in the process. There are strict timelines and rules, and if done correctly, it allows investors to keep more money in their pockets by postponing taxes.

Tax Advantages of 1031 Exchanges

Defer Capital Gains

A 1031 exchange allows real estate property owners to trade properties while deferring capital gains. 

Reduce State Taxes

Certain investors opt to transition from New Jersey to another state, often with the aim of eliminating state income taxes on their income. This opportunity is available in a limited number of states, and it is advisable to discuss it with a certified public accountant (CPA).

Reset Depreciation

Every year an investor owns real estate, they can mitigate their taxes using the property's depreciation schedule. Initiating a sale through a 1031 exchange resets this timeline, ensuring continued tax advantages for the investor.

The 1031 Exchange Process

Identify a Qualified Intermediary

Identify a Qualified Intermediary

Investors should first locate a qualified intermediary (QI) who will oversee the management of their funds throughout the exchange process. A QI can be identified at the sale of the relinquished property, though it is better to have this completed ahead of time due to the time constraints in this process. We are happy to connect you with a QI.

Sell the Relinquished Property

Sell the Relinquished Property

The property an investor is selling is referred to as the "relinquished property." To initiate the exchange, this property needs to be sold. It can be marketed either on or off the market, as the IRS does not impose any specific restrictions.

Place the Funds with the QI

Place the Funds with the QI

After the property is sold, the proceeds from the sale must be deposited with the Qualified Intermediary (QI). This constitutes a crucial step in the exchange process. Any funds directly received by the investor become taxable.

Identify a Replacement Property

Identify a Replacement Property

Following the closure of escrow on the relinquished property, an exchanger has a 45-day window to identify the exchange property, a period known as the 45-Day Rule. Participants in the exchange must adhere to one of the three identification rules outlined by the IRS.

The Three Property Rule allows an exchanger to designate any three properties as potential replacements and subsequently purchase one, two, or all three.

Under The 200 Percent Rule, an exchanger can identify more than three properties, provided that the total value of the designated properties does not exceed 200 percent of the relinquished property's value.

The 95 Percent Rule permits an exchanger to identify as many properties as desired. However, they are obligated to purchase 95 percent of the combined value of all identified properties.

Close on the Replacement Property

Close on the Replacement Property

In a 1031 exchange, an investor is allotted 180 days from the closure of the relinquished property to acquire a replacement property, a period referred to as the 180-Day Rule. If the investor successfully completes the purchase within this timeframe and fulfills the criteria for property identification, all gains are deferred as per the 1031 exchange regulations.

Delaware Statutory Trust

Delaware Statutory Trust

A Delaware Statutory Trust (DST) is a legal entity facilitating collective real estate ownership. Investors hold fractional interests in the trust's properties, managed by a professional real estate company, known as a DST sponsor. The sponsor is responsible for identifying the real estate assets. This structure allows investors to pool resources for real estate investments without the need for individual property management.

Income Requirements 

In order to invest in a DST, one must be an accredited advisor. The SEC typically classifies this as someone with a net worth (excluding their primary residence) of $1 million, or an average annual income surpassing $200,000 for the past two years for an individual, and $300,000 for a couple filing jointly.

Minimum Investment 

Delaware Statutory Trusts (DSTs) typically mandate a minimum investment of $100,000, and investors have the option to acquire or exchange into ownership in one or multiple DSTs. Generally, DST real estate is held for a duration ranging from 3 to 10 years. When the property is sold, investors receive their proportionate share of the sales proceeds, encompassing gains from potential appreciation. Importantly, these proceeds can be reinvested through a 1031 Exchange, enabling investors to continue deferring taxes on any capital gains.