5 Professionals Behind a Successful 1031 Exchange

When embarking on a 1031 Exchange, it's crucial to assemble a team of professionals who can guide you through the process and maximize the benefits. These experts possess the knowledge and experience necessary to ensure a successful exchange that aligns with your goals. Here are five professionals who play key roles in facilitating a smooth and effective 1031 Exchange:

Qualified Intermediary (QI): A QI is a crucial player in a 1031 Exchange. They facilitate the sale of your relinquished property, hold the funds in a segregated account, and assist in identifying and acquiring replacement properties within the specified timelines. Their expertise ensures compliance with IRS regulations.

Real Estate Agent/Broker: Engaging a knowledgeable real estate agent or broker can help you find suitable replacement properties that align with your investment objectives. They have access to market data and can guide you through the purchase process while considering your specific requirements.

Tax Advisor/Accountant: A tax advisor or accountant specializing in real estate can provide valuable insights into the tax implications of your exchange. They can help you understand the tax deferral benefits, assess your eligibility for various tax strategies, and ensure compliance with tax laws.

Real Estate Attorney: A real estate attorney familiar with 1031 Exchanges can offer legal guidance and help navigate any complex legal issues that may arise during the process. They ensure the transaction adheres to local laws, review contracts, and provide guidance on potential liabilities.

Financial professional: A financial professional can provide investment insights targeting your investment goals. They can help evaluate the financial impact of the exchange, assess the long-term implications, and strive to ensure your investment strategy aligns with your overall financial objectives.

By assembling a team of professionals, including a Qualified Intermediary, real estate agent/broker, tax advisor/accountant, real estate attorney, and financial professional, you can benefit from their specialized expertise and ensure a successful 1031 Exchange. Working collaboratively, they will guide you through the process, strive to mitigate risks, and attempt to help you achieve your investment goals.

A licensed 1031 Exchange professional 

A licensed 1031 Exchange professional serves as the team captain in the 1031 Exchange process. They possess expertise in the Exchange process, tax code, strategies, and replacement property options. As the team leader, they provide consultation, develop Exchange strategies, assist in selecting and acquiring replacement properties, and guide clients through the 8 key steps of the Exchange process while ensuring compliance with IRS rules.

Quality 1031 Exchange professional often have CPAs on staff to calculate tax liabilities and estimate financial projections for replacement properties. They continuously analyze and evaluate replacement properties to find high-quality options that align with client objectives.

Additionally, a good 1031 Exchange professional collaborates closely with other professionals involved in the Exchange, such as real estate agents, tax advisors, attorneys, and financial professionals. This collaboration ensures a smooth and seamless transition throughout the Exchange process, maximizing the chances of a successful outcome for clients.

A Qualified Intermediary (QI)

Purchase agreement for a new house indicating the role of a qualified intermediary in a 1031 exchange for tax deferral

A Qualified Intermediary (QI), also known as an Exchange Accommodator or Exchange Facilitator, is an independent entity that plays a crucial role in a 1031 Exchange. The QI holds the funds from the sale of the relinquished property and facilitates the acquisition of the replacement property.

To comply with IRS requirements, the exchanger must identify a qualified intermediary and establish an "Exchange" with them prior to closing on the sale of the relinquished property. The QI prepares the necessary documents for the Exchange and ensures that the funds are properly handled during the transaction.

When selecting a qualified intermediary for your 1031 Exchange, it is important to consider their reputation, transaction history, and experience in handling exchanges. Additionally, verifying that the QI has errors and omissions insurance, as well as fidelity insurance, is crucial for added protection.

Choosing a reputable and reliable qualified intermediary is essential to ensure a smooth and compliant 1031 Exchange process.

Real Estate Broker

Male real estate broker shaking hands with new property owners highlighting the role of a 1031 exchange in tax deferral

Working with a real estate broker who has experience with 1031 Exchanges can be highly beneficial when selling your relinquished rental property. These brokers have a deep understanding of the time-sensitive nature of exchanges and can take additional steps to safeguard your exchange.

A real estate broker with 1031 Exchange experience will be familiar with the intricacies of the exchange process and can provide guidance throughout the transaction. They may include a 1031 Exchange Cooperation Clause in the purchase and sale agreement, which helps protect your exchange by ensuring all parties involved are aware of the exchange and will cooperate accordingly.

By collaborating with a real estate broker who specializes in 1031 Exchanges, you can benefit from their knowledge and expertise, ultimately increasing the likelihood of a successful exchange.

CPA / Tax Advisor:

Engaging a CPA or tax advisor with expertise in 1031 Exchanges is crucial to ensure the tax implications of your exchange are properly addressed. They can help align your financial goals with the exchange strategy, provide guidance on tax planning, and ensure compliance with IRS regulations. Your tax advisor will gather the necessary documentation and report the 1031 Exchange on your tax return.

Attorney:

While not always necessary, hiring a real estate attorney for your 1031 Exchange can be beneficial, particularly in complex situations such as co-ownership or legal entity restructuring. A real estate attorney with experience in 1031 Exchanges can provide legal guidance, review contracts, and ensure compliance with applicable laws. They can also coordinate with other professionals involved in the exchange to ensure a smooth process.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Any information provided is for informational purposes only.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication. 

1031 Risk Disclosure: 

Understanding DSTs: Leveraging Them for 1031 Exchanges

Understanding DSTs: Leveraging Them for 1031 Exchanges

DST stands for Delaware Statutory Trust, a legal entity established according to Delaware law. It is important to note that the property and investors associated with a DST are not required to be situated in Delaware. In a DST, every investor possesses a stake in the Trust, which ultimately holds ownership of the property.

These investors are referred to as "beneficiaries" of the Trust. Consequently, the ownership rights held by investors in a DST are known as "beneficiary interests." Notably, the Internal Revenue Service (IRS) treats DST beneficiary interests as equivalent to direct property ownership, thereby making them eligible for a 1031 exchange.

1031 Exchange Explained

Financial advisor explaining 1031 exchange and Delaware Statutory Trust to a couple

A 1031 exchange is a tax deferral strategy widely employed by real estate investors to optimize their investments. It entails utilizing the proceeds obtained from the sale of an investment property to acquire another property that is considered "like-kind" in the eyes of the tax code.

By engaging in a 1031 exchange, investors can defer the payment of capital gains taxes that would typically arise from the sale of their assets. This allows them to retain a larger portion of their proceeds from a sale, facilitating the creation of a more diverse investment portfolio.

In the context of Delaware Statutory Trusts (DSTs), 1031 exchanges present a unique opportunity to expand one's investment horizon and potentially access high-value properties. DSTs offer a vehicle for investors with limited funds to participate in the ownership of premium commercial properties, such as retail spaces, apartment complexes, and industrial facilities. By pooling their resources together in a DST, individual investors gain the ability to collectively acquire these sought-after properties.

Once an investor becomes a beneficiary in a DST and holds passive ownership in a high-dollar property, the benefits of a 1031 exchange continue to play a significant role. By leveraging subsequent 1031 exchanges, investors can defer their tax liabilities and effectively roll their investment gains into additional high-end assets. This strategy enables them to perpetuate the growth of their investment portfolio while deferring the payment of capital gains taxes until a future date.

DST’s Explained

In order for a Delaware Statutory Trust (DST) to qualify under Section 1031 for a like-kind exchange, there are key guidelines set forth by the IRS. These guidelines include:

1. Unlimited Beneficiaries: While the number of beneficiaries in a DST is generally capped at 499 in practice, there is no strict limit imposed by the IRS.

2. Trustee Decision-Making: The Trustee of the DST is responsible for making material decisions, rather than the individual investors. This structure ensures a centralized decision-making process.

3. Passive Real Estate Holding: The DST operates as a passive holder of real estate. Trustees have limited powers, and beneficiaries (investors) do not have authority over property operations.

The DST structure offers several structural advantages, including:

Old weighing scale representing the advantages of Delaware Statutory Trust (DSTs) in a 1031 exchange

1. Limited Liability: Similar to a limited liability company (LLC) or corporation, the DST structure protects investors from personal liabilities beyond their investment amount.

2. Bankruptcy Protection: The DST structure safeguards individual investors from creditors pursuing the DST's debts. It also prevents investors from placing liens on the DST's property, providing additional protection to mortgage lenders and other beneficiaries.

3. Centralized Control: Major decisions within the DST are made by a single Trustee, eliminating concerns or disagreements among investors.

4. Single Borrower: The DST acts as the sole borrower and owns 100% of the property. This simplifies the process of obtaining a mortgage, as there is no need to coordinate multiple borrowers.

5. Permissible Number of Investors: DSTs can accommodate a large number of beneficiaries, with no strict limit imposed by the IRS (though it is typically capped at 499). This allows for the purchase of institutional quality properties, spread across a larger number of investors, and provides the advantage of lower investment minimums.

6. Pre-Packaged Investments: DSTs often offer pre-acquired properties with mortgages already in place. This simplifies the investment process for investors using 1031 exchange funds, as they can easily purchase fractional DST investments without the complexities of property acquisition and mortgage arrangements.

These guidelines and structural advantages make DSTs an attractive option for investors seeking the benefits of a like-kind exchange while enjoying limited liability, centralized control, and access to institutional-grade properties.

While the Delaware Statutory Trust (DST) structure offers numerous advantages, it is important to note the limitations that must be considered for qualification in a 1031 exchange. These prohibitions include:

1. Capital Contributions: Once the DST is closed, investors are not permitted to make additional capital contributions to the trust.

2. Loan Terms: The Trustee of the DST cannot renegotiate the terms of existing loans or secure new funds through borrowing.

3. Proceeds from Property Sales: If a property owned by the DST is sold, the Trustee is obligated to return the proceeds to the investors rather than reinvesting them in another property.

4. Capital Expenditures: The DST is restricted in terms of capital expenditures it can make on its properties. These expenditures are typically limited to normal repair and maintenance, non-structural improvements, and those mandated by law.

5. Investment of Cash: Cash held by the DST between distributions to investors can only be invested in short-term debt securities such as US Treasury bills.

6. Cash Distribution: With the exception of reserves, all cash must be regularly distributed to the beneficiaries (investors).

7. Leases: The Trustee is prohibited from entering into new leases or renegotiating existing leases.

Despite these limitations, fractional property investments through DSTs remain an appealing option for investors engaged in 1031 exchanges. This structure enables investors to participate in larger, higher-quality assets that might be otherwise out of their reach. Additionally, the pre-packaged nature of DSTs simplifies the investment process and helps investors meet the strict timelines required for exchanges. It is worth noting that DSTs are generally best suited for investors seeking longer-term, passive investment opportunities.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Any information provided is for informational purposes only.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication. 

1031 Risk Disclosure: 

Risk Assessment for Retirement Planning: What to Know

As you approach retirement, there are a variety of important considerations to keep in mind, not just whether or not to take up pickleball. One of the biggest worries for many retirees is ensuring their funds last throughout their retirement. To help achieve financial stability in retirement, it's important to understand and prepare for a range of risk factors, including inflation, market fluctuations, lifespan, spending habits, and health. This can be achieved through a comprehensive risk assessment.

By taking a closer look at each of these risk factors, you can better understand their potential impact on your retirement funds and create a more secure financial plan for your golden years.

Risk Factors of Retirement

Longevity, or living a longer lifespan, can have a significant impact on retirement planning. As life expectancies continue to increase, the likelihood of outliving one's retirement savings becomes a growing concern. This means that individuals must plan for a potentially longer period of time in which they will need to have a steady source of income.

To prepare for a longer lifespan, retirees should consider strategies such as delaying the age at which they start drawing Social Security, which can increase their monthly payments. Additionally, investing in a lifetime income annuity can provide a guaranteed source of income for the future.

It's important for retirees to factor in the possibility of a longer lifespan when planning for retirement, as it can have a major impact on the sustainability of their financial security in their later years.

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Market Volatility and Market Risk are two key factors that can greatly impact your retirement funds. Market volatility refers to the fluctuations and instability of the financial market, and market risk is the chance that your investments will lose value. Market risk is a common concern among retirees, as they have limited time to make up for any losses.

For instance, if the stock market experiences a downturn, your portfolio value could decrease, leaving you with less money for retirement. Market volatility can also make it difficult to determine when to invest, when to sell, and when to take distributions. This uncertainty can lead to fear and indecision, and may cause you to miss out on growth opportunities.

Additionally, market risk can also impact your investment strategy, as you may need to reduce your exposure to equities as you approach retirement. This can limit your potential for growth, but can also reduce your market risk, allowing you to preserve your retirement savings.

Overall, market volatility and market risk are critical considerations for retirees, and it's important to have a solid understanding of how they may impact your retirement funds. This can help you make informed investment decisions and ensure that your retirement is secure and comfortable.

Inflation is one of the most significant risk factors associated with retirement. Inflation refers to the general rise in prices over time, which can erode the purchasing power of your savings and retirement funds. This means that your hard-earned money may not be able to buy as much in the future as it can today. Over time, the cost of living, including housing, healthcare, and food expenses, can increase, leaving retirees struggling to make ends meet.

Retirees are particularly vulnerable to inflation, as they rely on fixed sources of income, such as pensions or Social Security, which may not keep pace with rising costs. This is why it's crucial to factor in inflation when planning for retirement. To mitigate the effects of inflation, some retirees choose to invest in assets that have the potential to grow with inflation, such as stocks, real estate, and commodities.

Others may choose to use a combination of both fixed and growth investments to balance their portfolios and reduce market risk. It's also important to plan for unexpected expenses, such as medical costs, which can rise rapidly with inflation. By considering the effects of inflation on your retirement plans, you can ensure that your nest egg will last throughout your Golden Years.

Overspending is a common risk factor that can greatly affect retirement funds. It is important to create a budget and stick to it, especially during retirement when there is no steady source of income. Overspending can quickly drain retirement savings and leave individuals struggling to make ends meet. It is important to have a clear understanding of monthly expenses and make adjustments where necessary to ensure that retirement funds last throughout their lifetime.

It's also a good idea to prioritize essential expenses such as healthcare and housing, and reduce spending on non-essential items such as dining out, entertainment, and travel. By staying disciplined with spending and making adjustments as needed, individuals can mitigate the risk of overspending and ensure a stable financial future during retirement.

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Healthcare Expenses can have a significant impact on retirement, especially as people age and require more medical care. The cost of healthcare is constantly rising and it can be difficult to predict exactly how much you may need to set aside for medical expenses in retirement.

Some people may have chronic health conditions that require ongoing treatment, while others may require more significant medical care in the form of hospital stays or surgeries. Additionally, long-term care expenses, such as nursing homes or assisted living facilities, can also be a major drain on retirement savings.

To mitigate the impact of healthcare expenses on your retirement, it's important to plan ahead and prepare for the unexpected. This may involve setting aside money in a dedicated healthcare account or investing in a long-term care insurance policy.

You should also take an honest look at your own health history and consider factors such as your lifestyle, genetics, and overall health, to better estimate your healthcare expenses in retirement. Additionally, it's important to stay informed about changes in the healthcare industry and be proactive in managing your healthcare expenses as you age.

Making Preparations

Proactive preparation for the potential risks of retirement can help you strive for a more secure financial future. Consulting with financial advisors or estate planners may provide you with expert insight and personalized strategies to potentially manage these risks and attempt to safeguard your retirement savings.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Any information provided is for informational purposes only.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

Ensuring Your 1031 Exchange is Successfully Transacted

Selling investment or business real estate can be costly, but a 1031 exchange may help preserve gains and generate wealth. Under Section 1031 of the federal tax code, no gain or loss is recognized on the sale of a real estate property held for business or investment purposes if a replacement property of equal or greater value is purchased. However, the 1031 exchange process can be complex. To help guide your clients through a successful exchange, consider these steps:

Step 1

Be aware of the deadlines set by the IRS. Investors have 45 days to identify a replacement property and 180 days to close on it after selling the relinquished property. It may seem like a short time frame, but it is manageable with the help of a professional 1031 exchange investment firm such as Perch Wealth.

Step 2

The IRS requires that an exchanger reinvest in a “like-kind” property, but this does not necessarily mean the same type of property. There are various options available. For example, if you are selling a duplex, you don't have to replace it with another duplex.

The 1031 exchange allows investors to replace relinquished real estate with different types of assets such as a medical building, single-family home, multifamily apartment building, raw land, self-storage facility or any other investment real estate as long as it is held for investment or business purposes. It is best to know what you are looking for in a replacement property before going into escrow on the property you are selling.

Working with a 1031 exchange investment firm like Perch Wealth can greatly reduce the stress and confusion surrounding 1031 exchanges.

Step 3

It is not uncommon for 1031 exchange investors to feel overwhelmed and stressed when they reach the 30-day mark of their 45-day window without a replacement property identified for their exchange. However, with some planning and preparation, you can avoid this situation. A good strategy is to identify five to ten potential replacement properties as the closing date of the property you are selling approaches.

Keep in mind that some of these properties may be acquired by other buyers or may not be suitable after further evaluation, which is why it is important to have a short list of potential replacement properties before relinquishing the original asset. This can help prevent your 1031 exchange from falling apart.

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Step 4

It is not uncommon for investors to call in a panic because they have found a replacement property, but they are unable to secure financing to purchase it. To avoid this stressful and potentially costly situation, it is important to ensure that financing is in place before closing on the property being sold.

One solution is to consider fractional ownership structures for 1031 exchanges, such as a Delaware Statutory Trust (DST) investment for accredited investors. DSTs have a non-recourse financing component built-in, so the investor does not need to sign for a loan. This can make a DST an ideal opportunity for an investor looking for a passive, turn-key solution with pre-established financing for their 1031 exchange.

Step 5

According to the IRS code, investors have options for identifying replacement properties for their 1031 exchange. The most common methods are identifying three properties at any value or identifying real estate valued at up to 200% of the property being sold. This allows for back-up options.

It is important to take advantage of this opportunity and not leave any empty spaces on the ID form submitted to the qualified intermediary. Often, the primary option may not work out, and having back-up options can strengthen the investor's negotiating power by providing additional choices.

For accredited investors, a Delaware Statutory Trust (DST) can be an excellent back-up strategy. DST properties are already purchased, stabilized, and may provide monthly distributions to investors. There is no need for negotiation and due diligence is already complete.

Additionally, closing on a DST can often be done in three to five business days. It is a good idea to consider using a DST as a back-up ID if there is room in the exchange and it is appropriate for the investor's situation.

Step 6

When entering into a purchase and sale agreement, it is important to include a 1031 contingency clause. Many buyers are willing to allow a 1031 contingency that allows the seller to extend escrow on the property being sold if the seller is unable to find a replacement property. For example, try to negotiate a clause that extends escrow by an additional 30 days in case you are unable to identify a suitable replacement property. This can provide extra time if needed when locating the right 1031 exchange investment.

In summary, a 1031 exchange may be a valuable tool for potentially building and preserving wealth, but it can also be a challenging process if not properly prepared. To ensure a successful exchange, start early, educate yourself, narrow down options, secure financing, have a back-up plan, and negotiate for more time if needed.

For accredited investors, consider using a Delaware Statutory Trust (DST) as part of your 1031 exchange strategy. Keep in mind that there are no guarantees in real estate, so it is always best to plan ahead when considering a 1031 exchange.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Any information provided is for informational purposes only.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure:

How do 1031 Exchanges Impact Real Estate Investors' Cash Flow?

A 1031 exchange, also known as a like-kind exchange, is a tax strategy that allows real estate investors to defer paying capital gains tax on the sale of a property by reinvesting the proceeds into a similar property. This strategy can have a significant impact on an investor's cash flow, as it allows them to retain more of the proceeds from the sale of the property and use it to purchase a new one.

A brief overview of how it impacts real estate investors' cash flow: When a property is sold, the investor is required to pay capital gains tax on the profit made from the sale. This can be a significant amount, especially for properties that have appreciated in value over time.

However, by using a 1031 exchange, the investor can defer paying this tax by reinvesting the proceeds from the sale into a similar property. This helps to preserve the investor's cash flow and allows them to use the proceeds to purchase a new property, which could generate more income or appreciate in value over time. Additionally, it can also help investors to diversify their property portfolios and avoid the concentration of assets in one specific area.

It's important to note that 1031 exchanges are complex transactions that are subject to strict rules and deadlines, and investors should consult with a tax professional before attempting one. But if done correctly, they can be an effective way to manage cash flow and grow wealth through real estate investments.

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How a 1031 Exchange Works:

A 1031 exchange is a process that allows real estate investors to defer paying capital gains tax on the sale of a property by reinvesting the proceeds into a similar property. However, there are several steps and guidelines that must be followed in order for the exchange to qualify for the tax deferment.

The first step in a 1031 exchange is the identification of the replacement property. Investors have 45 days from the sale of their original property to identify potential replacement properties. They can identify up to three potential properties, or any number of properties if their fair market value does not exceed 200% of the fair market value of the sold property.

Once the replacement property has been identified, the timing requirements for the exchange must be met. The investor must close on the replacement property within 180 days of the sale of the original property, or by the due date of their tax return for the year in which the original property was sold, whichever comes first.

The role of a qualified intermediary is critical in a 1031 exchange. The intermediary acts as a facilitator of the exchange and holds the proceeds from the sale of the original property until they are used to purchase the replacement property. The intermediary also helps the investor to ensure that all of the rules and guidelines for the exchange are met.

It's important to note that 1031 exchanges are complex transactions and investors must be aware of the rules and guidelines set by the IRS. Any mistake can disqualify the exchange, and investors should seek assistance from a professional to ensure that the exchange is done correctly.

Advantages of using a 1031 Exchange:

One of the main advantages of using a 1031 exchange is the deferment of capital gains tax. When an investor sells a property, they are required to pay capital gains tax on the profit made from the sale. However, by using a 1031 exchange, the investor can defer paying this tax by reinvesting the proceeds into a similar property. This can help to preserve the investor's cash flow and allow them to use the proceeds to purchase a new property.

Another advantage of using a 1031 exchange is the ability to reinvest proceeds into a larger or more profitable property. By deferring the capital gains tax, the investor can use the proceeds to purchase a more expensive property or one that has the potential to generate more income. This can be particularly beneficial for investors who are looking to grow their property portfolios and increase their wealth over time.

A third advantage of using a 1031 exchange is the potential for long-term wealth building. By deferring the capital gains tax and reinvesting the proceeds into a new property, the investor can potentially generate more income or capital appreciation over time. This can help them to build wealth through real estate investments over the long-term.

It's important to note that 1031 exchanges are complex transactions and investors should consult with a tax professional before attempting one. But if done correctly, they can be an effective way to manage cash flow, grow wealth through real estate investments, and diversify property portfolios.

Considerations for Real Estate Investors:

When considering a 1031 exchange, real estate investors must carefully consider their options and weigh the potential benefits against the potential drawbacks. One important consideration is choosing the right property for exchange. The replacement property must be of "like-kind" to the original property, meaning it must be used for the same purpose and in the same manner. It's important for the investor to identify a property that has the potential to generate more income or appreciate in value over time.

Another consideration is the strict deadlines and guidelines set by the IRS for 1031 exchanges. The investor must identify the replacement property within 45 days of the sale of the original property, and close on the replacement property within 180 days of the sale of the original property. If these deadlines are not met, the exchange will not qualify for the tax deferment.

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Another potential drawback of 1031 exchanges is that they can be costly. Investors may have to pay fees to a qualified intermediary and may also need to pay for legal and other professional services. Additionally, the replacement property may be more expensive than the original property, which can reduce the investor's cash flow.

In summary, 1031 exchanges can be an effective way to manage cash flow and grow wealth through real estate investments, but they are complex transactions that are subject to strict rules and deadlines. Real estate investors should carefully consider their options and consult with a tax professional before attempting a 1031 exchange. It's important to weigh the potential benefits against the potential drawbacks and to make sure that the replacement property is a good fit for the investor's goals and needs.

Conclusion:

A 1031 exchange, also known as a like-kind exchange, is a tax strategy that allows real estate investors to defer paying capital gains tax on the sale of a property by reinvesting the proceeds into a similar property. This strategy can have a significant impact on an investor's cash flow, as it allows them to retain more of the proceeds from the sale of the property and use it to purchase a new one.

The process of a 1031 exchange includes the identification of the replacement property, the adherence to timing requirements and the involvement of a qualified intermediary. The advantages of using a 1031 exchange include the deferment of capital gains tax, the ability to reinvest proceeds into larger or more profitable property and the potential for long-term wealth building.

However, 1031 exchanges also come with considerations such as choosing the right property for exchange, meeting strict deadlines and guidelines, and potential drawbacks such as higher costs and reduced cash flow.

In summary, a 1031 exchange can be an effective way to manage cash flow and grow wealth through real estate investments, but it's important to consult with a tax professional before attempting one, to weigh the potential benefits against the potential drawbacks, and to make sure that the replacement property is a good fit for the investor's goals and needs.

Additionally, it's important to remember that 1031 exchanges are complex transactions and investors must be aware of the rules and guidelines set by the IRS to avoid any mistake that can disqualify the exchange.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only and should not be relied upon to make an investment decision. All investing involves risk of loss of some, or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure:

The Estate Tax Exemption has Been Raised for 2023

The IRS has recently announced that the 2023 Estate Tax Exemption will be $12.92 million, which represents a significant increase from the 2022 amount of $11.7 million. This exemption represents the amount of a decedent’s estate (including previously taxable gifts) that is exempt from estate tax. The increased exemption is $860,000 more than the 2022 amount and is the result of the rising high interest rates reflected in the rapid growth of the consumer price index.

The estate tax is a federal tax that is imposed on the transfer of assets of a deceased person to his or her beneficiaries. The estate tax is generally imposed on the fair market value of the assets that are transferred, minus any debts or liabilities of the decedent. However, with the increased exemption, more people will be able to pass on their assets to their loved ones without having to pay estate taxes on them.

The increased exemption is a result of the American Taxpayer Relief Act of 2012, which established a formula for adjusting the estate tax exemption for inflation. This means that the exemption amount is adjusted annually to reflect changes in the consumer price index. The 2023 exemption amount is the highest it has ever been, and it is likely to continue to increase in the coming years.

It's important to note that this increase in the estate tax exemption does not mean that estate taxes are eliminated entirely. Estates that exceed the exemption amount will still be subject to estate tax. It's also important to consult with a tax professional or attorney to understand how this change may affect your specific situation.

The 2023 estate tax exemption of $12.92 million presents an opportunity for married couples to protect up to $25.84 million from estate taxes through coordinated estate planning. This is because the estate tax exemption is unified with the federal gift tax exemption, meaning that by utilizing the exemption through lifetime gifting, the amount of exemption available at death is reduced. It's worth noting that the highest estate or gift tax rate remains at 40% for the next year.

Gifting Opportunities to Defer Taxes

The increased estate tax exemption for 2023 presents additional opportunities for gifting. The annual gift tax exclusion amount for 2023 is $17,000 per donee, an increase from the 2022 amount of $16,000. This means that taxpayers can gift up to $17,000 to each individual recipient without having to pay gift taxes or use any of their lifetime gift tax exemption. This tax exclusion applies to present interest gifts, which are gifts that the donee can enjoy immediately, such as cash or similar property, or gifts made to certain trusts.

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For gifts made to non-US citizen spouses, taxpayers can gift up to $175,000 in 2023 before utilizing their Estate Tax Exemption. It's important to note that while gifts to US citizen spouses are unlimited, gifts to non-citizen spouses are not. The non-citizen spouse annual exclusion is a separate limit and it's not part of the general $17,000 per donee exclusion.

In addition to the annual gift tax exclusion, the increased estate tax exemption also provides an opportunity for taxpayers who have previously used all of their available exemption through lifetime gifting to give an additional $860,000 next year without incurring gift taxes. This can be a useful strategy for reducing the size of one's estate and potentially avoiding or minimizing estate taxes.

For married couples, the increased exemption means that they can give a combined $1.72 million without paying gift taxes. This is because the estate tax exemption is unified with the federal gift tax exemption, meaning that the total exemption for both individuals can be used for either estate or gift taxes.

The Future Exemption Amount

The estate tax exemption has been adjusted for inflation and updated annually since 2012, with a base set at $5 million. This base was doubled in 2017 and is effective for tax years 2018 through 2025. After 2025, the base will revert back to the original $5 million.

Given this, it is important to consider utilizing the larger exemption amount through estate planning before 2026. This could potentially help minimize or avoid estate taxes on the transfer of assets to beneficiaries.

Gift Tax Exclusion

The IRS has recently announced that the annual gift tax exclusion amount for 2023 will be $17,000 per donee, an increase from the 2022 amount of $16,000. This means that taxpayers can gift up to $17,000 to each individual recipient without having to pay gift taxes or use any of their lifetime gift tax exemption.

This tax exclusion applies to present interest gifts, which are gifts that the donee can enjoy immediately, such as cash or similar property, or gifts made to certain trusts. This is an opportunity for taxpayers to reduce the size of their estate and potentially avoid or minimize estate taxes.

For gifts to non-US citizen spouses, taxpayers can gift up to $175,000 in 2023 before utilizing their Estate Tax Exemption. It's important to note that while gifts to US citizen spouses are unlimited, gifts to non-citizen spouses are not. The non-citizen spouse annual exclusion is a separate limit and it's not part of the general $17,000 per donee exclusion.

It's important to consult with a tax professional or attorney to understand how these changes may affect your specific situation and to explore all the opportunities to reduce the size of your estate and minimize the taxes that may be due.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only and should not be relied upon to make an investment decision. All investing involves risk of loss of some, or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure:

Why NOI isn't the most reliable indicator of a REIT's Development

Most investors frequently seek out products that give excellent returns with little risk. While making individual real estate investments might have many advantages, there are also significant financial dangers involved. However, a REIT or Real Estate Investment Trust allows investors to buy significant income-producing properties without the hassle of owning or maintaining the properties. A business that owns and, in most circumstances, manages properties that generate revenue is known as a real estate investment trust. Most REITs make money by renting out space to tenants, who pay rent. A REIT can be categorized into two groups:

Equity REITs: Equity REITs are in charge of acquiring, supervising, upgrading, and managing real estate assets. Rent payments are how they make money after renting out space to tenants.
Mortgage REITs (mREITs): In contrast to Equity REITs, mortgage REITs (mREITs) invest in mortgages and mortgage-backed securities. A mortgage REIT advances funds to property developers and makes money on the interest earned on the loans. The difference between the interest a mortgaged REIT earns and the cost of financing the loan constitutes its profit.

Equity and mortgage REITs' sources of revenue

Let's start by taking a look at equity REITs. Suppose 'APC' is an equity REIT. APC rents out a few sizable properties it owns that generate cash. Now, APC's profit comes from the rent it receives from the rented properties.

Say PAC is a mortgage REIT. Consider the scenario where PAC gets $10 million from investors and borrows an additional $40 million at a 2% annual interest rate. The business now puts $50 million into 5% interest-paying mortgages. The annual interest expenditure for the business in this instance is $0.8 million, or 2% of $40 million. In contrast, it will earn $2.5 million in interest per year, or 5% of the $50 million invested.

Therefore, the PAC's net income is calculated as follows: ($2.5-0.8) million ($1.7 million) = ($2.5-0.8) million ($0.8) million).

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How should a REIT's growth be assessed?

A common statistic used by some investors to assess a REIT's future growth is net operating income. Depreciation costs are a less exact measure of a REIT's growth because they are deducted from net operating income. FFO and AFFO (Adjusted Funds From Operations) are two metrics used by qualified investors to assess a REIT's growth. Depreciation costs are added, and FFO is computed by deducting any gain or loss from the sale of the asset. Let's look at an illustration.

Assume that a REIT had net operating income of $545,989 and depreciation expense of $414,565 in 2018. However, the property sale generated a profit of $330,450.

FFO equals ($545,989 + 414,565 - 330,450)/(Net operating income + Depreciation expenditure - profit on property sale) to arrive at $630,104.

The business will now use this leftover money to pay dividends. A REIT is required by law to pay out 90% of its profits in dividends to its stockholders.

Undoubtedly, FFO is more exact indicator than net operating income for measuring a REIT's growth. However, capital expenditure, which is also significant, is not included. A REIT must make improvements to the property after a lease's term expires and before leasing it to a new tenant. As a result, the capital expenditure goes up, and the REIT can utilize some of its profits to fund improvement projects. Therefore, qualified investors favor AFFO over FFO for evaluating a REIT's growth. Investors determine AFFO by deducting capital expenditure from FFO, despite the fact that there is no specific formula for doing so. Assume that the capital outlay in this instance is $160,212.

(Funds From Operation - Capital Expenditure) = (630,104 - 160,212) = $469,892 is what is known as Adjusted Funds From Operation. As you can see, AFFO delivers a more precise value, and that's why it's utilized by specialists for calculating a REIT's growth throughout the years.

Manufactured housing Investments Are Becoming More Popular

Due to a lack of accessible housing options nationwide, purchasers are looking for practical, cost-effective alternatives to stick-built homes. Manufactured homes are just one option that is becoming more and more appealing. Since the days of the mobile home parks, manufactured housing has advanced significantly. Higher-end prefabricated houses that are almost indistinguishable from their foundation-built counterparts are replacing the cookie-cutter, one-story "trailers" that formerly had a bad reputation.

In this essay, we examine the development of the manufactured home market, the factors driving current demand, and the reasons that both individual owner-occupants and institutional investors are interested in this business.

What is Manufactured Housing?

A portion of the residential housing market is made up of manufactured homes. A manufactured house is a structure that has been mostly or totally built in a climate-controlled facility off-site. Units can be put together either on-site or off, however the latter requires flatbed delivery of the house to its ultimate location. Instead of being anchored into more substantial foundations, the majority of prefabricated houses are constructed on top of concrete slabs or mobile platforms. As a result, prefabricated housing needs to be tethered to the ground or otherwise secured.

Building costs are often reduced by efficiencies brought about by the off-site, assembly-line-style construction procedure. When compared to conventional residential structures, prefabricated homes are more economical since these cost savings may be transferred to the end users.

A particular kind of prefabricated housing is modular housing. In essence, modular construction uses a "kit of parts" strategy, wherein different building categories (such as kitchens, bathrooms, and bedrooms) are built using lean processes, and each of these modules is then combined with the others, depending on the needs of the home builder or buyer, and shipped to the location to be put together on-site.

Manufactured housing, as opposed to typical mobile houses, may be found in a variety of sizes and forms. The size of a home might range from 500 square feet to 3,000 square feet or more. Depending on the requirements, they may be created in a matter of days or weeks and can be constructed with a variety of materials, amenities, and finishes. Some tasks might take months to finish.

A Look Into Manufactured Housing History

Over the past 50 years, manufactured housing has advanced significantly, especially as technology has advanced and enabled more efficient industrial building methods. Traditionally, stick-built homes were regarded to be of higher quality than manufactured homes. The quality of prefabricated homes today is frequently comparable to other entry-level residences.

Furthermore, the majority of prefabricated homes in land-lease communities throughout the 1970s and 1980s. An owner/operator would "lease" the land to a homeowner who would then use a personal property loan to buy the house that was built on that particular piece of property. In the modern era, more than half of prefabricated houses are sold to purchasers who then set up the homes on privately held properties, including more conventional residential developments.

This movement is due to a few factors: First, compared to those constructed in earlier decades, modern prefabricated homes are frequently bigger and more appealing. As a result, these houses mix in perfectly with both established and more recent residential neighborhoods. Many people who own a piece of property choose to have their dream home delivered rather than waiting to build one, which may save both time and money. Second, prefabricated homes are a product category that has gained popularity among consumers of all stripes as the available choices have increased. Mobile houses or manufactured homes are no longer regarded as affordable accommodation for tenants or buyers with modest incomes.

Drivers of Manufactured Housing Demand

A resurgence in manufactured houses is taking place. This specialized product category is beginning to draw interest from consumers, both individual and institutional, for a number of reasons.

Better Product Quality: Modern prefabricated homes are constructed in climate-controlled facilities under stringent quality control and oversight at every stage of the process. Due to this, product quality has increased, especially in terms of durability and energy efficiency. Granite countertops, central air conditioning, and high-end appliances are examples of modern materials, conveniences, and finishes that may be implemented into prefabricated houses of various sizes. The higher product quality has frequently rendered prefabricated homes identical to their stick-built counterparts.
Reduction of Regulatory Barriers: For many years, the development of prefabricated housing communities was hampered by widespread and continuous resistance to manufactured houses. The resistance to manufactured housing has decreased as product quality has increased, making it more possible for consumers to invest in or buy manufactured housing for their own use and enjoyment.
Lack of Entry-Level Home: Manufactured housing offers a feasible entry-level housing choice amid the nation's affordable housing crisis, especially in coastal cities like Florida where workforce housing is getting harder to find. Comparing manufactured homes to conventional stick-built homes, their construction costs are around half as much per square foot. Because of this, prefabricated homes are a desirable alternative for both renters and first-time purchasers.

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Broad Appeal: Manufactured housing appeals to a variety of demographics, not only first-time homeowners. The market for prefabricated houses is being driven by Baby Boomers, particularly those wishing to downsize or retire in warmer regions.
Low Vacancy Rates: The vacancy rate of current manufactured home communities has drastically decreased due to the scarcity of cheap housing choices and the rising popularity of manufactured homes. The vacancy rate in prefabricated housing communities in coastal cities like Miami, San Jose, Denver, and Salt Lake City reportedly stayed around or below 1% last year, according to a recent Marcus & Millichap research.
Rents are going up: Land-lease prefabricated house owners have been able to raise rents due to a lack of available inventory. In a recent study, 93 percent of operators predicted that rents will remain the same or increase in 2020. With a 4.6 percent increase, the Northeast outpaced the rest of the country in terms of rent growth. The Gulf Coast and Mountain Region both had 4.5 percent increases from the previous year. In certain areas, lot rent in coastal towns is starting to nudge closer to $1,000 per month.
Housing manufactured as an investment

It should come as no surprise that investors are beginning to think about include prefabricated housing communities in their portfolios given the demand factors mentioned above. This is especially true now that these developments are being managed better. Most prefabricated housing communities were until recently locally owned and run, sometimes by untrained mom and pop investors. These communities are now being purchased by more seasoned investors, including DST sponsor businesses, who are also bringing in professional management. By doing this, they put themselves in a stronger position to work on raising rents and, consequently, property values, which, if attained, may then be transferred to investors.

Larger investors are joining the game as the value of prefabricated home communities becomes increasingly obvious. Four new REITs were established in 1994, the first ones created particularly to invest in this product category (Manufactured Home Communities, ROC Communities, SUN Communities, and Chateau Properties). These REITs are still performing better than many of their more established residential REIT competitors. Today, a number of other REITs have added prefabricated housing to their portfolios.

Additionally, manufactured homes are increasingly regarded as reliable investments. The majority of land-lease communities feature constant (and rising) rents and little turnover. According to some estimates, over 90% of land-leased manufactured home communities are occupied.

The Future of Manufactured Housing

The future is bright for prefabricated homes, maybe brighter than ever. The dearth of affordable housing choices in the country can actually increase the attraction of prefabricated houses.

From an investing standpoint, individuals need to be ready for yields to compress. The majority of the top-notch manufactured home communities have already been acquired as more institutional capital has entered the market. Cap rates have already started to decline. In response, a lot of investors are increasingly purchasing smaller, less desirable areas with the intention of expanding or adding value.

Conclusion

The appearance of manufactured homes has drastically changed over the past several decades. Modern prefabricated homes are luxurious yet reasonably priced. Individual buyers, tenants, and investors of various sizes are drawn to them. Nevertheless, despite the industry's increasing popularity, there is still a lot of room for growth, especially at a time when other residential product categories are also seeing growth. People will always need a place to live, and if more economical choices aren't available, prefabricated houses can be a popular choice.

Perch Wealth collaborates with sizable, seasoned, and qualified DST sponsor businesses that provide accredited investors wishing to invest their 1031 exchange funds with manufactured housing investment possibilities. To learn more about this asset class and investing prospects, get in touch with Perch Wealth right away.

General Information

neither a buy-side nor a sell-side solicitation of securities. The material presented here is purely for informational purposes and shouldn't be used to guide financial decisions. Every investment has the chance of losing part or all of the money. Future outcomes cannot be predicted based on past performance. Prior to investing, consult a financial or tax expert.

Financial products made available by Emerson Equity LLC Member: SIPC/FINRA. Only accessible in states where Emerson Equity LLC has a recognized business presence. There are no other organizations mentioned in this correspondence with whom Emerson Equity LLC is associated.

1031 Risk Disclosure: * There is no assurance that any strategy will be effective or achieve investment goals; * Property value loss is a possibility for all real estate investments over the course of ownership; * Tax status may change depending on the income stream and depreciation schedule for any investment property. All funded real estate investments involve the risk of going into foreclosure; adverse tax rulings may prevent capital gains from being deferred and result in immediate tax liability;
1031 exchanges are illiquid assets since they are frequently issued through private placement offers. There is no secondary market for these investments. * Reduction or Elimination of Monthly Cash Flow Distributions - Similar to any real estate investment, the possibility of suspension of cash flow distributions exists in the event that a property unexpectedly loses tenants or suffers significant damage; * The impact of fees and expenditures - The costs of the transaction might have an influence on investors' returns and even surpass the tax advantages.

Understanding the Holding Period of a "Like-Kind" Exchange

There are strict timeframes that every investor must adhere to successfully complete a 1031 exchange. However, investors commonly ask, is there a certain amount of time that a property must be held to qualify for an exchange? While the IRS has not explicitly identified a holding period, a few considerations may offer insight.

The 1031 Holding Period

The holding period is how long an investor holds their property. As mentioned, Internal Revenue Code (IRC) Section 1031 does not define how long a holding period must be. Rather, it comes down to the intent of the investor.

The IRS explains: “No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment.”

“Properties are of like-kind if they’re of the same nature or character, even if they differ in grade or quality.

“Real properties generally are of like-kind, regardless of whether they’re improved or unimproved. For example, an apartment building would generally be like-kind to another apartment building. However, real property in the United States is not like-kind to real property outside the United States.”

Understanding Intent

Section 1031 is designed to enable investors who have held their property for an extended period of time – specifically, those who held the property for income-producing purposes – to trade into another property that would serve the same purpose.

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However, not all real estate qualifies because not all is held for the same purpose. The most common example to look at is a primary residence. Since a primary home is not “held for productive use in a trade or business or for investment,” it does not qualify for an exchange. On the other hand, apartment buildings, offices and medical complexes, retail centers and single-tenant assets generally qualify since they are held as an investment.

Developers also face challenges when trying to complete a 1031 exchange. Since a property must be held for investment purposes, buying land, building a property, and selling for a profit often disqualifies the transaction from a 1031 exchange. In this scenario, the property was held to resell for profit, not for investment.

However, investors should consider holding the property for at least one year, if not two, if they are uncertain the property will satisfy Section 1031.

While the IRS has never stated that there is a minimum hold period, there have been situations in which the IRS did not permit an exchange because the owner’s intent was unclear.

Investors uncertain about whether they qualify may generally want to adhere to the two-year recommendation. However, as always, speak to your tax professional to get their professional advice about your particular situation. 

The two-year holding period was mentioned by the IRS in 1984 in Private Letter Ruling 8429039. The letter was written in response to an investor who wanted to trade his property via an exchange. The property in discussion was used as the investor’s primary residence until 1981. In 1983, the investor rented the property out. When pursuing a 1031 exchange in 1984, the investor requested a 1031 exchange; the IRS approved, stating that holding rental property for a minimum of 2 years is sufficient to meet the holding period test prescribed by Section 1031. However, a private letter ruling only applies to this particular case and is therefore only considered to be a general guideline for 1031 exchanges.

The one-year holding consideration, on the other hand, was introduced in 1989 when congress proposed a 1-year holding period for a property to qualify for a 1031 exchange. However, this proposal was never integrated into the Tax Code and is therefore not a requirement. Instead, tax advisors have referenced this proposal when determining if a property could qualify under Section 1031.

Another consideration for the one-year holding period is that by holding the property for at least 12 months, the investment will be reflected as an investment property on one’s taxes for two filing years.

These considerations, however, are just that – considerations. Historically, the IRS has made decisions regarding like-kind exchanges that do not align with these proposals. For example, in 1953, in the case Allegheny County Auto Mart v. C.I.R., the court permitted an investor to complete a 1031 exchange after holding property for only five days, whereas in other cases, such as one in 1967 in Klarkowski v. Commissioner, an investor was disqualified even after a six-year holding period.

Does a vacation home qualify?

While most commonly 1031 exchanges are discussed amongst commercial investors, those holding property as a vacation home can typically sell it and purchase a new property via a 1031 exchange. However, the vacation home must have tenants, and the property must be treated in a business-like manner. Furthermore, if the vacation home is acquired as the replacement property, the property must continue to be used for investment purposes. Generally, the home cannot be converted to a primary residence within five years following the exchange.

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Other Important Timelines in a 1031 Exchange

To qualify for a like-kind exchange, investors must understand and adhere to the timelines outlined in Section 1031.

Once a property is listed, there is no guideline on how long an investor has to sell the asset. They can sell it on or off-market and market it for one day or five years. In fact, they can list the asset and then change their mind. Up until the property is sold, any gains are unrealized. It is not until the property actually closes that a timeline kicks off, and the investor could be responsible for paying taxes on the realized gains.

When the initial property – or relinquished property – closes, an investor has 45 days to identify their replacement property and 180 days to close. The 180 days also commence from the closing date of the relinquished property. With few exceptions, any exchange that does not meet these deadlines results in all gains being taxable.

Speak to a Qualified Professional

Many 1031 exchanges look different, and for those considering selling their real estate and purchasing a new property via a 1031 exchange, speaking with a qualified professional is highly recommended. Not only can they offer insight on the possible exchange, but 1031 experts can also introduce investors to alternative 1031 exchange investment solutions that may otherwise be overlooked.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only, and should not be relied upon to make an investment decision. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure:

Where Do I Consider Investing My Money Today?

Today’s market offers investors a plethora of investment opportunities across numerous industries. While having multiple options can help improve an individual’s investment strategy, they can also cause uncertainty, raising questions about which investment suits the person’s financial objectives. To help provide direction on which investment is right for you, we will outline the basic elements of today’s most desired investments and briefly review the pros and cons of each one.

For this article, we will divide the information into two sections. First, we will look at more traditional investment options, such as investing in stocks or bonds. Next, we will review alternative investments. Although less known among today’s investors, alternative options offer potential perks that many traditional investments lack.

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Traditional Investment Options

Historically, investors have relied upon a 60/40 portfolio composition to help them achieve their long-term financial dreams, such as building a nest egg for retirement, repaying a mortgage early, or paying educational expenses for their children. According to this model, an investor’s portfolio should consist of roughly 60 percent stocks and 40 percent bonds. This model historically tended to deliver investors stable growth and income to help them meet their financial goals.

Stocks, or equities, are securities that represent fractional ownership in a corporation. Investors buy stocks and rely upon the corporation’s growth to increase their wealth over time. Additionally, stocks may offer investors dividends – or payments to shareholders – for passive income. On the other hand, bonds are debt securities offered by a corporation or government entity looking to raise capital. Unlike stocks, bonds do not give investors ownership rights, but rather they represent a loan. The most significant difference between stocks and bonds is how they generate profit: stocks must appreciate in value and be sold later on the stock market, while most bonds pay fixed interest over time.

While stocks offer investors the potential for higher returns than bonds, bonds are generally considered a less risky investment. As a result, many investors turn to investment funds, such as mutual funds, exchange-traded funds, or closed-end funds, to diversify their portfolios while maintaining a 60/40 composition. These investment funds pull together capital from multiple investors, which is then invested into a portfolio of stocks and bonds. Investment funds offer investors the potential to mitigate risk through a more balanced portfolio.

A Change in the Portfolio Model

Due to ongoing volatility in the stock and bond market, rising prices for commodities, and high equity valuations, the traditional 60/40 portfolio model is no longer serving investors to the same degree it once did. As a result, many financial experts are now recommending that investors diversify their portfolios with 40 percent alternative investments to help potentially improve their financial position. 

Alternative Investments

While numerous types of alternative investments exist, we will focus on alternative real estate investments due to the benefits they can possibly offer investors in today’s market. 

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Why real estate?

Real estate has long been one of the most sought-after opportunities for investors. As a limited commodity, real estate has historically afforded investors the potential for long-term security, great returns, passive income, tax advantages, and a hedge against inflation. However, real estate investments also come with certain disadvantages. Getting started in real estate investing typically requires an extensive amount of capital and strong financials for those who are leveraging debt. Furthermore, real estate generally requires active participation – investors are required to manage their assets to ensure optimal performance.

Therefore, alternative investments in real estate have started growing in popularity among the investment community. While they can often offer similar advantages to real estate investing, they deliver a passive opportunity, meaning they have zero management responsibility. Here are a few options for investors seeking alternative real estate investments.

Real Estate Investment Trusts

A real estate investment trust (REIT) is a company that owns and typically operates income-producing real estate or related assets. REITs incorporate all asset types, including multi-family, retail, senior living, self-storage, hospitality, student housing, office, and industrial properties, to name a few. Unlike other real estate investments, REITs generally purchase or develop real estate for a long-term hold.

Investors rely on a REIT professional’s understanding of the real estate market to diversify and stabilize their portfolios. Many REITs are publicly traded, meaning that all investors, including unaccredited investors with limited capital, can invest in them.

While publicly-traded REITs deliver many advantages associated with traditional real estate investing – such as income potential, diversification, and possible inflation protection – they also come with some distinct disadvantages. For example, REITs often experience slow growth. Because REITs must pay out at least 90 percent of their profits in dividends, new acquisitions and developments are limited. To determine the strength of an investment, potential investors should conduct due diligence – with the help of an expert – on the REIT prior to purchasing shares.

Delaware Statutory Trusts

A Delaware Statutory Trust (DST) is a legally recognized real estate investment trust where investors purchase an ownership interest, or fractional ownership, in a real estate asset or real estate portfolio. DSTs are commonly relied upon by 1031 exchange buyers since they qualify as a like-kind property per the Internal Revenue Service (IRS).

In addition to providing investors passive income potential through a management-free investment, DSTs enable investors to invest in institutional quality assets to which they would not otherwise have access. These assets may be able to deliver higher returns and longer-term stability. Furthermore, the debt structures of DSTs are attractive to many investors. People who invest in DSTs have limited liability equal to their investments; however, they are able to take advantage of the often attractive financing obtained by the sponsor companies. Unfortunately, only accredited investors can invest in DSTs.

Opportunity Zones

Opportunity zones (OZs), defined by the IRS, are “an economic development tool that allows people to invest in distressed areas in the United States. This incentive's purpose is to spur economic growth and job creation in low-income communities while providing tax benefits to investors.” OZs were introduced under the Tax Cuts and Jobs Act of 2017, and investors interested in investing in an OZ must do so through a qualified opportunity fund (QOF).

QOFs can be a superb option for investors due to their tax benefits, which depend on the length of time an investor holds a QOF investment. We have previously explained these benefits, which we refer to as OZ triple-layer tax incentives. Here’s a snapshot of the tax benefits a QOF offers an investor:

While opportunity zones are considered a risky investment, given their purpose, they can potentially deliver investors higher returns when compared to other alternative real estate investment options.

Interval Funds

An additional alternative investment option worth mentioning are interval funds. These funds are not limited to real estate but instead can be used to invest in many securities, including real estate. Similar to previously mentioned funds, interval funds pull shareholder capital together to invest in different securities. However, they offer a lower degree of liquidity. Instead of being able to trade shares daily, investors are typically limited to selling their shares at stated intervals (i.e., quarterly, semi-annually, or annually). The benefit of interval funds is the flexibility they offer the funds – they allow the fund to execute longer-term strategies, creating the potential for a more stable investment. As a result, interval funds tend to deliver higher returns and a more diversified opportunity.

Now, where do I invest my money today?

While the above information offers a snapshot into the pros and cons of various investment options, you should consider additional aspects. Rather than immediately trying to identify which option is best for you, the key takeaway here is to understand that today’s market offers an array of investment options that were previously unknown to many. Investors can diversify beyond stocks and bonds, which can possibly provide them with higher returns while seeking to mitigate risk. To develop an investment portfolio that meets your financial goals, we advise you to speak with a financial professional at Perch Wealth.

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General Disclosure

Not an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only and should not be relied upon to make an investment decision. All investing involves risk of loss of some, or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure:

•          There is no guarantee that any strategy will be successful or achieve investment objectives;

•          Potential for property value loss – All real estate investments have the potential to lose value during the life of the investments;

•          Change of tax status – The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;

•          Potential for foreclosure – All financed real estate investments have potential for foreclosure;

•          Illiquidity – Because 1031 exchanges are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments.

•          Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;

•          Impact of fees/expenses – Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits