Finding a Qualified Intermediary for Your 1031 Exchange

When engaging in real estate investing, it is crucial to assemble a team of trusted professionals to navigate and execute your investment approach successfully. Among these professionals, finding a reliable Qualified Intermediary (QI) is paramount, especially when undertaking tax-deferred 1031 Exchanges. The QI plays a crucial role as the "Exchange escrow," holding the sales proceeds from the relinquished property until the identification of replacement properties and the subsequent purchase.

To ensure a smooth and orderly 1031 Exchange, evaluating potential Qualified Intermediaries requires a framework for assessment. Here are some criteria we use to evaluate QIs:

Experience and Expertise: Look for QIs with extensive experience and a solid understanding of 1031 Exchanges. Consider their track record, industry reputation, and the number of successful exchanges they have facilitated.

Compliance and Security: Verify that the QI adheres to all legal and regulatory requirements. Confirm their compliance with IRS guidelines and industry best practices. It is also essential to assess their financial stability and the measures they have in place to safeguard clients' funds.

Service and Support: Evaluate the level of customer service and support provided by the QI. Are they responsive, knowledgeable, and proactive in assisting clients throughout the exchange process? Do they offer comprehensive guidance and resources?

Reputation and References: Research the QI's reputation within the industry. Seek feedback from other real estate investors who have previously engaged their services. Online reviews and testimonials can provide valuable insights.

Fee Structure: Compare the fee structures of different QIs and assess the value they provide in relation to the services offered. Consider both the upfront fees and any additional costs associated with the exchange process.

By carefully evaluating these criteria, you can make an informed decision when selecting a Qualified Intermediary for your 1031 Exchange. Collaborating with a reliable and competent QI will contribute to a seamless and successful exchange process, enhancing your overall investment experience.

Insurance and Fee Structure Considerations for Qualified Intermediaries in 1031 Exchanges

When evaluating Qualified Intermediaries (QIs) for 1031 Exchanges, it is essential to consider their insurance coverage and fee structure:

Insurance Coverage:

Man protecting a small house shaped object symbolizing the strategy to accumulate wealth through a 1031 exchange with proper insurance coverage

Fidelity Bonds: Inquire about the QI's fidelity bonds, which provide coverage against potential fraud or misappropriation of funds by the intermediary.
Errors and Omissions (E&O) Insurance: E&O insurance protects against errors, omissions, or negligence in the performance of the QI's duties. Confirm that the QI carries appropriate E&O insurance.
Written Performance Guarantees: Some QIs may offer written performance guarantees, assuring clients of the QI's commitment to fulfilling their obligations. Evaluate the scope and terms of such guarantees.

It is reasonable to request proof of insurance coverage from the QI. They should be willing to provide documentation or information regarding their insurance policies and the specific situations they cover. This will give you confidence in their ability to handle potential risks and protect your interests.

Fee Structure:

Typically, straightforward 1031 Exchanges involve the exchange of one property for one or more properties, with defined and relatively low costs. Ensure that the QI clearly outlines their fee structure and provides an estimate of the associated costs for your particular Exchange.

For more complex exchanges, such as Improvement Exchanges or Reverse Exchanges, there may be variability in the fee structure due to the additional complexities involved. However, even in these cases, the fees should be defined and communicated in advance. It is essential to have a clear understanding of the fee structure and associated costs to make informed decisions regarding your Exchange.

By evaluating the QI's insurance coverage and fee structure, you can ensure that they have adequate protection against potential risks and that their fees are transparent and reasonable. These considerations contribute to selecting a reliable and trustworthy QI for your 1031 Exchange.

Internal Security Controls and Client-Centric Counsel Considerations for Qualified Intermediaries in 1031 Exchanges

Mature couple sitting with financial advisor discussing strategies to accumulate wealth through 1031 exchanges

When evaluating Qualified Intermediaries (QIs) for 1031 Exchanges, it is important to consider their internal security controls and their ability to provide client-centric counsel:

Internal Security Controls:

Data Security: Inquire about the potential QI's policies and measures for data security. Assess their ability to protect sensitive client information, including financial and personal data.
Cybersecurity: Evaluate the QI's cybersecurity protocols to ensure they have safeguards in place to prevent unauthorized access, data breaches, or cyber threats.
Identity Verification: Understand the QI's procedures for verifying the identities of clients and counterparties involved in the exchange. This helps mitigate the risk of fraudulent activity and identity theft.

The industry trade association for QIs, the Federation of Exchange Accommodators (FEA), has established best practices that QIs should adhere to in order to protect client funds. Assess whether the potential QI aligns with these best practices and demonstrates a commitment to maintaining internal security controls.

Client-Centric Counsel:

Legal Guidance: Quality QIs provide valuable counsel to clients regarding the legal aspects of the Exchange. While they may recommend clients consult with their own attorney for liability purposes, a reputable QI should have experienced attorneys available to address any questions or concerns the client may have during the Exchange process.
Responsiveness: Evaluate the QI's willingness to provide timely and helpful guidance to clients. They should be proactive in addressing client inquiries and ensuring a clear understanding of the legal aspects of the Exchange.
Finding a QI that prioritizes client-centric counsel demonstrates their commitment to serving their clients' best interests and ensuring a smooth and legally compliant Exchange process.

By considering a potential QI's internal security controls and client-centric counsel practices, you can select a trusted partner who prioritizes data security, provides reliable legal guidance, and fosters open communication with their clients throughout the 1031 Exchange.

In Conclusion:

Tax-deferred 1031 exchanges offer significant opportunities for wealth preservation and asset repositioning. However, the key to success lies in assembling the right team of professionals. If you are interested in exploring the potential benefits of tax-deferred exchanges or would like to discuss our preferred qualified intermediaries, we are here to assist you. Feel free to reach out to us, and we'll be happy to provide further information and guidance.

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

Exploring the Viability of a 1031 Exchange for New Construction Projects

Can investors leverage the benefits of a 1031 exchange for new construction endeavors? The answer is affirmative, albeit with the understanding that the process can be intricate.

Typically, the IRS imposes limitations on utilizing funds from a 1031 exchange for new construction projects. However, they do provide guidelines that allow for such usage under specific circumstances.

In a standard 1031 exchange, the proceeds from the sale of an investment property are utilized to acquire a similar replacement investment, thereby deferring capital gains taxes as per IRS regulations. However, when it comes to new construction, eligibility for a 1031 exchange becomes multifaceted, encompassing a multitude of variables that must be carefully evaluated.

Successfully executing a 1031 exchange for new construction necessitates a comprehensive understanding of the IRS guidelines, as well as a thorough examination of the unique factors at play in each individual case. Consulting with professionals well-versed in the intricacies of 1031 exchanges is highly recommended to navigate the complexities and attempt to maximize the potential benefits of utilizing this tax-deferment strategy in the context of new construction projects.

Here's how the process works:

Mature couple discussing the viability of a 1031 exchange for new construction projects with a financial advisor symbolizing informed decision making in property investment

First and foremost, the title of the new construction property must be held by someone other than the taxpayer or exchanger. To achieve this, the exchanger designates an independent third-party representative, such as an Exchange Accommodation Titleholder (EAT) or Qualified Intermediary (QI). The representative's name will be listed on the Purchase Agreement and will receive the title.

In some cases, the exchanger may choose to have their contractor acquire the land where the new construction will take place. While the title is transferred to the EAT or QI during the closing, all associated funds are held in an escrow account established by the investor. The taxpayer retains control over the construction process, and the titleholder pays the bills using the funds from the escrow account.

The assigned representative retains the title until the construction is completed or throughout the 180-day exchange period specified by the IRS. The 180-day period is the duration allotted for the acquisition of a new property following the sale of the relinquished property.

Similar to other 1031 exchange transactions, there is a 45-day timeframe after the sale of the original investment to identify the replacement investment. In the case of new construction, the identification must meet specific requirements, including providing detailed information such as building plans for the proposed construction.

Once the construction is finalized, the representative transfers the title to the investor, enabling the completion of a regular 1031 exchange for the newly constructed property.

Engaging in a 1031 exchange involving new construction necessitates strict adherence to regulations and meticulous planning. Seeking the guidance of professionals experienced in handling 1031 exchanges is highly recommended to ensure compliance with the requirements and strive to maximize the potential benefits of utilizing this tax-deferral strategy for new construction projects.

Points to Ponder

Business man signing a contract for a 1031 exchange symbolizing a successful deal in new construction projects to illustrate key points to ponder in property investment decisions

When considering the utilization of a 1031 exchange for new construction projects, it is crucial to keep several factors in mind:

Value Equality: The value of the new construction project must ultimately be equal to or greater than the original investment property's value once construction is complete and before the representative transfers the title back to the investor. This implies that the investor can purchase land or property with a lower initial value as long as it appreciates to an equivalent value upon completion of the construction.

Timing and Completion: The representative cannot transfer the title back to the investor until the construction is fully finished, and this transfer must occur within the 180-day exchange period specified by the IRS.

Equity Utilization: Within the 180-day exchange period, all equity from the relinquished property must be utilized for construction costs or as a down payment for the new construction project. This ensures that the funds from the original investment are actively utilized and contribute to the completion of the new property.

Construction Timelines: It is essential to be mindful of the construction timelines involved in new construction projects. In recent years, labor and supply chain issues have caused delays in construction schedules. Investors should consider whether selecting a completed or nearly completed new construction property may be a more suitable replacement option, considering potential challenges in meeting the 180-day deadline.

Complexity and Expertise: Undertaking a 1031 exchange for a new construction property can be a complex process with multiple variables to consider. Engaging the assistance of a knowledgeable partner, such as a qualified intermediary or real estate professional experienced in 1031 exchanges, is highly advisable to navigate the intricacies of the transaction successfully.

By taking these factors into account and seeking professional guidance, investors can better evaluate the feasibility and potential benefits of utilizing a 1031 exchange for new construction projects while ensuring compliance with the applicable regulations.

General Disclosure

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

Is it Possible to Execute a 1031 Exchange With Raw Land?

Completing a 1031 exchange can be a complicated journey, but the benefits can be significant for investors looking to defer capital gains taxes on their relinquished properties. There are many moving parts to the exchange process, as well as important deadlines that can’t be missed. For this reason, it is important that investors fully understand exchange rules and special stipulations prior to undertaking their exchanges. In this article, we will delve into the question of whether investors can use raw land as their replacement asset to complete 1031 exchanges.

When it comes to 1031 exchanges, the rules regarding what constitutes a like-kind asset are quite broad. In general, any real property held for investment purposes or for use in a trade or business can qualify for like-kind exchange treatment. This includes raw land, which is considered real property for purposes of a 1031 exchange. As long as the raw land is held for investment purposes or for use in a trade or business, it can be used as a replacement asset in a 1031 exchange.

Understanding the Concept of Like-Kind Property

To carry out a successful 1031 exchange, it is important for investors to replace their relinquished property with a like-kind asset that has similar characteristics and usage. The guidelines for what qualifies as a like-kind property for the purpose of a 1031 exchange were redefined by the Tax Cuts and Jobs Act of 2017.

Before this legislation, investors were allowed to exchange a broad range of personal and intangible assets such as machinery, equipment, vehicles, collectibles, and intellectual property, as long as they were used for business or trade purposes. However, since January 1, 2018, the rules have changed, and 1031 exchanges are now only applicable to real property.

When considering replacement properties for a 1031 exchange, it's important to note that the like-kind requirement is based on the nature and usage of the asset, not its quality or class. Real estate is considered generally like-kind to other real estate by the IRS, which means a wide range of properties can qualify as replacement assets.

types-of-real-estate-replacement-property-Texas-investors-rules-regulation-of-1031-exchange-hedge-against-inflation

For example, a single-family rental property can be exchanged for a duplex, a triplex can be swapped for a multifamily apartment complex, and a retail complex can be exchanged for an office building. However, it's important to keep in mind that the replacement property must have a purchase price equal to or greater than the relinquished asset, and an equal or greater amount of debt must also be swapped.

It's worth noting that 1031 exchanges can't be used to improve an investor's financial position or reduce leverage in investment real estate. The primary purpose of a 1031 exchange is to defer capital gains taxes on the sale of a property, so investors must carefully consider their options and adhere to strict guidelines to successfully complete an exchange.

Can Raw Land Qualify as Like-Kind Property in a 1031 Exchange?

When considering the definition of like-kind in a 1031 exchange, it's important to understand that the IRS looks at the nature and use of the asset, rather than its type, quality, or grade. As long as the asset is held as an investment, it can be considered like-kind for the purpose of a 1031 exchange.

This means that investors can exchange real property for unimproved property, including raw land. The fact that a parcel of real estate is either improved or unimproved doesn't affect its eligibility for a 1031 exchange. Raw land that an investor holds for future use or for future realization of appreciation is considered held for investment rather than for sale.

According to the American Bar Association, vacant or raw land is not available for rent, so it's considered an investment that's held for a potential increase in value. This makes raw land a suitable replacement asset for a variety of relinquished exchange properties.

However, it's important to note that the replacement property must have a purchase price equal to or greater than the relinquished property, and the investor must also swap an equal or greater amount of debt. Additionally, the investor cannot use a 1031 exchange to improve their financial position or reduce leverage in investment real estate.

In Conclusion:

Completing a 1031 exchange can be a complex process with many nuances that must be adhered to in order to ensure a successful exchange. This is particularly true when considering the exchange of investment properties for raw land. It is important for investors to consult with taxation professionals and experienced exchange accommodators before initiating the exchange process to help them potentially avoid mistakes that could invalidate their exchanges.

The guidance of a qualified exchange professional can be invaluable when navigating the exchange process. They can help investors understand the exchange rules and deadlines, identify potential replacement properties that meet like-kind requirements, and ensure that the exchange is structured in compliance with IRS regulations.

In addition, consulting with a taxation professional can help investors understand the potential tax implications of an exchange, including any capital gains taxes that may be deferred, and the effect that exchanging into raw land may have on their long-term investment strategy.

By working with experienced professionals, investors are in a better position to attempt to maximize the benefits of a 1031 exchange and potentially avoid costly errors that could jeopardize their investment goals. With proper planning and execution, exchanging investment properties for raw land has the potential to be a smart and profitable investment strategy.

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 a 1031 Exchange Available Through Banks?

A 1031 exchange is a tax-deferral strategy that allows real estate investors to defer paying capital gains tax on the appreciation of a property. It involves the sale of an appreciated property and the reinvestment of the proceeds into another "like-kind" property. By doing this, the investor can continue to grow their investment portfolio without the immediate burden of paying taxes on the appreciation.

The 1031 exchange provides investors with the opportunity to defer capital gains taxes by investing the proceeds from the sale of a property into a like-kind property. This can be a valuable strategy for investors looking to grow their portfolios without incurring immediate tax liabilities.

According to the IRS, a wide range of business properties can be considered for a 1031 exchange, including residential rentals, office spaces, retail assets, industrial properties, and even farmland. However, in order to fully defer the taxes, it is important to note that the replacement property must be of equal or greater value than the relinquished asset, including any debt that is associated with the property.

One of the key provisions of the 1031 exchange regulations is that the investor cannot have access to the proceeds from the sale of the property during the exchange period. This means that the transaction must be structured carefully, typically through the use of a Qualified Intermediary who will hold the funds and manage the escrow process.

The 1031 exchange regulations are also quite strict when it comes to timelines. The potential replacement properties must be identified within 45 days of the initial sale, and the entire transaction must be completed within 180 days. This requires careful planning and due diligence on the part of the investor to ensure that they meet all the requirements and deadlines set forth by the IRS.

An investor may repeatedly engage in 1031 exchanges, as long as they hold each property for a minimum of one year, continuously deferring capital gains tax accumulation. If the investor continues this pattern indefinitely, they have the potential to pass on the assets to their heirs without incurring any capital gains tax. Upon the grantor's death, the heirs would receive the property with a stepped-up basis, meaning that no capital gains taxes would be owed at that time.

banks-financial-institutions-real-estate-investing-investment-portfolio-capital-gains-tax-deferrals-Houston-Dallas-Austin-Texas

Is My Bank Equipped to Offer Expert Advice on 1031 Exchanges?

Navigating a 1031 exchange can be a complex and challenging process, with strict timelines and stringent requirements for identifying replacement properties, as well as limitations on access to funds during the exchange period. The process may become even more complicated if the investor needs to improve the replacement property or has existing mortgage obligations.

Given the intricacies of a 1031 exchange, it's crucial to engage a professional expert who can guide you through the process. While some banks may offer this service, most large financial institutions do not have extensive experience in conducting 1031 exchanges. For example, Wells Fargo is one of the few major banks that offers this service. While working with your bank may be convenient, they may not be eligible to serve as your Qualified Intermediary, a critical component of the 1031 exchange process.

If you do choose to work with your bank, consider seeking the advice of a trusted financial advisor to ensure that the transaction is carried out successfully. Additionally, make sure to research the bank's qualifications and experience with 1031 exchanges to ensure that you're engaging a qualified professional.

Why a Bank Would be Disqualified.

The IRs does not specify specific qualifications for a Qualified Intermediary (QI) for a 1031 exchange. However, there is a list of parties that are excluded from serving as a QI, which includes the investor, their family members, employees, employers, and agents, such as an attorney, accountant, real estate broker, investment broker, or tax advisor.

Although banks are not specifically listed as excluded parties, if you have an account with the bank you wish to use as your QI, it may result in the IRS disallowing your exchange and imposing an unexpected capital gains tax. To avoid this, it is best to choose a bank that you have not conducted business with in the past two years for your 1031 exchange needs.

In conclusion, banks are not explicitly disqualified from serving as a Qualified Intermediary for a 1031 exchange, but it's important to understand the IRS restrictions regarding 1031 exchanges. While some banks do offer the service, it's crucial to engage an expert to assist with the complex process of a 1031 exchange. If the bank you use for other banking services is not experienced in 1031 exchanges, it's recommended to choose one that has more expertise in the matter.

Additionally, having an account with the bank could potentially disqualify the exchange according to the IRS, which is why choosing a bank with which you have not conducted business in the past two years is a safer option. Regardless of whether you choose a bank or a specialist, the ultimate goal is to ensure a successful and compliant 1031 exchange, deferring capital gains taxes, and striving to maximize investment 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

How do 1031 Exchanges Impact Real Estate Investors' Portfolios?

Real estate investing can be a great way to build wealth, but it can also come with its own set of challenges, especially when it comes to taxes. One way that real estate investors can mitigate these challenges is through the use of 1031 exchanges. In this blog post, we will take a closer look at what 1031 exchanges are, how they work, and how they can impact a real estate investor's investment portfolio.

A 1031 exchange, also known as a like-kind exchange, is a way for investors to defer paying capital gains taxes when they sell a property that they own and use the proceeds to purchase a new property. The idea behind a 1031 exchange is to allow investors to continue growing their wealth without having to pay taxes on the sale of their property. This can be a powerful tool for real estate investors looking to upgrade to a higher-performing property, increase cash flow, or diversify their portfolio.

The purpose of this blog post is to provide a comprehensive overview of 1031 exchanges and how they can be used by real estate investors. We will cover everything from the basics of 1031 exchanges to the advantages and challenges of using them, as well as how they can impact an investment portfolio. Whether you are a seasoned real estate investor or just getting started, this post will give you a better understanding of how 1031 exchanges can be used to your advantage.

The Basics of 1031 Exchanges

A 1031 exchange is a provision in the US tax code that allows real estate investors to defer paying capital gains taxes when they sell a property that they own and use the proceeds to purchase a new property. This is known as a like-kind exchange, as the properties being exchanged must be of a similar nature or use. In order to qualify for a 1031 exchange, the properties being exchanged must be used for investment or for use in a trade or business.

One of the key eligibility requirements for a 1031 exchange is that the properties being exchanged must be of a similar nature or use. This means that the properties must be used for investment or for use in a trade or business. For example, an investor can exchange a rental property for another rental property, or a commercial property for another commercial property. It is not possible to exchange personal property such as a primary residence, vacation home, or collectibles.

Another important aspect of 1031 exchanges is the timeframe for completing the exchange. Investors have a specific period of time to complete a 1031 exchange, starting from the date of sale of the relinquished property.

The investor must identify potential replacement properties within 45 days of the sale of the relinquished property, and must close on the purchase of the replacement property within 180 days of the sale of the relinquished property. If the investor fails to meet these deadlines, the exchange will not qualify and the investor will be liable for paying capital gains taxes on the sale of the relinquished property.

In summary, 1031 exchanges provide a tax-deferral opportunity for real estate investors looking to sell a property and purchase a new property of a similar nature or use. The process of a 1031 exchange is time-sensitive and requires the investor to identify and close on the replacement property within specific deadlines. The investor must ensure that the properties being exchanged are used for investment or for use in a trade or business.

1031-exchange-benefits-Austin-Texas-Deleware-statutory-trusts-retirement-planning-wealth-management-cash-flow-stock-market

Advantages of 1031 Exchanges for Real Estate Investors

There are several advantages that real estate investors can enjoy by using 1031 exchanges. One of the biggest advantages is the ability to defer capital gains taxes. When an investor sells a property that has appreciated in value, they are typically liable for paying capital gains taxes on the sale.

However, by using a 1031 exchange, the investor can defer paying these taxes until they eventually sell the replacement property. This can provide a significant tax savings, as the investor can continue to reinvest the proceeds from the sale of the relinquished property without having to pay taxes on the sale.

Another advantage of 1031 exchanges is the opportunity to upgrade to a higher-performing property. By using a 1031 exchange, an investor can sell a property that may not be performing as well and use the proceeds to purchase a property that has better potential for cash flow or appreciation. This can help the investor increase their returns and grow their wealth over time.

1031 exchanges can also provide benefits for cash flow. An investor can use a 1031 exchange to purchase a property that has a higher cash flow than the property they are selling. This can help the investor increase their cash flow and potentially improve their overall return on investment.

In summary, 1031 exchanges provide several advantages for real estate investors, including the ability to defer capital gains taxes, the opportunity to upgrade to a higher-performing property, and potential for increased cash flow. By using a 1031 exchange, investors can continue to grow their wealth without having to pay taxes on the sale of their property.

How 1031 Exchanges Impact Investment Portfolios

1031 exchanges can have a significant impact on a real estate investor's investment portfolio. One of the main ways that 1031 exchanges can impact a portfolio is through diversification benefits. By using a 1031 exchange, an investor can sell a property in one market and use the proceeds to purchase a property in another market. This can help the investor diversify their portfolio and spread out their risk across different markets, which can help to mitigate the impact of a downturn in any one market.

1031 exchanges can also have a positive impact on returns. By using a 1031 exchange to upgrade to a higher-performing property, an investor can potentially increase their returns. Additionally, 1031 exchanges can also provide benefits for cash flow, which can lead to higher overall returns.

1031 exchanges can also play a role in risk management. By using a 1031 exchange to diversify a portfolio, investors can mitigate the risk of being overexposed to any one market. Additionally, by upgrading to a higher-performing property, an investor can potentially reduce the risk of poor returns.

1031 exchanges can have a significant impact on a real estate investor's investment portfolio. They can provide benefits for diversification, returns, and risk management. By using this strategy, investors can take advantage of these benefits and potentially increase the overall performance of their portfolio.

Challenges and Risks of 1031 Exchanges

While 1031 exchanges can offer many benefits to real estate investors, they also come with their own set of challenges and risks. One of the main challenges is the complexity of the process.

These types of investments can be difficult to navigate, especially for investors who are not familiar with the process. The rules and regulations can be quite complex, and investors must work with a qualified intermediary to ensure that the exchange is completed correctly.

Another challenge of 1031 exchanges is the strict deadlines that must be met. Investors have a limited amount of time to identify potential replacement properties and complete the purchase. If the deadlines are not met, the exchange will not qualify, and the investor will be liable for paying capital gains taxes on the sale of the relinquished property.

There is also a risk of disqualification. There are several rules and regulations that must be followed, and if these rules are not followed, the exchange can be disqualified, and the investor will be liable for paying capital gains taxes on the sale of the relinquished property.

1031 exchanges can be a powerful tool for real estate investors, but they also come with their own set of challenges and risks. The process can be complex, and investors must meet strict deadlines. There is also a risk of disqualification if the rules and regulations are not followed correctly. Investors should be aware of these challenges and risks when considering a 1031 exchange, and should work with a qualified intermediary to ensure a smooth process.

General Disclosure

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

5 Things to Look for in a Delaware Statutory Trust (DST) Broker

Your financial success can be made or broken when you set out to select the best Delaware Statutory Trust (DST) broker for your 1031 exchange. Investors frequently have to make complex evaluations, but it's crucial to know who to trust and where to put their money.

Finding the DST investments that make the most sense for you is essential, as is getting informed, experienced guidance about which DST(s) to select from someone who has your best interests in mind. Your broker should also be able to match you with investment options that are in line with your objectives and goals by taking the time to get to know you, as well as have a diverse selection of investment options accessible, a grasp of the management and track record of the DST sponsors.

Discover the warning signs and signals to look out for when selecting a DST broker to guide you through your 1031 exchange.

5 Essential DST Broker Characteristics And Important Warning Signs

When selecting a broker, being aware of what to look for and what to avoid might be helpful. As a result, you will be able to think through your investments with confidence knowing that you are receiving information that is specific to your needs. However, more importantly, you will feel more at ease knowing that you are working with a professional, experienced broker who is concerned about the success of your investments and who wants to build a long-term relationship with you.

1: Are they reputable and established?

Since the DST industry is smaller than you might imagine, when professionals mistreat their clients, word spreads quickly, especially if it is a regular occurrence. Consider a scenario in which a company or broker has a history of advising clients on substitute properties that are less ideal. That is a red flag that they probably don't have the interests of the investor at heart.

What to do: Verify that the broker you are considering has knowledge and expertise navigating market cycles. Inquire about their background in real estate and investments, including how long they've been doing it and what they did previously.

2: Do they disclose conflicts of interest and take steps to minimize them?

You need a consultant who will support you despite their competing interests. When deciding whether to engage with them and when analyzing the advice that they provide, anything that could affect their ability to defend your financial interests should be taken into account.

A stringent professional code of conduct is followed by the top DST brokers, so they won't have any improbable interests in the DSTs they recommend or don't. This indicates that neither the broker nor their business are owners of the DST investment. Of course, there will always be some degree of conflicts of interest, such as pay.

What to do: It's important to ask your broker directly if they or their business are associated with or owners of the DST investment opportunities they present to you. Ask them if there are any other potential conflicts, such as pay agreements.

3: Does your prospective DST broker learn about and comprehend your unique situation?

This is more significant than it first appears to be. Your broker should be entirely focused on getting to know you and developing an appropriate investment strategy that is specific to your goals and situation.

Make sure they also prioritize education and offer a balanced view of the dangers and opportunities.

What to do: Consider the suggestions that your broker gives. Anything that doesn't seem like it would be a good idea for you, challenge it. They should provide you options and explain why each one would be the best choice given your circumstances. It is likely that they have not done much investigation if they are unable to discuss the benefits and drawbacks of each investment and provide precise guidance on how to approach those decisions. This suggests that you might not be receiving a unique set of recommendations.

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4: What kind of analysis and due diligence team do they employ when evaluating offerings?

You count on your DST broker to be knowledgeable about each DST sponsor and each one's unique offering. The more thorough the investigation and due diligence, however, the more valuable the knowledge will be to investors as they choose which DST to invest in. Having enough pertinent knowledge is the foundation for making well-informed decisions.

Ask your broker if they have a team dedicated to analyzing DST offerings, and if so, how experienced they are. If they respond that they only rely on information from third parties or that their broker-dealer approves such offerings, that is probably insufficient. A staff within the broker should be solely responsible for examining the offerings. Inquire from the broker regarding the training and experience of their due diligence analysts.

5: Is your DST broker impartial and practical?

Although integrity and expertise can be discerned in a number of ways, promissory language is a surefire indicator. Never accept success or results guarantees from your broker. In reality, they ought to be upfront about prospects, risks, rewards, pros, and their limitations.

They will be aware of market volatility, have carefully researched the assets they are proposing to you, and never speculate in a way that ensures the performance of your investment in the future. Anyone who talks as though they possess a crystal ball is not being rational or impartial.

What to do: Be skeptical of concrete language about how much money you'll make from investing, and be prepared to walk away from overblown promises. Instead, a wise broker will examine many scenarios in order to determine the value of an investment. They will be able to express their evaluation of the risks and value based on your unique scenario, which is maybe most significant.

Conclusion: Choosing a Reliable Broker

A one-time trade of professional services should be avoided when looking for the ideal DST broker. Look for someone who views the connection as a partnership.

If you're thinking about selling an investment property, it's important to be aware of all your alternatives in order to get the most money possible. Call us right away. Our experts would be pleased to speak with you in further detail regarding the potential advantages of various investing strategies.

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.

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

DST Cash Investments as a Substitute for Stock Market Investing

For accredited investors participating in a 1031 exchange, Delaware Statutory Trusts are a worthwhile investment option to consider. However, some investors are unaware that DST cash investments are also a viable option.

Why think about making a DST investment?

DSTs may provide a number of advantages to investors engaging in a 1031 exchange, including the possibility to postpone the realization of capital gains from the sale of investment real estate and the avoidance of some of the risks involved in finding a replacement property quickly.

However, there are additional potential DST advantages that can benefit investors as a complement to either outright real estate ownership or stock market trading.

Potential Advantage #1: Professionally managed passive income

Have your money working for you - DSTs are professionally managed by asset managers and property managers who are responsible for ensuring that the tenants pay their rent on time and delivering the investor a check, often every month (assuming funds are available). You never engage with any of the tenants and have no management duties as an investor.

Potential benefit #2: Geographic and real estate sector diversification

It's wonderful to make an investment and see it pay off. What if it doesn't, though? Any investment has the potential to experience losses, whether it be in real estate, equities, futures, commodities, jack's magic beans, etc. However, the risk is spread out when one diversifies their portfolio by making investments in several different things.

Investors have access to a variety of DST real estate investments from different DST sponsors, including multifamily, storage space, commercial, and NNN leases. Additionally, you can invest in a specific type of DST, like multifamily, across a number of different geographic areas of the nation, increasing the likelihood that other locations won't experience a downturn in their local economies or, at the very least, lowering the likelihood that they will due to diversification.

Benefit #3: Supported by tangible assets

The fact that real estate is permanently anchored to the earth makes it one of the reasons why so many investors adore it. Real estate also has an inherent value, which means that it is fundamentally a hard asset with at least some minimal value, as opposed to a firm, whose shares can possibly lose all of its value should the latter go bankrupt. Uncovered natural disasters and foreclosure are always a possibility, but as was already mentioned, no investment is without risk.

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Potential benefit #4: traditionally less volatile and associated with the stock market

The stock market can be unpredictable, as we've recently witnessed during the coronavirus pandemic. On other days, market volatility in the double digits have been the norm. The link between real estate and the stock market, however, has historically been smaller. Real estate is typically much less affected by market turbulence than the equity markets, but that doesn't mean it can't be volatile and experience a downturn like we did during the Great Recession of 2008–2009.

Potential benefit number five: access to institutional real estate.

Real estate is a popular way to possibly accumulate money and has several advantages as an asset type. Real estate, however, is not created equal. Real estate is similar to how there are blue-chip stocks and "junk" bonds. There are DSTs that allow investors to purchase "institutional-level" real estate, which is generally real estate that is thought to be of a certain grade and class such that huge institutions and significant investment funds would consider it. The majority of people would find it challenging to access these kinds of real estate investments on their own, but the DST structure enables them to indirectly hold a portion of these investments that they would not otherwise be able to.

Potential Perk #6: Low Minimum Investment for Accredited Investors (sometimes as Low as $25,000)

Sometimes as little as $25,000 can be invested directly in a DST as the minimal amount. This gives them access to DST real estate assets that would normally cost millions of dollars to acquire, finance, and operate on a fractional basis and is not a princely sum for the majority of accredited investors.

Potential benefit #7: DSTs allow investors to perform a 1031 exchange when the investment property is sold, according to current IRS regulations.

Investors who buy in equities, for instance, must pay capital gains taxes on any profits they make (note: Opportunity Zones may provide an option to defer those gains). However, under the current IRS code, investors have the choice to do a 1031 exchange into another property into which they own 100% or another partial DST, so delaying any capital gains, once a DST asset has been sold. Of fact, if President Biden's economic plan is approved, changes to the IRS rules, such as those under it, could alter how future earnings are treated.

Potential Advantage #8: Cash investors do not need personal finance clearance.

In contrast to buying a property directly and potentially needing to obtain financing from a lender, DSTs provide investors with non-recourse loans that are not dependent on the investor's capacity to obtain financing.

The Benefits of DSTs for Real Estate Investors

What exactly is a DST (Delaware Statutory Trust)?

For authorized investors who want to make fractional real estate investments, a Delaware Statutory Trust, or DST, is a frequently used structure.

The main benefit of investing in a DST is that it qualifies for a 1031 Exchange, which enables investors who are selling a property to postpone paying capital gains tax by putting the profits into a DST, which the IRS has determined is an investment of "like kind."

National real estate corporations typically "sponsor," or bring to market and make available to accredited investors, DST offers. These offerings can be made available through third-party securities broker-dealers. The property(ies) to be offered under the trust are purchased by DST sponsors. In order to make sure the trust is eligible for 1031 exchange purposes, the DST sponsor will perform due diligence on the property, occasionally acquire long-term debt that is non-recourse to investors, and organize the necessary paperwork. The DST sponsor will then offer the asset(s) to accredited investors on a fractional ownership basis, and in exchange will get payment for organizing, supervising, and managing the investment on their behalf.

The Evolution of DSTs

Tenant-in-common real estate, or "TICs," is a type of co-ownership that is discussed in more detail below. In the early 2000s, some of the biggest real estate sponsors in the country and their attorneys urged the IRS to create regulations that would allow TICs to qualify for 1031 exchanges. Investment in TICs soared as a result. Investors soon encountered some of the difficulties brought on by TICs, such as the requirement for investor unanimity in order to make certain sorts of property-related decisions.

The idea of investing through a DST started to catch hold at about this time. DSTs offered more flexibility than TICs and addressed some of the concerns of investors, notably with regard to the clauses requiring unanimous consent.

It was no surprise, then, that investors and sponsors asked the IRS to adopt identical 1031 exchange standards for DSTs. As a result, the IRS released Revenue Ruling 2004-86 in 2004 that permitted the use of the DST structure to buy real estate where the trust's beneficial interests would be recognized as direct interests in replacement property for the purposes of a 1031 exchange. The syndicated real estate sector hailed this as a significant triumph.

Prior to the start of the Great Recession in 2008, both TICs and DSTs were commonly utilized. Their appeal declined along with real estate values. TICs were impacted more than DSTs. Few individual investors were willing to assume the risk of jointly owning so much underwater real estate. At least with DSTs, the DST sponsor was responsible for loan repayment, not individual investors. Investment in real estate syndication increased as the economy strengthened. Given the difficulties involved with TICs, DSTs are now frequently regarded as the preferred way of fractional real estate ownership.

The Distinction Between DSTs and TICs

For long-time real estate investors, DSTs are a relatively new notion. Instead, tenant-in-common real estate investments, or TICs, are more commonly known to long-term investors. Both TICs and DSTs allow people to invest fractionally in real estate. They can both be combined with 1031 exchanges. As a result, it is understandable why some individuals mistake TICs for DSTs. There are, however, some significant differences between the two.

The degree of investor involvement is a key area of distinction. The co-owners of a TIC are typically more actively involved in managing the property on a day-to-day basis, including property management. DSTs are really passive investments in which the sponsor manages the transaction on the part of the investors.

The need for unanimous co-owner approval for all significant actions is one of the reasons management of TICs may be so difficult. In actuality, this is one of the difficulties that prompted the development of DSTs. Many investors were put off by the unanimous approval needed for TICs, and those who had previously invested in TICs encountered difficulties.

Another difference between TICs and DSTs is how they hold title to the property. Each TIC co-owner has a little portion of the property's title. Individual investors do not actually own the real estate asset; instead, the DST does. In terms of financing, this has consequences. The individual co-owners of a TIC are liable for any debt used to fund the property, whether for acquisition or upgrades. This makes it necessary for lenders to individually vet each borrower, which can be time-consuming for most of them and make it challenging to finance real estate held in TICs. Since the asset is solely held by the DST on behalf of the investors in a trust arrangement, DST investors do not directly incur debt.

TICs and DSTs also differ in terms of the number of investors authorized to participate. In contrast to DSTs, which are limited to 499 individual investors, TICs are only permitted to have 35 investors (or "co-owners").

Finally, the minimum investment for DSTs is typically lower than that of TICs because more investors can engage in them. Compared to DSTs, which typically permit contributions as little as $100,000, many TICs need at least a $500,000 commitment (or sometimes less).

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How are DSTs Used by Investors?

An investor can benefit from the advantages DSTs provide in one of two ways. Investing with funds from a 1031 exchange is the first and most common method. Direct cash investment into a DST is the alternative.

1031 Exchanges
Traditionally, an investor wanting to avoid paying capital gains tax on the sale of a real estate asset will perform a 1031 exchange and utilize the profits from the sale to invest in another "like kind" asset. However, there are stringent rules for 1031 exchanges. In accordance with current regulations, for instance, investors must:

Find a potential replacement property within 45 days of the sale. Close on the replacement property(s) within 180 days of the sale. Reinvest 100% of net sales proceeds, also known as equity, into the replacement property. Acquire an equal or greater amount of debt on the replacement property.
It can be challenging to meet these requirements, especially in the competitive real estate market of today.

DSTs are a 1031 exchange alternative for "whole property."

Investors can instead transfer the money received from the sale of their property into a DST. The investor will thereafter possess proportionally fractional ownership in the property (or properties) owned by the DST. DSTs are already in place (or "pre-packaged," if you prefer) and prepared to receive investors, enabling someone selling their property to typically move fast in conformity with the IRS's 1031 exchange standards. All due diligence on the actual estate is already complete. Additionally, under present law, the profits from the sale of the investors' property will be eligible for the same capital gains tax deferral as if the investors had invested via a whole property 1031 exchange.

Investors occasionally combine methods by purchasing both a DST and a full property. When an investor discovers a suitable replacement property (or properties), it frequently happens that they still have extra money from the sale of their former asset. To fully benefit from the present law's 1031 exchange benefits, the investor may use the remaining sales proceeds and invest that money in a DST.

Investments in Direct Cash
Accredited investors can purchase DSTs without selling any of their own properties. This is a fantastic option for individuals who want to start investing in diversified passive real estate. There is often a $25,000 minimum investment requirement for direct cash investments in most DSTs. Accredited investors seeking access to institutional-quality and other high-value real estate that they would not be able to afford on their own would find this to be a particularly appealing alternative.

Potential Rewards of DST Investment

There are several potential benefits of investing in a DST, several of which are described below:

Capital preservation tool: As previously mentioned, DSTs offer investors an excellent option to postpone paying capital gains tax on the revenues from the sale of their other real estate. They can get the same advantages by investing in a DST as opposed to performing a "whole property" 1031 exchange. According to existing law, investors can reinvest in another DST or sole-ownership property to continue postponing paying capital gains taxes indefinitely after the DST program expires or the asset is sold.
Quickness: Finding a suitable like-kind property to buy within constrained IRS timeframes is typically the main obstacle for people attempting to complete a standard 1031 exchange. This is especially true in the competitive real estate market of today, where there aren't as many "bargains" to be found. Investors still need to perform extensive due research on every potential opportunity, and it can frequently be difficult to discover a property that satisfies their investment criteria within the allotted time. DSTs provide pre-investment-ready real estate that has previously undergone a rigorous review. This enables sellers to move fast while continuing to benefit from the tax advantages of a 1031 exchange.
Additional inventory to take into account: Many investors who are looking to complete a 1031 exchange find themselves under pressure to trade up into a property that they otherwise might not buy because of the 1031-time restrictions. When you invest in a DST, you have access to a larger selection of properties, including those that have undergone comprehensive inspection by some of the top players in the market. This can assist lower the likelihood of making a "poor" investment for folks who might otherwise make a quick decision given timeline pressures.
No need for active management: Those who use a standard 1031 exchange to trade-up into a better value asset are still responsible for managing the real estate. Instead, customers who invest their sale proceeds into a DST transfer management duties to the DST's sponsor, who manages the real estate holdings on their behalf. As a result, an investor can convert real estate that they actively own and control into 100% passive real estate.
Less expensive to finance and no personal liability for DST debt: Unlike TICs, investors in DSTs are not held personally responsible for any debt incurred in connection with the asset. The sponsor is the only party accountable to the lenders. Real estate held in DSTs is also simpler to finance since, unlike with TICs, the lender simply underwrites the sponsor, which is often a sizable, renowned institutional real estate corporation with a proven track record.
Access to institutional-quality assets: Due to the price and funding required to invest in higher-quality real estate, those who directly purchase property are frequently restricted to assets of a specific caliber. Given its fractional ownership format, a DST enables those wishing to invest in assets of institutional quality. An ordinary investor can acquire a tiny stake in a high-quality asset through a DST, which lowers entry barriers.
Diversification: A variety of DST real estate investments, including multifamily, storage space, office, and NNN leases, are available to investors from different DST sponsors. Additionally, you can invest in a specific type of DST, like multifamily, across a number of different geographic areas of the nation, increasing the likelihood that other locations won't experience a downturn in their local economies or, at the very least, lowering the likelihood that they will due to diversification.

Conclusion

As you can see, there are a lot of reasons why an investor should think about making a DST-based real estate investment. For investors seeking to fully benefit from advantages normally associated with conventional 1031 exchanges, the DST model offers exceptional flexibility, opportunity, and investment variety.

Additionally, investors can close on DST investments rapidly — frequently in a matter of days. Therefore, investing in a DST can be a terrific alternative whether you're an accredited investor looking to deploy your funds for the first time or someone who has a strict deadline to do so after a 1031 sale.

Are you eager to discover more about DSTs? Contact us today at Perch Wealth to discover more about our current DST real estate offers and how we might possibly help you.

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 some 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 have 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 offerings. 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 expenses - The costs of the transaction could have an influence on investors' returns and even surpass the tax advantages.

Who to Consider for a 1031 Exchange: BD vs. RIA

Investors might choose to work with a broker-dealer (BD) or registered investment advisor if they want to speak with a knowledgeable expert about their 1031 exchange investment alternatives (RIA). Although both BDs and RIAs can frequently provide comparable services, the breadth of their knowledge and costs can differ greatly. In this post, we clarify the distinction between a BD and an RIA in the hopes of assisting you in selecting the expert who is more suitable for your needs.

What's the distinction?

RIAs are people or businesses that primarily concentrate on providing general financial advice, managing client accounts, and carrying out stock trades on behalf of clients. RIAs often charge annual fees that are calculated as a percentage of the assets they manage for their clients' benefit.

BDs, on the other hand, primarily assist their clients in investment transactions. BDs typically charge a one-time fee rather than a recurring cost for each transaction they assist because their fees are largely commission-based.

A 1031 Exchange's Relevance

Work with a certified expert, such as a broker-dealer or a registered investment advisor, if you're an investor looking to sell your real estate and exchange it for a like-kind alternative investment.

Trading from a real estate asset into a Delaware Statutory Trust (or "DST") is one of the most prevalent types of a 1031 exchange in use today.

An investor can purchase an ownership interest in a DST, which is a legally recognized real estate investment trust. Beneficiaries of the trust are investors who own fractional ownership; they are regarded as passive investors. … Retail assets, multifamily properties, self-storage facilities, medical offices, and other types of commercial real estate are among the properties owned in DSTs that are deemed to be of "like-kind."

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Investors can sell their real estate and purchase a suitable investment while postponing capital gains thanks to these one-time transactions.

Investors can also use the exceptional financing secured by a DST sponsor, receive possible management-free passive income, access institutional quality assets they might not otherwise be able to purchase, and limit their liability in the investment by trading into a DST.

Instead of comparing a DST to an equity acquisition, it is ideal to compare it to a real estate exchange because there is a big difference between the two in terms of how much an investor should spend in fees.

Preventing Possibly False Claims

Why is this significant when choosing between working with an RIA or a BD?

Many claims are now frequently made in an effort to attract investors for 1031 exchanges or people wishing to invest money in DSTs. Since their commissions are eliminated, several RIAs assert that working with them is less expensive than working with a BD. This assertion, however, disregards the fact that RIAs frequently charge continuous annual fees to their clients. Over time, this fee can end up costing you more. It's crucial to conduct research to determine the recurring fee and, if any, additional services you are receiving in exchange for that cost. It's important to remember that the recurring charge is often determined as a percentage of the assets' value. This implies that you will pay more if the item increases in value and less if it decreases in value. As a result, it is impossible to estimate how much the advising fee will actually cost over time.

Let's examine a case in point.

Consider a scenario in which an investor switches from a retail property to a DST, an investment that typically lasts for five to ten years before being sold and allowing the investor to make another transaction. Let's say the investor contributes $1 million to the DST. Let's compare the prices of a BD and an RIA now. If the BD charges a 6% commission on the investment, the commission on the transaction will be $60,000.

Contrarily, an RIA levies fees as a percentage of the assets under management (AUM), which in this case is $1 million. Let's now assume that the RIA fee is 1.5% of the AUM (assets under management). The investor would then pay the RIA $15,000 annually for the investment (assuming the asset value remains stable). The investor would spend between $75,000 and $150,000 for the exchange based on the typical holding time of a DST (five to 10 years)! Of course, there is a chance that the charge will be smaller if the DST sponsor leaves early or if you are given the chance to sell or swap early.

Compared to registered investment advisors, broker-dealers may be less expensive.

The aforementioned scenario only illustrates how dealing with a BD might be less expensive than working with an RIA by comparing the costs of the two types of advisors. In the example above, working with an RIA costs the investor 50% to 250% more than working with a BD. If an investor had millions to invest, just imagine.

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Pay No Annual Fees for Passive Investments Such as DSTs and Other 1031 Exchange Investment Options

DSTs and other 1031 exchange investment choices are set up as management-free investments, so neither the investor nor the person acting on their behalf in the transaction is responsible for managing the investments. Sponsors are absolutely passive because they manage these alternative investments on behalf of their investors. When your DST investment is already being managed for you, why would you pay an RIA to "manage" it?

Recognizing Your Options

Investors should do their homework before making any investments to fully grasp the possibilities and costs involved. An investor should evaluate who has greater expertise in the investment and whose fees are more in line with the type of investment they are considering when deciding between an RIA and a BD. These inquiries might aid investors in safeguarding their capital and themselves in subsequent investments.

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

How Should I Invest My Wealth in 2022?

The present market offers financial backers a plenty of speculation valuable open doors across various ventures. While having different choices can assist with further developing a singular's venture methodology, they can likewise cause vulnerability, bringing up issues about which speculation suits the individual's monetary targets. So you may be wondering where do I invest my wealth in the current economy.

To help give guidance on which investment is ideal for you, we will frame the fundamental components of the present most wanted speculations and go over the upsides and downsides of every one.

For this article, we will isolate the data into two segments. To start with, we will take a gander at more conventional speculation choices, like putting resources into stocks or bonds. Then, we will audit elective speculations. Albeit less known among the present financial backers, elective choices offer potential advantages that numerous customary speculations need.

Customary Investment Options

By and large, financial backers have depended upon a 60/40 portfolio piece to assist them with accomplishing their long-term monetary dreams, for example, fabricating a savings for retirement, reimbursing a home loan early, or paying instructive costs for their youngsters. As indicated by this model, a financial backer's portfolio ought to comprise of about 60% stocks and 40 percent bonds. This model generally would in general convey financial backers stable development and pay to assist them with meeting their monetary objectives.

Stocks, or values, are protections that address partial possession in an enterprise. Financial backers purchase stocks and depend upon the organization's development to expand their abundance after some time. Also, stocks may offer financial backers profits - or installments to investors - for recurring, automated revenue. Then again, bonds are obligation protections presented by a company or government substance hoping to raise capital. Not at all like stocks, bonds don't give financial backers proprietorship freedoms, yet rather they address a credit.

The largest contrast among stocks and securities is the manner by which they produce benefit: stocks should appreciate in esteem and be sold later on the financial exchange, while most bonds pay fixed interest after some time.

While stocks offer financial backers the potential for more significant yields than securities, securities are by and large considered a safer venture. Therefore, numerous financial backers go to venture reserves, like common assets, trade exchanged reserves, or shut end assets, to broaden their portfolios while keeping a 60/40 arrangement. These venture subsidizes arrange capital from various financial backers, which is then, at that point, put into an arrangement of stocks and bonds. Venture subsidizes offer financial backers the possibility to moderate risk through a more adjusted portfolio.

A Change in the Portfolio Model

Because of progressing unpredictability in the stock and security market, rising costs for wares, and high valuations, the customary 60/40 portfolio model is done serving financial backers in a similar way it once did. Therefore, numerous monetary specialists are presently suggesting that financial backers broaden their portfolios with 40% elective ventures to help possibly advance their monetary position.

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Elective Investments

While various kinds of elective ventures exist, we will zero in on elective land speculations because of the advantages they might perhaps offer financial backers in the present market.

Why Invest in land?

Land has for quite some time been one of the most sought-after open doors for financial backers. As a restricted ware, land has generally managed the cost of financial backers the potential for long haul security, fantastic returns, recurring, automated revenue, charge benefits, and a fence against expansion. Notwithstanding, land speculations additionally accompany specific drawbacks. Beginning in land effective money management ordinarily requires a broad measure of capital and solid financials for the individuals who are utilizing obligation.

Besides, land by and large requires dynamic support - financial backers are expected to deal with their resources for guarantee ideal execution. In this manner, elective interests in land have begun filling in prominence among the venture local area. While they can frequently offer comparable benefits to land money management, they convey a uninvolved open door, meaning they have zero administration obligation. The following are a couple choices for financial backers looking for elective land speculations.

Real Estate Investment Trusts

A real estate investment trust (REIT) is an organization that possesses and normally works pay creating land or related resources. REITs consolidate all resource types, including multi-family, retail, senior living, self-capacity, cordiality, understudy lodging, office, and modern properties, to give some examples. Dissimilar to other land ventures, REITs by and large buy or foster land for a drawn out hold.

Financial backers depend on a REIT's comprehension expert might interpret the housing business sector to broaden and balance out their portfolios. Numerous REITs are public, implying that all financial backers, including unaccredited financial backers with restricted capital, can put resources into them.

While public REITs convey many benefits related with customary land effective financial planning - like pay potential, broadening, and conceivable expansion security - they additionally accompany some particular inconveniences. For instance, REITs frequently experience slow development. Since REITs should pay out at least 90% of their benefits in profits, new acquisitions and improvements are restricted. To decide the strength of a venture, potential financial backers ought to lead a reasonable level of investment - with the help of a specialist on the REIT before buying shares.

Delaware Statutory Trusts

A Delaware Statutory Trust (DST) is a lawfully perceived land speculation trust where financial backers buy a possession interest, or partial proprietorship, in a land resource or land portfolio.

DSTs are usually depended upon by 1031 trade purchasers since they qualify as a like-kind property per the Internal Revenue Service (IRS).

As well as giving financial backers recurring, automated revenue potential through an administration free venture, DSTs empower financial backers to put resources into institutional quality resources for which they wouldn't in any case have access. These resources might have the option to convey more significant yields and longer-term strength.

Moreover, the obligation designs of DSTs are appealing to numerous financial backers. Individuals who put resources into DSTs have restricted obligation equivalent to their ventures; nonetheless, they can exploit the frequently alluring funding gotten by the support organizations. Sadly, just licensed financial backers can put resources into DSTs.

Opportunity Zones

Opportunity zones (OZs), characterized by the IRS, are "a financial advancement device that permits individuals to put resources into upset regions in the United States. This incentive’s intention is to prod financial development and work creation in low-pay networks while giving tax breaks to financial backers." OZs were presented. under the Tax Cuts and Jobs Act of 2017, and financial backers keen on putting resources into an OZ should do as such through a qualified opportunity fund (QOF).

QOFs can be an eminent choice for financial backers because of their tax breaks, which rely upon the period of time a financial backer holds a QOF venture. We have recently made sense of these advantages, which we allude to as OZ triple-layer charge motivators. Here is a depiction of the tax cuts a QOF offers a financial backer:

● Deferral: Those who rollover their capital increases into a QOF can concede capital earn respect from the first speculation until December 31, 2026.

● Decrease: how much capital increase perceived from the first speculation is diminished by 10

percent in the wake of accomplishing a five-year holding period, as long as that five-year holding period is accomplished by December 31, 2026.

● Avoidance: Long-term financial backers are qualified to pay no expense on the enthusiasm for their QOF venture upon attitude of that speculation, no matter what the benefit size, assuming the resources held in that QOF are held for no less than 10 years.

While opportunity zones are viewed as an unsafe speculation, provided their motivation, they might possibly convey financial backers better yields when contrasted with other elective land venture choices.

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Interval Funds

An extra elective venture choice worth focusing on are interval funds. These assets are not restricted to land yet rather can be utilized to put resources into numerous protections, including land. Comparable to recently referenced reserves, these arrange investor money to put resources into various protections. Be that as it may, they offer a lower level of liquidity. Rather than having the option to exchange shares everyday, financial backers are normally restricted to selling their portions at expressed spans (i.e., quarterly, semi-every year, or yearly). The advantage of stretch assets is the adaptability they offer the assets - they permit the asset to execute longer-term procedures, making the potential for a more steady venture.

Accordingly, interval funds will generally convey better yields and a more broadened an open door. Presently, where do I put away my cash today? While the above data offers a depiction into the upsides and downsides of different speculation choices, you ought to think about extra perspectives. As opposed to promptly attempting to distinguish which choice is ideal for your purposes, the critical focal point here is to comprehend that the present market offers a variety of venture choices that were already obscure to quite a large number. Financial backers can broaden past stocks and bonds, which might potentially give them more significant yields while trying to relieve risk. To foster a venture portfolio that meets your monetary objectives, we encourage you to talk with one of our monetary experts.

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