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A 1031 Exchange is a powerful tax-deferral strategy that allows real estate investors to reinvest proceeds from the sale of an investment property into another qualifying property, deferring associated taxes and preserving wealth. While many investors are familiar with the basic benefits of 1031 Exchanges, fewer fully understand their role in estate planning and passive investment opportunities like Delaware Statutory Trusts (DSTs). In this blog, we’ll explore how 1031 Exchanges can be strategically used to build and preserve wealth across generations, optimize estate planning, and provide investors with passive real estate options. Additionally, we’ll cover key considerations for Registered Investment Advisors guiding clients through the 1031 Exchange process, including tax implications, compliance requirements, and investment alternatives. 
Estate Planning 
https://www.accruit.com/blog/1031-tax-deferred-exchanges-important-esta… planning is an essential consideration for many, particularly those with large real estate holdings. One of the key benefits of a 1031 Exchange in this context is its potential to help preserve wealth across generations. 
Stepped-Up Basis Upon Inheritance 
By using a 1031 Exchange during their lifetime, individuals can continue to defer taxes, thereby allowing them to build a larger estate that will benefit from a stepped-up basis when transferred to heirs upon death. Essentially, the exchange allows Exchangers to grow their wealth, pass it down, and defer taxes on gains, sometimes indefinitely, that they would have incurred by selling the property outright. It is important to note that the stepped-up basis applies to property acquired through a 1031 Exchange that is still held at the time of the property owner’s death. 
When an individual passes away, their heirs receive inherited real estate at the fair market value as of the date of the prior owner’s death. Typically, this means that the heirs received the property with a stepped-up basis, rather than the basis of the previous owner. For individuals who have held property for many years, this adjustment can significantly reduce tax liabilities if the property is later sold by the heirs. 
Wealth Preservation 
For individuals with significant real estate investments, a 1031 Exchange provides a powerful tool for preserving wealth without having to liquidate assets and pay taxes on gains and depreciation recapture. Exchangers have the ability to reinvest the full proceeds from the sale of their Relinquished Property into other qualifying property, deferring tax liabilities that would otherwise reduce the amount of capital available for reinvestment.  
Without a 1031 Exchange, investors face a combination of taxes that could significantly devalue their proceeds: 

https://www.accruit.com/blog/what-are-capital-gains”>Federal Capital Gains Tax: 15-20%  
https://www.accruit.com/blog/what-depreciation-recapture-tax”>Depreciat… Recapture Tax: 25% 
https://www.accruit.com/blog/1031-exchanges-state-tax-law-consideration… Income Tax: If applicable, up to 13.3% 
https://www.accruit.com/blog/what-net-investment-income-tax”>Net Investment Income Tax: If applicable, 3.8% 

These taxes typically total between 25 – 35% of the proceeds, depending on an individual’s situation. For example, if the Relinquished Property is sold for $1,000,000 with an adjusted basis of $400,000 and $200,000 in prior depreciation, their total gain is $600,000. Without a 1031 Exchange, the investor could lose nearly $200,000 of their proceeds to the aforementioned taxes. In contrast, utilizing an exchange allows the full $1,000,000 to be reinvested, preserving a significantly larger portion of wealth.  
Strategic Use for Family Trusts 
For individuals looking to pass their real estate holdings to future generations through family trusts, 1031 Exchanges can help optimize the timing of asset transfers that are deemed necessary due to market issues or other circumstances that arise over time. As opposed to a taxable sale of a property no longer wanted, trusts can use 1031 Exchanges to reposition or diversify their holdings as often as necessary, thus deferring taxes, enhancing the real estate portfolio and possibly allow the estate to receive a stepped-up basis when the estate is passed down to beneficiaries. 
Exploring Passive Investment Opportunities 
While 1031 Exchanges are often associated with active real estate management, passive real estate investments are becoming increasingly popular among many investors. This is where Delaware Statutory Trusts (DSTs) come in as a powerful option. DSTs allow investors to participate in the ownership of professionally managed, commercial grade property without the need for active management.  
Delaware Statutory Trusts 
A https://www.accruit.com/blog/delaware-statutory-trusts-1031-exchange-in… Statutory Trust is a legally recognized trust that holds title to investment property. Investors in a DST receive beneficial ownership interests and share in the income and potential appreciation from the property. DSTs are structured to qualify as like-kind properties for a 1031 Exchange, making them an attractive option for clients looking for a more hands-off approach to real estate investment. (
Benefits for Investors 
DSTs offer several benefits that can align with investor goals: 

Passive Management: Since DSTs are managed by professional real estate operators, investors don’t have to worry about the day-to-day management of the property. This is ideal for those who want the benefits of real estate investment without the time commitment. 
Diversification: DSTs allow investors to pool their capital with others to invest in larger, institutional-grade properties, such as commercial real estate or apartment complexes, which may be out of reach for individual investors. 
Stable Income: Many DSTs invest in income-producing properties, offering potential for regular cash flow through rental income. This can be a stable, predictable addition to an investment portfolio. 

Key Considerations for Registered Investment Advisors When Advising Clients on 1031 Exchanges 
Registered Investment Advisors (RIAs) and other financial advisors help individuals and companies manage their finances and make investments based on their financial goals including stocks, bonds, retirement accounts, etc. Their responsibilities include providing investment strategies, asset management, and comprehensive financial planning.  
Real estate holdings represent a largely untapped area of overall wealth with over $6.4 Trillion held within investment property by US households age 55 and over. Furthermore, 90% of these investors identify as unadvised or under-advised on tax deferral strategies for their real estate investments, such as 1031 Exchanges.  
Many real estate investors fail to utilize 1031 Exchanges for tax deferral because they lack awareness of reinvestment options including passive real estate investments such as Delaware Statutory Trusts (DSTs). This creates an opportunity for advisors to establish themselves as a total wealth solution discussing not just traditional investment options, but alternative investment options including real estate.   
Discussing real estate and incorporating 1031 Exchanges into a client’s wealth strategy can greatly enhance their portfolio, helping clients preserve and grow their wealth while offering advisors the chance to serve as a comprehensive financial guide.  
For RIAs advising clients on 1031 Exchanges, understanding the rules, deadlines, and tax implications is essential to facilitating a seamless transaction. Below are critical points to keep in mind: 
Strict Deadlines and Timelines 
For a 1031 Exchange to qualify, clients must identify Replacement Property(ies) within 45 days of selling the Relinquished Property and close the purchase within a total of 180 days after the sale. Keeping track of these strict deadlines is crucial to ensuring the exchange goes smoothly and tax benefits are preserved. 
The Role of a Qualified Intermediary (QI) 
A https://www.accruit.com/blog/what-qualified-intermediary”>Qualified Intermediary (QI) is required to facilitate the 1031 Exchange process. The QI holds the proceeds from the sale of the Relinquished Property and ensures that the exchange is conducted according to IRS rules. It’s important to work with a reputable QI, such as Accruit, who has experience in handling these types of transactions. 
State Taxes 
While the IRS allows 1031 Exchanges, some states, such as https://www.accruit.com/blog/commercial-real-estate-transactions-and-10…;, have their own rules and tax treatments for such exchanges. Be sure to consider any state-level tax implications when advising clients, as these can vary. 
Depreciation and Recapture 
While 1031 Exchanges allow tax deferral, they do not eliminate depreciation recapture taxes. Clients who have depreciated the property over time may face recapture taxes on the depreciation deductions they’ve taken when they sell the property. Understanding the impact of depreciation and recapture is key to providing sound advice. 
 
Utilizing 1031 Exchanges in investment strategies can offer significant benefits for estate planning, wealth preservation, and passive investing. By understanding tax implications, timelines, and the role of QIs, investment advisors can help clients make informed decisions that align with their financial goals. Whether aiming to defer taxes, diversify investments, or secure a legacy for future generations, leveraging 1031 Exchanges can be a powerful tool in a well-rounded investment approach. 
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.  
 

A 1031 Exchange is a powerful tax-deferral strategy that allows real estate investors to reinvest proceeds from the sale of an investment property into another qualifying property, deferring associated taxes and preserving wealth. While many investors are familiar with the basic benefits of 1031 Exchanges, fewer fully understand their role in estate planning and passive investment opportunities like Delaware Statutory Trusts (DSTs). In this blog, we’ll explore how 1031 Exchanges can be strategically used to build and preserve wealth across generations, optimize estate planning, and provide investors with passive real estate options. Additionally, we’ll cover key considerations for Registered Investment Advisors guiding clients through the 1031 Exchange process, including tax implications, compliance requirements, and investment alternatives. 
Estate Planning 
https://www.accruit.com/blog/1031-tax-deferred-exchanges-important-esta… planning is an essential consideration for many, particularly those with large real estate holdings. One of the key benefits of a 1031 Exchange in this context is its potential to help preserve wealth across generations. 
Stepped-Up Basis Upon Inheritance 
By using a 1031 Exchange during their lifetime, individuals can continue to defer taxes, thereby allowing them to build a larger estate that will benefit from a stepped-up basis when transferred to heirs upon death. Essentially, the exchange allows Exchangers to grow their wealth, pass it down, and defer taxes on gains, sometimes indefinitely, that they would have incurred by selling the property outright. It is important to note that the stepped-up basis applies to property acquired through a 1031 Exchange that is still held at the time of the property owner’s death. 
When an individual passes away, their heirs receive inherited real estate at the fair market value as of the date of the prior owner’s death. Typically, this means that the heirs received the property with a stepped-up basis, rather than the basis of the previous owner. For individuals who have held property for many years, this adjustment can significantly reduce tax liabilities if the property is later sold by the heirs. 
Wealth Preservation 
For individuals with significant real estate investments, a 1031 Exchange provides a powerful tool for preserving wealth without having to liquidate assets and pay taxes on gains and depreciation recapture. Exchangers have the ability to reinvest the full proceeds from the sale of their Relinquished Property into other qualifying property, deferring tax liabilities that would otherwise reduce the amount of capital available for reinvestment.  
Without a 1031 Exchange, investors face a combination of taxes that could significantly devalue their proceeds: 

https://www.accruit.com/blog/what-are-capital-gains”>Federal Capital Gains Tax: 15-20%  
https://www.accruit.com/blog/what-depreciation-recapture-tax”>Depreciat… Recapture Tax: 25% 
https://www.accruit.com/blog/1031-exchanges-state-tax-law-consideration… Income Tax: If applicable, up to 13.3% 
https://www.accruit.com/blog/what-net-investment-income-tax”>Net Investment Income Tax: If applicable, 3.8% 

These taxes typically total between 25 – 35% of the proceeds, depending on an individual’s situation. For example, if the Relinquished Property is sold for $1,000,000 with an adjusted basis of $400,000 and $200,000 in prior depreciation, their total gain is $600,000. Without a 1031 Exchange, the investor could lose nearly $200,000 of their proceeds to the aforementioned taxes. In contrast, utilizing an exchange allows the full $1,000,000 to be reinvested, preserving a significantly larger portion of wealth.  
Strategic Use for Family Trusts 
For individuals looking to pass their real estate holdings to future generations through family trusts, 1031 Exchanges can help optimize the timing of asset transfers that are deemed necessary due to market issues or other circumstances that arise over time. As opposed to a taxable sale of a property no longer wanted, trusts can use 1031 Exchanges to reposition or diversify their holdings as often as necessary, thus deferring taxes, enhancing the real estate portfolio and possibly allow the estate to receive a stepped-up basis when the estate is passed down to beneficiaries. 
Exploring Passive Investment Opportunities 
While 1031 Exchanges are often associated with active real estate management, passive real estate investments are becoming increasingly popular among many investors. This is where Delaware Statutory Trusts (DSTs) come in as a powerful option. DSTs allow investors to participate in the ownership of professionally managed, commercial grade property without the need for active management.  
Delaware Statutory Trusts 
A https://www.accruit.com/blog/delaware-statutory-trusts-1031-exchange-in… Statutory Trust is a legally recognized trust that holds title to investment property. Investors in a DST receive beneficial ownership interests and share in the income and potential appreciation from the property. DSTs are structured to qualify as like-kind properties for a 1031 Exchange, making them an attractive option for clients looking for a more hands-off approach to real estate investment. (
Benefits for Investors 
DSTs offer several benefits that can align with investor goals: 

Passive Management: Since DSTs are managed by professional real estate operators, investors don’t have to worry about the day-to-day management of the property. This is ideal for those who want the benefits of real estate investment without the time commitment. 
Diversification: DSTs allow investors to pool their capital with others to invest in larger, institutional-grade properties, such as commercial real estate or apartment complexes, which may be out of reach for individual investors. 
Stable Income: Many DSTs invest in income-producing properties, offering potential for regular cash flow through rental income. This can be a stable, predictable addition to an investment portfolio. 

Key Considerations for Registered Investment Advisors When Advising Clients on 1031 Exchanges 
Registered Investment Advisors (RIAs) and other financial advisors help individuals and companies manage their finances and make investments based on their financial goals including stocks, bonds, retirement accounts, etc. Their responsibilities include providing investment strategies, asset management, and comprehensive financial planning.  
Real estate holdings represent a largely untapped area of overall wealth with over $6.4 Trillion held within investment property by US households age 55 and over. Furthermore, 90% of these investors identify as unadvised or under-advised on tax deferral strategies for their real estate investments, such as 1031 Exchanges.  
Many real estate investors fail to utilize 1031 Exchanges for tax deferral because they lack awareness of reinvestment options including passive real estate investments such as Delaware Statutory Trusts (DSTs). This creates an opportunity for advisors to establish themselves as a total wealth solution discussing not just traditional investment options, but alternative investment options including real estate.   
Discussing real estate and incorporating 1031 Exchanges into a client’s wealth strategy can greatly enhance their portfolio, helping clients preserve and grow their wealth while offering advisors the chance to serve as a comprehensive financial guide.  
For RIAs advising clients on 1031 Exchanges, understanding the rules, deadlines, and tax implications is essential to facilitating a seamless transaction. Below are critical points to keep in mind: 
Strict Deadlines and Timelines 
For a 1031 Exchange to qualify, clients must identify Replacement Property(ies) within 45 days of selling the Relinquished Property and close the purchase within a total of 180 days after the sale. Keeping track of these strict deadlines is crucial to ensuring the exchange goes smoothly and tax benefits are preserved. 
The Role of a Qualified Intermediary (QI) 
A https://www.accruit.com/blog/what-qualified-intermediary”>Qualified Intermediary (QI) is required to facilitate the 1031 Exchange process. The QI holds the proceeds from the sale of the Relinquished Property and ensures that the exchange is conducted according to IRS rules. It’s important to work with a reputable QI, such as Accruit, who has experience in handling these types of transactions. 
State Taxes 
While the IRS allows 1031 Exchanges, some states, such as https://www.accruit.com/blog/commercial-real-estate-transactions-and-10…;, have their own rules and tax treatments for such exchanges. Be sure to consider any state-level tax implications when advising clients, as these can vary. 
Depreciation and Recapture 
While 1031 Exchanges allow tax deferral, they do not eliminate depreciation recapture taxes. Clients who have depreciated the property over time may face recapture taxes on the depreciation deductions they’ve taken when they sell the property. Understanding the impact of depreciation and recapture is key to providing sound advice. 
 
Utilizing 1031 Exchanges in investment strategies can offer significant benefits for estate planning, wealth preservation, and passive investing. By understanding tax implications, timelines, and the role of QIs, investment advisors can help clients make informed decisions that align with their financial goals. Whether aiming to defer taxes, diversify investments, or secure a legacy for future generations, leveraging 1031 Exchanges can be a powerful tool in a well-rounded investment approach. 
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.  
 

What is a Land Trust? 
The term “Land Trust” is generally used in several different contexts, including in connection with open land conservation. However, this blog pertains to the type of land trust that is often used by people, or other legal entities, to separate the title to real estate from the beneficial ownership of the property. This separation is created by the property being deeded at the time of acquisition, or sometime thereafter, by placing title in the name of the Trustee and creating a trust instrument, a Land Trust Agreement, naming the trust beneficial owner, otherwise known as the Beneficiary. In most cases, the Trustee is a corporate trustee who is in the business of acting in this capacity and receives an annual fee for its services. In some cases, an individual is named as the Trustee. The land trust is disregarded for tax purposes, and the beneficiary of the trust receives the economic benefits and burdens of the ownership. The land trust provides certain liability protection, confidentiality of actual ownership, succession of ownership, as well as certain other benefits that users are sometimes seeking. 
Land Trust Origins 
The origins of land trusts date back to medieval times when all real estate was owned by the King but granted to noblemen who fought on behalf of the King. But when the nobleman died fighting in wars in his service to the King, the land reverted back to the King, who could dole it out to a new loyalist. Creative thinking at the time, lawyers (likely) came up with this idea of taking the land handed out and putting title under the name of a Trustee for the benefit of the nobleman. Therefore, the nobleman’s death in support of the King would not cause the property to revert since the title would not be affected by the death. The land would remain in the trust for the benefit of the named successor beneficiary(ies). Separating title from the use and benefit of the property also solved another problem in those times. When a property owner holding title did not wish the property to transfer to his first-born son up his death, which was the law at the time, the land trust allowed the initial beneficiary to name others in the family to succeed him in beneficial ownership. 
Eventually the State (the King) realized that this legal arrangement limited its important control over property ownership. In 1535, a new law was passed known as the “Statute of Uses”. Essentially, it provided that regardless of how title was held, whomever had the “use and benefit” of the property ownership was deemed the legal owner. The law applied only to passive trusts where the actual duties of the Trustee were negligible or non-existent, versus an active trust where the Trustee had true duties, decision making, etc. The passive trust was no longer legally recognized, and the Statute of Uses became part of the Common Law in England. 
The Evolution of Land Trusts in U.S. Law 
Fast forwarding to the early days of the United States, as a core body of law to follow, most states adopted the Common Law of England. In the late 1800s and again in the 1920’s, the Illinois Supreme Court reviewed a couple of trust arrangements that would in time become land trusts as we known them today. Essentially, the trust agreement before the court provided that the Trustee held legal title to the property and would take direction from the beneficiary. For all intents and purposes, the Trustee had no independence nor active responsibility. The court examined the land trust document and found the following: 

The Trustee had duty to take action upon direction from the beneficiary 
The Trustee had duty to apprise the Beneficiary of anything it received as record titleholder 
The trust term was limited to 20 years 
If the trust was still in place after 20 years, the Trustee had to hold a public sale of the property and distribute the proceeds to the Beneficiary(ies) 

Review of the facts and circumstances might lead to the conclusion that this was a passive trust, and therefore not valid. However, the Illinois Supreme Court found that these very limited duties were still enough to cause the trust to be active and, as such, valid. Over the years, many other state courts had occasion to rule on the same type of trust arrangement and for the most part found them to be passive and violated the Statute of Uses. As a result, the land trust flourished particularly in Illinois. Today, some states allow them due to case law and some under statutory authority. Below is a list of states that recognize the conventional land trust: 

Illinois 
Indiana 
Florida 
Hawaii 
Virginia 
South Dakota 

Impact of 2017 Tax Law on Land Trusts and Like-Kind Exchanges 
Prior to 2018, a like-kind exchange could take place not only for real estate, but also such things as personal property and intangibles. This included a broad range of assets, personal property included such things as machinery, equipment, aircraft and railcars, whereas examples of intangibles include fast food and hotel franchise rights and territorial product distribution rights.   
Among other things that were not permitted historically under the Code for exchange treatment included interests held under certificates of trust or beneficial interest. A holder of an interest in a land trust is considered to hold the beneficial interest and that interest in considered personal property. After signing into law, The Tax Cuts and Jobs Act (TCJA) effective January 1, 2018, Section 1031 was changed to simply allow real estate exchanges and nothing more. So, while holding a beneficial interest was never allowed, after the start of 2018, neither was a personal property interest. 
Holding interest in real estate in land trusts have always been very common. As mentioned above, among many other benefits, they are used as a form of asset protection, similar to the use of a limited liability company. At one time, there was concern by people and their advisors that an exchange might not qualify due to the fact that the Exchanger’s interest was defined as holding the beneficial interest in the trust. This led to a considerable number of people to request some clarity on the part of the IRS. This resulted in the issuance of Rev. Rul. 92-105 which stated that:  
“A taxpayer’s beneficiary interest in an Illinois land trust constitutes real property which may be exchanged for other real property without recognition of gain or loss under IRC §1031 provided that the requirements of that section are otherwise satisfied”. 
This removed any uncertainty about the qualification under §1031 for an Exchanger selling property that was held under a land trust. In addition, by deeming it “real estate,” in 2018, when “personal property” was dropped from the type of assets capable of being exchanged, this had no effect on selling out of a land trust. 
Considerations for Land Trusts in 1031 Exchanges 
The presence of a land trust holding title to a property that is being sold as Relinquished Property   in the first leg of an exchange can require extra care when administering an exchange. Technically, since the title to the property and the deed to the Buyer is in the name of the Trustee, the Trustee should also be the signer of the PSA, but this is not always the way PSAs are completed and signed in practice.   
Some of the variations in the preparation and signature on a PSA involving land trust property are: 

The PSA will reference the land trust as Seller, and it will be signed by the Land Trustee 
The PSA will reference the land trust as Seller, but it will be signed by the Beneficiary with an express reference to the Beneficiary signing in his capacity as such 
The PSA will reference the land trust as Seller and the Beneficiary will just sign on the signature line in his own name with no further reference to his capacity 
The PSA will simply show the Beneficiary as the Seller and will be signed as such (with no reference to the land trust) 

The manner of execution can pose legal risks, specifically, risks as to the contract enforceability, but that is another topic. 
When using the Qualified Intermediary safe harbor under the exchange Regulations, it is required that “…the rights of a party to the agreement are assigned to the intermediary and all parties to that agreement are notified in writing of the assignment…”.  Due to the many ways a PSA may describe the Seller and how it might be signed, the Assignment of Contract Rights and Notice need to correspond to the named party(ies) even if the title to the property is held by a land trust. When in doubt, the other selling party can be added to the documents, as it would be better to have an extra party than to leave out a necessary party. 
 
In summary, in some states, land trusts are a common way for title to real estate to be held.  Due to the origin of the land trust concept and the interpretation of various state courts they are not available in every state. Some documents effecting the real estate, like a mortgage/deed of trust, as a legal matter have to be signed by the legal titleholder (i.e. the land trust). Other documents such as contracts and leases are sometimes signed by the land trust Beneficiary directly. Ideally the document references their capacity as Beneficiary. In any event, the exchange Regulations require adherence to form which requires exchange documents to reflect parties to the PSA, notwithstanding how legal title is held.    
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.    
   

What is a Land Trust? 
The term “Land Trust” is generally used in several different contexts, including in connection with open land conservation. However, this blog pertains to the type of land trust that is often used by people, or other legal entities, to separate the title to real estate from the beneficial ownership of the property. This separation is created by the property being deeded at the time of acquisition, or sometime thereafter, by placing title in the name of the Trustee and creating a trust instrument, a Land Trust Agreement, naming the trust beneficial owner, otherwise known as the Beneficiary. In most cases, the Trustee is a corporate trustee who is in the business of acting in this capacity and receives an annual fee for its services. In some cases, an individual is named as the Trustee. The land trust is disregarded for tax purposes, and the beneficiary of the trust receives the economic benefits and burdens of the ownership. The land trust provides certain liability protection, confidentiality of actual ownership, succession of ownership, as well as certain other benefits that users are sometimes seeking. 
Land Trust Origins 
The origins of land trusts date back to medieval times when all real estate was owned by the King but granted to noblemen who fought on behalf of the King. But when the nobleman died fighting in wars in his service to the King, the land reverted back to the King, who could dole it out to a new loyalist. Creative thinking at the time, lawyers (likely) came up with this idea of taking the land handed out and putting title under the name of a Trustee for the benefit of the nobleman. Therefore, the nobleman’s death in support of the King would not cause the property to revert since the title would not be affected by the death. The land would remain in the trust for the benefit of the named successor beneficiary(ies). Separating title from the use and benefit of the property also solved another problem in those times. When a property owner holding title did not wish the property to transfer to his first-born son up his death, which was the law at the time, the land trust allowed the initial beneficiary to name others in the family to succeed him in beneficial ownership. 
Eventually the State (the King) realized that this legal arrangement limited its important control over property ownership. In 1535, a new law was passed known as the “Statute of Uses”. Essentially, it provided that regardless of how title was held, whomever had the “use and benefit” of the property ownership was deemed the legal owner. The law applied only to passive trusts where the actual duties of the Trustee were negligible or non-existent, versus an active trust where the Trustee had true duties, decision making, etc. The passive trust was no longer legally recognized, and the Statute of Uses became part of the Common Law in England. 
The Evolution of Land Trusts in U.S. Law 
Fast forwarding to the early days of the United States, as a core body of law to follow, most states adopted the Common Law of England. In the late 1800s and again in the 1920’s, the Illinois Supreme Court reviewed a couple of trust arrangements that would in time become land trusts as we known them today. Essentially, the trust agreement before the court provided that the Trustee held legal title to the property and would take direction from the beneficiary. For all intents and purposes, the Trustee had no independence nor active responsibility. The court examined the land trust document and found the following: 

The Trustee had duty to take action upon direction from the beneficiary 
The Trustee had duty to apprise the Beneficiary of anything it received as record titleholder 
The trust term was limited to 20 years 
If the trust was still in place after 20 years, the Trustee had to hold a public sale of the property and distribute the proceeds to the Beneficiary(ies) 

Review of the facts and circumstances might lead to the conclusion that this was a passive trust, and therefore not valid. However, the Illinois Supreme Court found that these very limited duties were still enough to cause the trust to be active and, as such, valid. Over the years, many other state courts had occasion to rule on the same type of trust arrangement and for the most part found them to be passive and violated the Statute of Uses. As a result, the land trust flourished particularly in Illinois. Today, some states allow them due to case law and some under statutory authority. Below is a list of states that recognize the conventional land trust: 

Illinois 
Indiana 
Florida 
Hawaii 
Virginia 
South Dakota 

Impact of 2017 Tax Law on Land Trusts and Like-Kind Exchanges 
Prior to 2018, a like-kind exchange could take place not only for real estate, but also such things as personal property and intangibles. This included a broad range of assets, personal property included such things as machinery, equipment, aircraft and railcars, whereas examples of intangibles include fast food and hotel franchise rights and territorial product distribution rights.   
Among other things that were not permitted historically under the Code for exchange treatment included interests held under certificates of trust or beneficial interest. A holder of an interest in a land trust is considered to hold the beneficial interest and that interest in considered personal property. After signing into law, The Tax Cuts and Jobs Act (TCJA) effective January 1, 2018, Section 1031 was changed to simply allow real estate exchanges and nothing more. So, while holding a beneficial interest was never allowed, after the start of 2018, neither was a personal property interest. 
Holding interest in real estate in land trusts have always been very common. As mentioned above, among many other benefits, they are used as a form of asset protection, similar to the use of a limited liability company. At one time, there was concern by people and their advisors that an exchange might not qualify due to the fact that the Exchanger’s interest was defined as holding the beneficial interest in the trust. This led to a considerable number of people to request some clarity on the part of the IRS. This resulted in the issuance of Rev. Rul. 92-105 which stated that:  
“A taxpayer’s beneficiary interest in an Illinois land trust constitutes real property which may be exchanged for other real property without recognition of gain or loss under IRC §1031 provided that the requirements of that section are otherwise satisfied”. 
This removed any uncertainty about the qualification under §1031 for an Exchanger selling property that was held under a land trust. In addition, by deeming it “real estate,” in 2018, when “personal property” was dropped from the type of assets capable of being exchanged, this had no effect on selling out of a land trust. 
Considerations for Land Trusts in 1031 Exchanges 
The presence of a land trust holding title to a property that is being sold as Relinquished Property   in the first leg of an exchange can require extra care when administering an exchange. Technically, since the title to the property and the deed to the Buyer is in the name of the Trustee, the Trustee should also be the signer of the PSA, but this is not always the way PSAs are completed and signed in practice.   
Some of the variations in the preparation and signature on a PSA involving land trust property are: 

The PSA will reference the land trust as Seller, and it will be signed by the Land Trustee 
The PSA will reference the land trust as Seller, but it will be signed by the Beneficiary with an express reference to the Beneficiary signing in his capacity as such 
The PSA will reference the land trust as Seller and the Beneficiary will just sign on the signature line in his own name with no further reference to his capacity 
The PSA will simply show the Beneficiary as the Seller and will be signed as such (with no reference to the land trust) 

The manner of execution can pose legal risks, specifically, risks as to the contract enforceability, but that is another topic. 
When using the Qualified Intermediary safe harbor under the exchange Regulations, it is required that “…the rights of a party to the agreement are assigned to the intermediary and all parties to that agreement are notified in writing of the assignment…”.  Due to the many ways a PSA may describe the Seller and how it might be signed, the Assignment of Contract Rights and Notice need to correspond to the named party(ies) even if the title to the property is held by a land trust. When in doubt, the other selling party can be added to the documents, as it would be better to have an extra party than to leave out a necessary party. 
 
In summary, in some states, land trusts are a common way for title to real estate to be held.  Due to the origin of the land trust concept and the interpretation of various state courts they are not available in every state. Some documents effecting the real estate, like a mortgage/deed of trust, as a legal matter have to be signed by the legal titleholder (i.e. the land trust). Other documents such as contracts and leases are sometimes signed by the land trust Beneficiary directly. Ideally the document references their capacity as Beneficiary. In any event, the exchange Regulations require adherence to form which requires exchange documents to reflect parties to the PSA, notwithstanding how legal title is held.    
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.    
   

What is a Land Trust? 
The term “Land Trust” is generally used in several different contexts, including in connection with open land conservation. However, this blog pertains to the type of land trust that is often used by people, or other legal entities, to separate the title to real estate from the beneficial ownership of the property. This separation is created by the property being deeded at the time of acquisition, or sometime thereafter, by placing title in the name of the Trustee and creating a trust instrument, a Land Trust Agreement, naming the trust beneficial owner, otherwise known as the Beneficiary. In most cases, the Trustee is a corporate trustee who is in the business of acting in this capacity and receives an annual fee for its services. In some cases, an individual is named as the Trustee. The land trust is disregarded for tax purposes, and the beneficiary of the trust receives the economic benefits and burdens of the ownership. The land trust provides certain liability protection, confidentiality of actual ownership, succession of ownership, as well as certain other benefits that users are sometimes seeking. 
Land Trust Origins 
The origins of land trusts date back to medieval times when all real estate was owned by the King but granted to noblemen who fought on behalf of the King. But when the nobleman died fighting in wars in his service to the King, the land reverted back to the King, who could dole it out to a new loyalist. Creative thinking at the time, lawyers (likely) came up with this idea of taking the land handed out and putting title under the name of a Trustee for the benefit of the nobleman. Therefore, the nobleman’s death in support of the King would not cause the property to revert since the title would not be affected by the death. The land would remain in the trust for the benefit of the named successor beneficiary(ies). Separating title from the use and benefit of the property also solved another problem in those times. When a property owner holding title did not wish the property to transfer to his first-born son up his death, which was the law at the time, the land trust allowed the initial beneficiary to name others in the family to succeed him in beneficial ownership. 
Eventually the State (the King) realized that this legal arrangement limited its important control over property ownership. In 1535, a new law was passed known as the “Statute of Uses”. Essentially, it provided that regardless of how title was held, whomever had the “use and benefit” of the property ownership was deemed the legal owner. The law applied only to passive trusts where the actual duties of the Trustee were negligible or non-existent, versus an active trust where the Trustee had true duties, decision making, etc. The passive trust was no longer legally recognized, and the Statute of Uses became part of the Common Law in England. 
The Evolution of Land Trusts in U.S. Law 
Fast forwarding to the early days of the United States, as a core body of law to follow, most states adopted the Common Law of England. In the late 1800s and again in the 1920’s, the Illinois Supreme Court reviewed a couple of trust arrangements that would in time become land trusts as we known them today. Essentially, the trust agreement before the court provided that the Trustee held legal title to the property and would take direction from the beneficiary. For all intents and purposes, the Trustee had no independence nor active responsibility. The court examined the land trust document and found the following: 

The Trustee had duty to take action upon direction from the beneficiary 
The Trustee had duty to apprise the Beneficiary of anything it received as record titleholder 
The trust term was limited to 20 years 
If the trust was still in place after 20 years, the Trustee had to hold a public sale of the property and distribute the proceeds to the Beneficiary(ies) 

Review of the facts and circumstances might lead to the conclusion that this was a passive trust, and therefore not valid. However, the Illinois Supreme Court found that these very limited duties were still enough to cause the trust to be active and, as such, valid. Over the years, many other state courts had occasion to rule on the same type of trust arrangement and for the most part found them to be passive and violated the Statute of Uses. As a result, the land trust flourished particularly in Illinois. Today, some states allow them due to case law and some under statutory authority. Below is a list of states that recognize the conventional land trust: 

Illinois 
Indiana 
Florida 
Hawaii 
Virginia 
South Dakota 

Impact of 2017 Tax Law on Land Trusts and Like-Kind Exchanges 
Prior to 2018, a like-kind exchange could take place not only for real estate, but also such things as personal property and intangibles. This included a broad range of assets, personal property included such things as machinery, equipment, aircraft and railcars, whereas examples of intangibles include fast food and hotel franchise rights and territorial product distribution rights.   
Among other things that were not permitted historically under the Code for exchange treatment included interests held under certificates of trust or beneficial interest. A holder of an interest in a land trust is considered to hold the beneficial interest and that interest in considered personal property. After signing into law, The Tax Cuts and Jobs Act (TCJA) effective January 1, 2018, Section 1031 was changed to simply allow real estate exchanges and nothing more. So, while holding a beneficial interest was never allowed, after the start of 2018, neither was a personal property interest. 
Holding interest in real estate in land trusts have always been very common. As mentioned above, among many other benefits, they are used as a form of asset protection, similar to the use of a limited liability company. At one time, there was concern by people and their advisors that an exchange might not qualify due to the fact that the Exchanger’s interest was defined as holding the beneficial interest in the trust. This led to a considerable number of people to request some clarity on the part of the IRS. This resulted in the issuance of Rev. Rul. 92-105 which stated that:  
“A taxpayer’s beneficiary interest in an Illinois land trust constitutes real property which may be exchanged for other real property without recognition of gain or loss under IRC §1031 provided that the requirements of that section are otherwise satisfied”. 
This removed any uncertainty about the qualification under §1031 for an Exchanger selling property that was held under a land trust. In addition, by deeming it “real estate,” in 2018, when “personal property” was dropped from the type of assets capable of being exchanged, this had no effect on selling out of a land trust. 
Considerations for Land Trusts in 1031 Exchanges 
The presence of a land trust holding title to a property that is being sold as Relinquished Property   in the first leg of an exchange can require extra care when administering an exchange. Technically, since the title to the property and the deed to the Buyer is in the name of the Trustee, the Trustee should also be the signer of the PSA, but this is not always the way PSAs are completed and signed in practice.   
Some of the variations in the preparation and signature on a PSA involving land trust property are: 

The PSA will reference the land trust as Seller, and it will be signed by the Land Trustee 
The PSA will reference the land trust as Seller, but it will be signed by the Beneficiary with an express reference to the Beneficiary signing in his capacity as such 
The PSA will reference the land trust as Seller and the Beneficiary will just sign on the signature line in his own name with no further reference to his capacity 
The PSA will simply show the Beneficiary as the Seller and will be signed as such (with no reference to the land trust) 

The manner of execution can pose legal risks, specifically, risks as to the contract enforceability, but that is another topic. 
When using the Qualified Intermediary safe harbor under the exchange Regulations, it is required that “…the rights of a party to the agreement are assigned to the intermediary and all parties to that agreement are notified in writing of the assignment…”.  Due to the many ways a PSA may describe the Seller and how it might be signed, the Assignment of Contract Rights and Notice need to correspond to the named party(ies) even if the title to the property is held by a land trust. When in doubt, the other selling party can be added to the documents, as it would be better to have an extra party than to leave out a necessary party. 
 
In summary, in some states, land trusts are a common way for title to real estate to be held.  Due to the origin of the land trust concept and the interpretation of various state courts they are not available in every state. Some documents effecting the real estate, like a mortgage/deed of trust, as a legal matter have to be signed by the legal titleholder (i.e. the land trust). Other documents such as contracts and leases are sometimes signed by the land trust Beneficiary directly. Ideally the document references their capacity as Beneficiary. In any event, the exchange Regulations require adherence to form which requires exchange documents to reflect parties to the PSA, notwithstanding how legal title is held.    
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.