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

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:

There’s no guarantee any strategy will be successful or achieve investment objectives;
All real estate investments have the potential to lose value during the life of the investments;
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;
All financed real estate investments have potential for foreclosure;
These 1031 exchanges are offered through private placement offerings and are illiquid securities. There is no secondary market for these investments.
If a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;
Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits

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

1031 Risk Disclosure:

There’s no guarantee any strategy will be successful or achieve investment objectives;
All real estate investments have the potential to lose value during the life of the investments;
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;
All financed real estate investments have potential for foreclosure;
These 1031 exchanges are offered through private placement offerings and are illiquid securities. There is no secondary market for these investments.
If a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;
Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits

Is Gold Eligible for a 1031 Exchange?

Utilizing 1031 Exchanges for Tax Deferral in Investment: Exploring Property Eligibility and Limitations

Investors often aim to defer capital gains taxes through 1031 exchanges, which boosts funds for reinvestment and enhances investment leverage. Sequential exchanges have the potential to compound these benefits, helping to facilitate the possibility of portfolio growth. Some taxpayers have attempted to expand the scope of eligible properties, including collectibles, intellectual property, and valuable metals.

While stocks and securities do not qualify, certain items like coins, artwork, and antiques were occasionally eligible before the Tax Cuts and Jobs Act (TCJA). Nonetheless, even with looser regulations, the IRS imposed restrictions, such as disallowing gold-for-silver exchanges and gold coin-for-bullion exchanges.

TCJA Exclusion and IRS Rulings on 1031 Exchanges

Following the enactment of the TCJA, the scope of 1031 exchanges was narrowed down to exclusively include real estate. The IRS provided further clarification through rulings such as REG-117589-18, which outlined the statutory limitations on like-kind exchanges. According to this regulation, real property encompasses land, land improvements, unsevered crops, natural products of the land, and adjacent water and air space. It also encompasses permanent structures like roads and bridges.

gold-investing-tax-strategies-real-estate-optiions-1031-exchanges-Illinois-Chicago-area-financial-advisors

Understanding the Basics of a 1031 Exchange

A 1031 exchange is a valuable tool for real estate owners. It allows them to strategically shift their investments without incurring immediate capital gains taxes. Here's how it works:

Scenario: Suppose you own an apartment building in one state but want to shift your focus to a different area or change your portfolio composition, such as moving from residential to industrial properties.

Capital Gains Taxes: If you sell the apartment building, you would typically owe capital gains taxes on the profit, which is the difference between the purchase price (basis) and the selling price.

Tax Liability Example: Let's say you bought the apartment building for $500,000, and it's now valued at $1,000,000. This represents a profit of $500,000 (after considering adjustments to the basis). Depending on your income and eligibility for long-term capital tax rates, your tax bill could be as high as $100,000.

Deferring Taxes: By executing a 1031 exchange, you can defer the tax payment and reinvest the entire $500,000 profit into a new property.

In summary, a 1031 exchange allows you to defer capital gains taxes and reinvest the proceeds into another property, thereby seeking to maximize your investment potential.

Exploring Sequential 1031 Exchanges and Tax Deferral Strategies

While a 1031 exchange allows you to defer capital gains tax, it's important to note that the tax is not eliminated entirely. If you eventually sell the replacement property acquired through the exchange, you will owe capital gains tax on any profit from that sale. Additionally, you will also be liable for the deferred tax on the original asset.

However, there is a potential strategy to continue deferring the tax liability. By deferring the tax until the point of transferring the property to an heir through inheritance, it becomes possible to entirely avoid the capital gains tax. This is due to the concept of a stepped-up value for inherited assets.

When the property is inherited, the heir receives it at its stepped-up value, which is determined based on its worth at the time of the original owner's death. This stepped-up value becomes the new basis for the heir, and no tax is due for any gains that occurred prior to the inheritance.

By carefully planning and utilizing this strategy, investors can effectively defer their tax obligations through sequential 1031 exchanges and ultimately pass on the property to heirs, allowing them to enjoy the benefits of a stepped-up basis and avoiding capital gains tax on prior gains.

General Disclosure

1031 Risk Disclosure:

· There’s no guarantee any strategy will be successful or achieve investment objectives;

· All real estate investments have the potential to lose value during the life of the investments;

· 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;

· All financed real estate investments have potential for foreclosure;

· These 1031 exchanges are offered through private placement offerings and are illiquid securities. There is no secondary market for these investments.

· If a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;

· Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits

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.

1031-exchanges-IL-retirement-planning-wealth-management-investment-strategy-opportunities-passive-income-tax-deferral — Business Brainstorming Graph Chart Report Data Concept

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

1031 Risk Disclosure:

There’s no guarantee any strategy will be successful or achieve investment objectives;
All real estate investments have the potential to lose value during the life of the investments;
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;
All financed real estate investments have potential for foreclosure;
These 1031 exchanges are offered through private placement offerings and are illiquid securities. There is no secondary market for these investments.
If a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;
Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits

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.

real-estate-investments-Illinios-1031-exchanges

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.

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:

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:

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

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).

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.

How Investing In Real Estate May Protect You From Inflation

All of the major business news channels have recently used the word "inflation" in their headlines to describe the gradual rise in the price of goods and services over time. Everyone was mainly concerned with talking about how abruptly and finally the United States' record low inflation rate was ending. Food prices were the highest they had ever been, used car prices were setting records, lumber costs were soaring, and it appeared that gasoline prices would continue to rise.

It is no longer a secret that the price of necessities like food and shelter is rising, even though the precise cause of price hikes is still up for debate. While it is still true that we have experienced a fortunate and extended period of low inflation, it seems like all good things do, in fact, come to an end, and currently is essentially the end of inflation's record lows. Inflation is currently having an impact on the life and work of the average American.

For financial backers, high inflation prices have the consequence that it may affect the value of a potential source of revenue in the future. As a result, investors must produce returns that are greater than the rate of price inflation. This means that financial backers should be prepared to adjust their venture strategies going forward and carefully plan to support against inflation now more than ever.

In this essay, we will define inflation, discuss how it affects financial backers, and promote one main idea: that sound money management may be the best defense against both inflation and the lack of buying power that results from it.

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Inflation: What is it?

After some time, inflation is the gradual increase in labor and product costs. The Consumer Price Index, which is based on a registry of frequently purchased products and services, is used to estimate it. The United States' central bank is in charge of establishing monetary policy, and inflation is frequently one of its main concerns.

The Federal Reserve saves the ability to respond when price inflation extends over or below this reach, but generally works to control inflation to a defined aim (about 2-3% annually).

According to the most recent report from the U.S. Department of Labor Statistics, the Consumer Price Index (CPI), a measure of inflation, rose by 5% over the course of the previous year alone. The most notable increase started in 2008, ironically the last time the country experienced a financial disaster.

How is inflation going to hurt financial investors?

Since financial backers must generate returns that outpace economic inflation, inflation can be harmful to their investments.

To reach this important conclusion even more forcefully, a model can be used.

If inflation is running at 3% per year and a financial backer puts her money in a currency market account that offers a reasonable rate of income at 2% per year, she will actually lose 1% of her purchasing power annually compared to inflation. Long-term, the financial backer's funds may buy less because labor and product costs have increased more quickly than her speculative returns.

Financial backers can think about looking for inflation fences or resource classes that are ideally located with the potential to perform well in times like these to avoid a situation like this.

Financial planning that emphasizes real estate may be the hedge you need to protect yourself from inflation.

Why is real estate considered to be a reliable inflation hedge?

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There are several causes. Insofar as one is concerned, one could examine how inflation affects obligation. After some time, the rising cost of a home reduces the credit to the amount of any mortgage debt, functioning as a kind of cyclical markdown. As a result, even while the property's value rises, your fixed-rate contract installments stay the same.

Due to the fact that rising home prices typically result in multifamily housing networks, inflation may also benefit investors who make money from investment properties, particularly those who own property in those locations. If a land investor can modify the terms of their lease while keeping their mortgage the same, this creates the opportunity for increased financial flexibility.

Finally, as property valuations tend to continue on a steady vertical arc over time, land may be a good hedge against inflation. The bulk of the homes that fell to their lowest prices when the real estate bubble broke in 2008 did so in less than ten years. Additionally, land speculation can produce predicted recurrent income for financial supporters and can keep pace with or even outpace inflation in terms of value.

We should now focus on a few techniques frequently employed to try to fence land enterprises against inflation because the evidence seems to favor land and because it is a resource class that has generally held its own when faced with rising inflation rates.

How could using real estate as a hedge possibly be possible?

Investing in a multifamily property may be one of the most revolutionary ways to use land to protect against inflation. Residents of certain types of properties, such as commercial buildings (such retail sites), are required to sign long-term business leases. The majority of multifamily housing only renews rents once a year for each occupant. The more frequently you are given adequate opportunities to change the lease, the more units the building has. The same holds true for self-capacity.

Multifamily structures, such as apartment buildings, are a special resource class in that they are frequently continually in demand, especially as accommodation expenses soar. Additionally, there is a limited supply of buildings or new improvement projects due to recent increases in labor and material costs, which might lead to an increase in rental rates and property estimates. Together, these two factors equal a property that might not be vacant for prolonged periods of time and different opportunities to renew or start leases at prices that reflect changes in the market.

Another thing to take into account is that cost repayments, another rent component, are another way that land money management may be able to keep up with inflation. No matter the type of building structure, leases transmit some of a property's ongoing operating costs to its tenants. Landowners or building owners can surely be partially protected against the increase in utility and support costs due to inflation.

At that moment, it is obvious that investing in land, particularly in multifamily housing units, may be a good way for our ongoing business sector to protect itself from inflation. Effective money management is frequently considered a technique to protect reserve monies in a volatile and inflationary economy.

The motivation for financial backers' hasty landing in the midst of financial weakness is extremely clear. No matter what, a place to stay will always be needed, and hence likely in demand. A long-term investment in a speculation property may be a safe way to turn a passing interest into something more substantial in the near future.

However, investors can look at land trusts (REITs), intuitional land assets, and Delaware Statutory Trusts if they are unable to own and manage the venture property themselves or simply don't want to (DSTs). It is entirely up to each individual to decide how to manage their finances with regard to their land; this is and should be a personal financial decision. In any event, it might be worth your time and effort to educate yourself on all of your options before making a decision. You might also consult a learning experience expert like the team at Perch Wealth.

Why is investing in a DST a potentially lucrative land venture option?

Investing in a Delaware Statutory Trust, or DST, may be an extremely enticing land investment option if your major worry is to hunt for wealth protection during an inflationary financial moment. A DST is a typically complex arrangement for people who want to invest some resources in land.

A DST is a mechanism for financial supporters to own land with the potential to obtain recurring, automated income and have no management responsibility. Most investors rarely think about whether they want active or passive management of domain property, and as a result, they frequently find themselves in situations they don't feel qualified for, aren't very interested in, or aren't currently benefitting from as they would like. A DST investment is a fantastic prelude to a potential ongoing source of income and accumulation of unrelated riches for a first-time or relatively new financial supporter.

There are two crucial methods via which one can invest in a DST. The first is by making a quick financial guess. If you're new to land effective money management, for instance, and you merely need to lock down your opportunity, you can aim to invest $50,000 in a DST in order to gain momentum in the land industry. The second method involves a 1031 Exchange.

Many investors are completely unaware that they can use a 1031 Exchange to fund a DST, despite the fact that there are many potential benefits to doing so. By completing a 1031 Exchange, you can potentially increase the current housing market level and separate your assets into multiple DSTs that are geologically shifted and in certain resource classes, helping to moderate and potentially limiting the overall risk to your capital. If you're interested in learning more about 1031 Exchanges, DSTs, or other types of optional land speculation schemes, contact a financial professional at Perch Wealth right away.

General Disclosure

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

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.

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:

Deferral: Those who rollover their capital gains into a QOF can defer capital gain recognition from the original investment until December 31, 2026.
Reduction: The amount of capital gain recognized from the original investment is reduced by 10 percent after achieving a five-year holding period, as long as that five-year holding period is achieved by December 31, 2026.
Exclusion: Long-term investors are eligible to pay no tax on the appreciation of their QOF investment upon disposition of that investment, regardless of the profit size, if the assets held in that QOF are held for at least 10 years.

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

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