Category: 1031 Exchange General

There are many types of conventional 1031 exchanges. There are also a lot of exchange-related transactions not specifically covered by Internal Revenue Code §1031. The variety and the terminology associated with the transactions can be confusing to taxpayers. Definitions of many of the terms that follow can be the rules. In fact, recognizing that persons may wish to apply these rules to simultaneous exchanges, the preamble to the exchange Regulations provide:
The rules in the proposed Regulations, including the safe harbors, apply only to deferred (delayed) exchanges. Commentators noted that the concerns relating to actual or constructive receipt and agency also exist in the case of simultaneous exchanges. They requested that the safe harbors be made available for simultaneous exchanges. Upon review, the Service has determined it necessary to make only the qualified intermediary safe harbor available for simultaneous exchanges. The final Regulations provide, therefore, that in the case of simultaneous transfers of like-kind properties involving a qualified intermediary, the qualified intermediary will not be considered the agent of the taxpayer for purposes of section 1031 (a). Thus, in such a case the transfer and receipt of property by the taxpayer will be treated as an exchange.
Three Party Simultaneous Exchanges
Most of the points related to a two-party simultaneous exchange apply to this type of exchange as well. The primary difference with this type of exchange is that only one of the parties wishes to do an exchange and the second party has no property to transfer to the taxpayer/exchanger. However, the parties arrange so a third-party seller of a target property is identified. The second party buyer acquires the target property from the third party and exchanges that property with the taxpayer to enable the taxpayer to compete their exchange. This type of transaction also closes simultaneously with all parties at the closing table.
Delayed or Deferred Exchange
These types of exchanges are by far most common. Here the taxpayer sells to the party of choice and has 45 days to identify in writing potential replacement property and 180 days (sometimes earlier based on the due date for tax return filing) to acquire one or more of the properties identified. This type of transaction is covered by the sold to the buyer through the intermediary and bought from the seller through the intermediary. Unlike the prior types of exchanges, the sale of the old property and the acquisition of the new property are not simultaneous.
In addition, the Regulations require that the during the period between the sale and the purchase, the proceeds of the sale, i.e. the exchange funds, be held outside the actual or “constructive” receipt of the taxpayer. This can be accomplished in a number of ways, however the most common and simplest is to have the qualified intermediary hold the funds for the benefit of the client. If replacement property is not identified or is identified but not all funds are used for acquisition, all or a portion of the exchange funds are returned to the taxpayer.
Reverse Exchanges
Under the exchange Regulations, exchanges have to be completed in the proper sequence. This means the sale of the relinquished property must take place prior to the acquisition of the new or replacement property. However, on occasion the facts are such that a taxpayer must acquire the new property prior to the sale or risk losing the desired new property. This reverse sequence is often referred to as a “reverse exchange.” Since exchanges have to be done in the proper sequence, embarking on this type of transaction is more complicated than a properly sequenced forward transaction.
In September 2000 the IRS issued a 180 days to find a true buyer of the old property and the buyer’s funds make everyone whole.
Build-to-Suit or Improvement Exchange
Build-to-Suit, also known as Construction-to-Suit or Improvement Exchanges pertain to situations where a taxpayer desires to use a portion of the proceeds from the sale of the relinquished property to build on vacant new property or to make improvements to new property being acquired. Since exchanges must be “like-kind” exchanges of real estate, once the taxpayer takes ownership of the new property, any value of improvements completed is considered payment for labor and materials which is not real property and therefore not considered like-kind. This problem can be overcome with a technique which is essentially a reverse exchange.
More specifically, the exchange company affiliate can take title to the replacement property on behalf of the taxpayer and cause the desired improvements to be made while under ownership of the exchange company affiliate. Upon the earlier of 180 days or the completion of the improvements the

There are many types of conventional 1031 exchanges. There are also a lot of exchange-related transactions not specifically covered by Internal Revenue Code §1031. The variety and the terminology associated with the transactions can be confusing to taxpayers. Definitions of many of the terms that follow can be the rules. In fact, recognizing that persons may wish to apply these rules to simultaneous exchanges, the preamble to the exchange Regulations provide:
The rules in the proposed Regulations, including the safe harbors, apply only to deferred (delayed) exchanges. Commentators noted that the concerns relating to actual or constructive receipt and agency also exist in the case of simultaneous exchanges. They requested that the safe harbors be made available for simultaneous exchanges. Upon review, the Service has determined it necessary to make only the qualified intermediary safe harbor available for simultaneous exchanges. The final Regulations provide, therefore, that in the case of simultaneous transfers of like-kind properties involving a qualified intermediary, the qualified intermediary will not be considered the agent of the taxpayer for purposes of section 1031 (a). Thus, in such a case the transfer and receipt of property by the taxpayer will be treated as an exchange.
Three Party Simultaneous Exchanges
Most of the points related to a two-party simultaneous exchange apply to this type of exchange as well. The primary difference with this type of exchange is that only one of the parties wishes to do an exchange and the second party has no property to transfer to the taxpayer/exchanger. However, the parties arrange so a third-party seller of a target property is identified. The second party buyer acquires the target property from the third party and exchanges that property with the taxpayer to enable the taxpayer to compete their exchange. This type of transaction also closes simultaneously with all parties at the closing table.
Delayed or Deferred Exchange
These types of exchanges are by far most common. Here the taxpayer sells to the party of choice and has 45 days to identify in writing potential replacement property and 180 days (sometimes earlier based on the due date for tax return filing) to acquire one or more of the properties identified. This type of transaction is covered by the sold to the buyer through the intermediary and bought from the seller through the intermediary. Unlike the prior types of exchanges, the sale of the old property and the acquisition of the new property are not simultaneous.
In addition, the Regulations require that the during the period between the sale and the purchase, the proceeds of the sale, i.e. the exchange funds, be held outside the actual or “constructive” receipt of the taxpayer. This can be accomplished in a number of ways, however the most common and simplest is to have the qualified intermediary hold the funds for the benefit of the client. If replacement property is not identified or is identified but not all funds are used for acquisition, all or a portion of the exchange funds are returned to the taxpayer.
Reverse Exchanges
Under the exchange Regulations, exchanges have to be completed in the proper sequence. This means the sale of the relinquished property must take place prior to the acquisition of the new or replacement property. However, on occasion the facts are such that a taxpayer must acquire the new property prior to the sale or risk losing the desired new property. This reverse sequence is often referred to as a “reverse exchange.” Since exchanges have to be done in the proper sequence, embarking on this type of transaction is more complicated than a properly sequenced forward transaction.
In September 2000 the IRS issued a 180 days to find a true buyer of the old property and the buyer’s funds make everyone whole.
Build-to-Suit or Improvement Exchange
Build-to-Suit, also known as Construction-to-Suit or Improvement Exchanges pertain to situations where a taxpayer desires to use a portion of the proceeds from the sale of the relinquished property to build on vacant new property or to make improvements to new property being acquired. Since exchanges must be “like-kind” exchanges of real estate, once the taxpayer takes ownership of the new property, any value of improvements completed is considered payment for labor and materials which is not real property and therefore not considered like-kind. This problem can be overcome with a technique which is essentially a reverse exchange.
More specifically, the exchange company affiliate can take title to the replacement property on behalf of the taxpayer and cause the desired improvements to be made while under ownership of the exchange company affiliate. Upon the earlier of 180 days or the completion of the improvements the

There are many types of conventional 1031 exchanges. There are also a lot of exchange-related transactions not specifically covered by Internal Revenue Code §1031. The variety and the terminology associated with the transactions can be confusing to taxpayers. Definitions of many of the terms that follow can be the rules. In fact, recognizing that persons may wish to apply these rules to simultaneous exchanges, the preamble to the exchange Regulations provide:
The rules in the proposed Regulations, including the safe harbors, apply only to deferred (delayed) exchanges. Commentators noted that the concerns relating to actual or constructive receipt and agency also exist in the case of simultaneous exchanges. They requested that the safe harbors be made available for simultaneous exchanges. Upon review, the Service has determined it necessary to make only the qualified intermediary safe harbor available for simultaneous exchanges. The final Regulations provide, therefore, that in the case of simultaneous transfers of like-kind properties involving a qualified intermediary, the qualified intermediary will not be considered the agent of the taxpayer for purposes of section 1031 (a). Thus, in such a case the transfer and receipt of property by the taxpayer will be treated as an exchange.
Three Party Simultaneous Exchanges
Most of the points related to a two-party simultaneous exchange apply to this type of exchange as well. The primary difference with this type of exchange is that only one of the parties wishes to do an exchange and the second party has no property to transfer to the taxpayer/exchanger. However, the parties arrange so a third-party seller of a target property is identified. The second party buyer acquires the target property from the third party and exchanges that property with the taxpayer to enable the taxpayer to compete their exchange. This type of transaction also closes simultaneously with all parties at the closing table.
Delayed or Deferred Exchange
These types of exchanges are by far most common. Here the taxpayer sells to the party of choice and has 45 days to identify in writing potential replacement property and 180 days (sometimes earlier based on the due date for tax return filing) to acquire one or more of the properties identified. This type of transaction is covered by the sold to the buyer through the intermediary and bought from the seller through the intermediary. Unlike the prior types of exchanges, the sale of the old property and the acquisition of the new property are not simultaneous.
In addition, the Regulations require that the during the period between the sale and the purchase, the proceeds of the sale, i.e. the exchange funds, be held outside the actual or “constructive” receipt of the taxpayer. This can be accomplished in a number of ways, however the most common and simplest is to have the qualified intermediary hold the funds for the benefit of the client. If replacement property is not identified or is identified but not all funds are used for acquisition, all or a portion of the exchange funds are returned to the taxpayer.
Reverse Exchanges
Under the exchange Regulations, exchanges have to be completed in the proper sequence. This means the sale of the relinquished property must take place prior to the acquisition of the new or replacement property. However, on occasion the facts are such that a taxpayer must acquire the new property prior to the sale or risk losing the desired new property. This reverse sequence is often referred to as a “reverse exchange.” Since exchanges have to be done in the proper sequence, embarking on this type of transaction is more complicated than a properly sequenced forward transaction.
In September 2000 the IRS issued a 180 days to find a true buyer of the old property and the buyer’s funds make everyone whole.
Build-to-Suit or Improvement Exchange
Build-to-Suit, also known as Construction-to-Suit or Improvement Exchanges pertain to situations where a taxpayer desires to use a portion of the proceeds from the sale of the relinquished property to build on vacant new property or to make improvements to new property being acquired. Since exchanges must be “like-kind” exchanges of real estate, once the taxpayer takes ownership of the new property, any value of improvements completed is considered payment for labor and materials which is not real property and therefore not considered like-kind. This problem can be overcome with a technique which is essentially a reverse exchange.
More specifically, the exchange company affiliate can take title to the replacement property on behalf of the taxpayer and cause the desired improvements to be made while under ownership of the exchange company affiliate. Upon the earlier of 180 days or the completion of the improvements the

Delaware Statutory Trust Investments (DSTs) have flourished as real estate investments over the past decade. They are an outgrowth of the older Tenant-in-Common (TIC) investments but don’t have some of the burdensome requirements of a TIC investment. In particular, TIC investments require the unanimity of all the co-investors to agree on any actions and that is often difficult to achieve.
What is a Delaware Statutory Trust?
The reference to the term DST does little to describe such an investment. Rather, the term describes a simple mini-type trust that is available to establish in the business-friendly state where it originated. The use of the DST structure helps keep title clean in connection with ownership by many co-investors. It separates the investor holding title individually to holding in a new trust where the investor is the beneficial owner. The trustee of the trust can take actions on behalf of the trust beneficiaries (i.e. the DST investors/owners) which does not require agreement by all. One challenge of a DST structure is that the property cannot be refinanced after the initial loan is in place nor can a lease be revised for a single tenant property. These factors are usually dealt with before the DST formation but sometimes the issues may arise later. If so, solutions can be complicated.
Why invest in a DST?
A DST is attractive to an investor who desires access to a single property or portfolio of high value, high quality real estate asset(s) that may not otherwise be available to them due to size or service constraints. The investor receives a deeded fractional ownership in the property in a percentage based upon the equity invested. It has some characteristics of a REIT or Real Estate Investment Trust but is different, including the fact that it is often, but not always, just a single property. In addition, the owner of REIT shares holds a partnership interest in the underlying real estate investment. Partnership investments do not qualify for 1031 exchange investments, even if the underlying asset consists of real estate.
These investments generally pay quarterly an amount based upon the excess rent over the property expenses, including any mortgage payments. The rate of return varies from deal to deal based on the specifics of the property and financing. Typically, the sponsor knows the net rent that can be expected and can give the investor the anticipated return for the term of the investment. The holding period of the asset is usually 5-7 years and the investor shares in the same percentage basis the appreciation in value upon sale of the property. This can increase the overall annualized return a couple of percentage points.
The manner in which DSTs are marketed to the public have a lot of characteristics of sales of securities. Over time, the SEC decided to regulate them as actual sales of securities. So, although a DST interest retains the nature of real estate ownership, with some exceptions, they are regulated. They are typically brought to market for syndication by large well-known sponsors, although they have to be acquired through a Broker, Registered Investment Advisor or a licensed Financial Advisor. If a consumer does not have one, the sponsor will usually refer him or her to a few to work with. The broker or advisor must have an agreement in place with the sponsor and not all brokers or advisors have agreements with all sponsors. Typically, the broker or advisor will vet all offerings of the sponsors with whom they have an agreement and that level of due diligence is a benefit to the investor who is unlikely to have the wherewithal to review the investment as closely. All fees are paid by the sponsor and not the investor.
Delaware Statutory Trust Pros and Cons
DSTs are popular to people in general who generally wish to have some diversity in their investment portfolio by introducing some real estate component. People like being able to count on the specific return and appreciate not having to deal directly with tenants. They are also extremely popular with 1031 exchange investors for the same reasons but also due to the fact that it can be difficult to identify replacement property within 45 days of sale of their relinquished property and they have certainty of a closing within the applicable 180-day window. Most investments include picking up a pro-rata amount of underlying debt on the property, an important factor for 1031 exchange investors. The debt is non-recourse to the investor but allows the investor to hold new debt equal to or greater than the debt retired upon sale of the relinquished property. A DST or two make this very easy. Exchange investors also sometimes use a DST as a backup in case the primary identified property falls through or the primary property acquisition does utilizethe entire exchange value. The DST purchase can absorb the balance.
Like any investment, DSTs have risks associated with them. The sponsor does due diligence as does the back office of the broker or adviser’s firm, but so should the investor. The prospectus typically does a good job in pointing out other risks of each such individual investment. Also, they are somewhat illiquid once acquired, so the investor should be prepared to stay invested for the term of the deal.

Delaware Statutory Trust Investments (DSTs) have flourished as real estate investments over the past decade. They are an outgrowth of the older Tenant-in-Common (TIC) investments but don’t have some of the burdensome requirements of a TIC investment. In particular, TIC investments require the unanimity of all the co-investors to agree on any actions and that is often difficult to achieve.
What is a Delaware Statutory Trust?
The reference to the term DST does little to describe such an investment. Rather, the term describes a simple mini-type trust that is available to establish in the business-friendly state where it originated. The use of the DST structure helps keep title clean in connection with ownership by many co-investors. It separates the investor holding title individually to holding in a new trust where the investor is the beneficial owner. The trustee of the trust can take actions on behalf of the trust beneficiaries (i.e. the DST investors/owners) which does not require agreement by all. One challenge of a DST structure is that the property cannot be refinanced after the initial loan is in place nor can a lease be revised for a single tenant property. These factors are usually dealt with before the DST formation but sometimes the issues may arise later. If so, solutions can be complicated.
Why invest in a DST?
A DST is attractive to an investor who desires access to a single property or portfolio of high value, high quality real estate asset(s) that may not otherwise be available to them due to size or service constraints. The investor receives a deeded fractional ownership in the property in a percentage based upon the equity invested. It has some characteristics of a REIT or Real Estate Investment Trust but is different, including the fact that it is often, but not always, just a single property. In addition, the owner of REIT shares holds a partnership interest in the underlying real estate investment. Partnership investments do not qualify for 1031 exchange investments, even if the underlying asset consists of real estate.
These investments generally pay quarterly an amount based upon the excess rent over the property expenses, including any mortgage payments. The rate of return varies from deal to deal based on the specifics of the property and financing. Typically, the sponsor knows the net rent that can be expected and can give the investor the anticipated return for the term of the investment. The holding period of the asset is usually 5-7 years and the investor shares in the same percentage basis the appreciation in value upon sale of the property. This can increase the overall annualized return a couple of percentage points.
The manner in which DSTs are marketed to the public have a lot of characteristics of sales of securities. Over time, the SEC decided to regulate them as actual sales of securities. So, although a DST interest retains the nature of real estate ownership, with some exceptions, they are regulated. They are typically brought to market for syndication by large well-known sponsors, although they have to be acquired through a Broker, Registered Investment Advisor or a licensed Financial Advisor. If a consumer does not have one, the sponsor will usually refer him or her to a few to work with. The broker or advisor must have an agreement in place with the sponsor and not all brokers or advisors have agreements with all sponsors. Typically, the broker or advisor will vet all offerings of the sponsors with whom they have an agreement and that level of due diligence is a benefit to the investor who is unlikely to have the wherewithal to review the investment as closely. All fees are paid by the sponsor and not the investor.
Delaware Statutory Trust Pros and Cons
DSTs are popular to people in general who generally wish to have some diversity in their investment portfolio by introducing some real estate component. People like being able to count on the specific return and appreciate not having to deal directly with tenants. They are also extremely popular with 1031 exchange investors for the same reasons but also due to the fact that it can be difficult to identify replacement property within 45 days of sale of their relinquished property and they have certainty of a closing within the applicable 180-day window. Most investments include picking up a pro-rata amount of underlying debt on the property, an important factor for 1031 exchange investors. The debt is non-recourse to the investor but allows the investor to hold new debt equal to or greater than the debt retired upon sale of the relinquished property. A DST or two make this very easy. Exchange investors also sometimes use a DST as a backup in case the primary identified property falls through or the primary property acquisition does utilizethe entire exchange value. The DST purchase can absorb the balance.
Like any investment, DSTs have risks associated with them. The sponsor does due diligence as does the back office of the broker or adviser’s firm, but so should the investor. The prospectus typically does a good job in pointing out other risks of each such individual investment. Also, they are somewhat illiquid once acquired, so the investor should be prepared to stay invested for the term of the deal.

Delaware Statutory Trust Investments (DSTs) have flourished as real estate investments over the past decade. They are an outgrowth of the older Tenant-in-Common (TIC) investments but don’t have some of the burdensome requirements of a TIC investment. In particular, TIC investments require the unanimity of all the co-investors to agree on any actions and that is often difficult to achieve.
What is a Delaware Statutory Trust?
The reference to the term DST does little to describe such an investment. Rather, the term describes a simple mini-type trust that is available to establish in the business-friendly state where it originated. The use of the DST structure helps keep title clean in connection with ownership by many co-investors. It separates the investor holding title individually to holding in a new trust where the investor is the beneficial owner. The trustee of the trust can take actions on behalf of the trust beneficiaries (i.e. the DST investors/owners) which does not require agreement by all. One challenge of a DST structure is that the property cannot be refinanced after the initial loan is in place nor can a lease be revised for a single tenant property. These factors are usually dealt with before the DST formation but sometimes the issues may arise later. If so, solutions can be complicated.
Why invest in a DST?
A DST is attractive to an investor who desires access to a single property or portfolio of high value, high quality real estate asset(s) that may not otherwise be available to them due to size or service constraints. The investor receives a deeded fractional ownership in the property in a percentage based upon the equity invested. It has some characteristics of a REIT or Real Estate Investment Trust but is different, including the fact that it is often, but not always, just a single property. In addition, the owner of REIT shares holds a partnership interest in the underlying real estate investment. Partnership investments do not qualify for 1031 exchange investments, even if the underlying asset consists of real estate.
These investments generally pay quarterly an amount based upon the excess rent over the property expenses, including any mortgage payments. The rate of return varies from deal to deal based on the specifics of the property and financing. Typically, the sponsor knows the net rent that can be expected and can give the investor the anticipated return for the term of the investment. The holding period of the asset is usually 5-7 years and the investor shares in the same percentage basis the appreciation in value upon sale of the property. This can increase the overall annualized return a couple of percentage points.
The manner in which DSTs are marketed to the public have a lot of characteristics of sales of securities. Over time, the SEC decided to regulate them as actual sales of securities. So, although a DST interest retains the nature of real estate ownership, with some exceptions, they are regulated. They are typically brought to market for syndication by large well-known sponsors, although they have to be acquired through a Broker, Registered Investment Advisor or a licensed Financial Advisor. If a consumer does not have one, the sponsor will usually refer him or her to a few to work with. The broker or advisor must have an agreement in place with the sponsor and not all brokers or advisors have agreements with all sponsors. Typically, the broker or advisor will vet all offerings of the sponsors with whom they have an agreement and that level of due diligence is a benefit to the investor who is unlikely to have the wherewithal to review the investment as closely. All fees are paid by the sponsor and not the investor.
Delaware Statutory Trust Pros and Cons
DSTs are popular to people in general who generally wish to have some diversity in their investment portfolio by introducing some real estate component. People like being able to count on the specific return and appreciate not having to deal directly with tenants. They are also extremely popular with 1031 exchange investors for the same reasons but also due to the fact that it can be difficult to identify replacement property within 45 days of sale of their relinquished property and they have certainty of a closing within the applicable 180-day window. Most investments include picking up a pro-rata amount of underlying debt on the property, an important factor for 1031 exchange investors. The debt is non-recourse to the investor but allows the investor to hold new debt equal to or greater than the debt retired upon sale of the relinquished property. A DST or two make this very easy. Exchange investors also sometimes use a DST as a backup in case the primary identified property falls through or the primary property acquisition does utilizethe entire exchange value. The DST purchase can absorb the balance.
Like any investment, DSTs have risks associated with them. The sponsor does due diligence as does the back office of the broker or adviser’s firm, but so should the investor. The prospectus typically does a good job in pointing out other risks of each such individual investment. Also, they are somewhat illiquid once acquired, so the investor should be prepared to stay invested for the term of the deal.