One of the most common reasons 1031 exchanges fail is because of issues relating to the acquisition of suitable replacement property. What if I can’t find suitable replacement property for my 1031 exchange in time? What if my selections fall through after the 45 days? Can I change my identifications? We get questions like this all the time. With the proper precautions, these risks are easily avoidable and TIC properties and Delaware Statutory Trusts can be a useful tool to help protect from the risk of paying the tax. If you’re not sure what a TIC or DST is there’s an overview on each at the bottom of this article. When exchanges fail (about 15% of them do), it’s often due to issues with finding/acquiring replacement property. In this article we review some of the most common and how to avoid them.
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Why Does this happen?
How can it be avoided?
Why does it happen?
How can it be avoided?
Why does this happen?
How can this be avoided?
No one wants to pay capital gains tax on a failed exchange. The safest course of action is to actually close in the 45 days following closing of the relinquished property, thereby eliminating the chance of a failed exchange. The IRS does not even require identification of replacement properties, if closed within the 45 days. TIC/DST properties can be closed within a matter of days. If you are approaching the end of the 45 day identification period without a suitable replacement property, it certainly makes sense to identify a DST/TIC property.
Regardless of where you are in the process, if you’d like assistance with finding suitable replacement property, please talk with one of our 1031 advisors.
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A TIC (Tenant in Common) property is deeded, fractional ownership interest in real estate. The basis of TICs popularity is due to the low minimum investments of most TIC properties. They can be as low as $50,000 thus providing exchangors in smaller (<$1M) exchanges access to investment-grade real estate. Typical TIC properties feature net leases with Fortune 500 tenants with the advantages of longer term leases (often as long as 10-15 years) and strong corporate tenants that are responsible for the property's taxes, insurance, utilities, maintenance, and upkeep. This leaves investors with a very passive role. Returns are predictable as they are based on the lease and are guaranteed by the tenant. This provides consistent, steady monthly income that is simply direct-deposited in exchangors' bank accounts each month. TIC properties are available through 'sponsors' (such as our sister company Realtynet Advisors) and because of their inventory-like nature, they have the ability to acquire and close on-demand.
As the name Delaware Statutory Trust or ``DST`` suggests, a trust under the state laws of Delaware owns the property and in turn each exchangor/investor owns a fractional interest in the trust. Similarly to TICs, DSTs give exchangors access to institutional-grade real estate they wouldn't otherwise have access to. One of the primary benefits to a DST is that they are completely managed by the 'sponsor' and thus completely passive investments for exchangors. The other primary benefit is that multiple properties can be held in the trust which can provide security through diversification in a single investment. Also like TIC properties, DSTs are available through sponsors and can be acquired close very quickly and easily. Many DSTs have built in financing so for exchangors with debt-replacement requirements in their exchange can satisfy their debt needs by simply acquiring their pro rata share of the debt without the hassles of having to procure financing on their own. All-in-all they're another great on-demand exchange solution.