Your 1031 Exchange Backup Plan

Dan was nearing his retirement age and thought that it was time to increase his investment potential. He planned to purchase a triplex or fourplex through a 1031 exchange by selling the 3-bedroom condo he had been renting for twelve years. In order to carry out his 1031 exchange in compliance with the rules and regulations, he engaged a 1031 Qualified Intermediary (“QI”) to handle the funds that he would get after selling his condo and to complete acquisition of the replacement property.
Dan was able to sell the 3-bedroom condo for the anticipated price and the entire process went smoothly. Dan then in his identification period of 45 days had to identify three potential replacement properties for the 1031 Exchange. He found a fourplex and a couple of triplexes that he thought offered him the investment opportunity he was looking for. Before the 45-day deadline of his identification period, he notified his QI and began the process of purchasing the first property.

Due to some unforeseen circumstances with the seller of the first property and many competitors for the second property, Dan was not able to make a deal on either of his first two replacement property choices that he shared in his 45 day identification period with the QI. And by the time Dan came to know that he wouldn’t be able to close deal on the first two properties, there was not enough time left with him in the 180-day exchange period to acquire the third replacement property. Due to this, Dan had to cancel his 1031 exchange and pay the taxes on the capital gains he earned from the sale of his 3-bedroom condo. Dan did not have the cash that he had expected after paying the capital gains taxes and could no longer afford a triplex or a fourplex which he wanted in order to increase his investment potential, without obtaining a loan amount, which would in turn decrease his income potential.

Are you also looking for 1031 exchange and don’t want to end up paying taxes like Dan, get in touch with our 1031 Experts spread across United States of America.

So what could have been done by Dan while planning his 1031 Exchange, that would have guaranteed him a successful 1031 exchange?

Delaware Statutory Trusts (“DSTs”) is a way to ensure the successful completion of 1031 Exchange for all the investors by being a potential backup plan; Investors can invest into a DST (as long as the DST is open) 100% of their exchange funds rather than being taxed for capital gains. Every 1031 Exchange investor should put their backup plan in place by identifying a property within a DST as their third potential replacement property during their 45 days identification period. This would be the fall back option in case there is some issue / problem in acquiring the first two replacement properties.

If Dan would have identified the third replacement property as a DST, he would have been able to save on taxes by choosing the DST as his replacement property. DST’s not only helps investors save on the taxes but also comes with many more benefits which can be read here.

Are you also looking for 1031 exchange and don’t want to end up paying taxes like Dan, get in touch with our 1031 Experts spread across United States of America.

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