Navigating the intricate process of a 1031 exchange requires a discerning eye and a willingness to engage with the specifics of the real estate market. Introduce the complexity of crossing state lines into the mix, and the picture becomes even more detailed. This extensive guide will explore the nuances of executing 1031 exchanges across state lines.

Understanding 1031 Exchanges

A 1031 exchange, named after Section 1031 of the Internal Revenue Code, is a transaction that allows an investor to defer capital gains taxes by reinvesting the proceeds from the sale of one property into another “like-kind” property. This like-kind exchange encourages economic growth by allowing investors to potentially defer taxes on selling valuable properties. The rules surrounding these exchanges are specific and must be strictly adhered to. Crossing state lines means you must impeccably execute these rules, as the environment across different states could vary significantly, leading to a higher risk of legal and financial missteps.

Investors partake in 1031 exchanges for the substantial tax benefits. Without the 1031 exchange, an investor who sells a property for more than they paid for it would face capital gains taxes on the appreciated amount. In real estate investment, where property values often skyrocket, these taxes can significantly erode an investor’s profit margin. A 1031 exchange is a potent strategic shield against such losses, allowing investors to continually invest in lucrative properties without the burden of immediate tax obligations.

The Power of Portfolio Diversification

Investors often see 1031 exchanges as valuable tools for portfolio diversification. These exchanges allow them to swap properties that have peaked in value for ones that better align with their financial goals. By moving capital between geographically diverse assets, investors can mitigate risk and react to new market opportunities.

Investments in properties across state lines can introduce tax benefits such as lower property tax rates or better financing terms due to local market conditions. By engaging in 1031 exchanges across different states, astute investors can unlock these benefits while continuing to grow their real estate empires.

But what does it mean to execute a seamless exchange when state lines are also boundaries of tax-legislative territories?

The Legal Landscape of 1031s and State Jurisdiction

Certain federal requirements govern 1031 exchanges, but state laws predominantly govern real estate transactions. The divergence between federal and state law regarding real estate transactions presents a puzzle you can solve with skill and caution.

Understanding Varying State Laws

Each state has unique regulations regarding the critical components of 1031 exchanges, including hold time, identification rules, and how to handle a 1031 going into or out of a state. For instance, California treats 1031 exchanges differently than New York, contrasting with Texas, which doesn’t have an income tax. You must understand effectively navigate these discrepancies to ensure an exchange’s integrity and the tax deferral’s legitimacy.

Legal Considerations and Risks Across State Lines

Engaging counsel familiar with the legalities of real-estate transactions in specific states is absolutely necessary. Legal risks can range from unintentional violation of state tax to complicated issues with property titles. Cross-border transactions can lead to property disputes, title defects, and zoning concerns, all of which can pose significant obstacles if you don’t adequately address them.

Investors must recognize that the legal and regulatory atmosphere can change dramatically from one state to another, and a misstep in one could lead to unfavorable consequences—including the loss of 1031 benefits. Thus, due diligence and competent legal guidance are critical to executing a 1031 exchange across state lines.

Selecting a Reputable Intermediary

A qualified intermediary (QI) holds a strategic position within 1031 exchanges. The QI facilitates the exchange, keeps the proceeds from the sale of the relinquished property, and assists in acquiring the replacement property. When state lines are crossed, the intermediary’s role becomes even more pivotal, as they’ll guide investors through the nuances of different state requirements.

Investors must diligently research and select a QI with experience in the states involved in the exchange. The QI’s understanding of local real-estate practices and tax laws can be a key determinant in the success of a cross-state 1031 exchange.

Education and Research

An informed investor is a successful investor. Each state has its intricacies, and investors must familiarize themselves with the regulations and tax codes that will affect the exchange.

The first step is to comprehend federal guidelines and the specific requirements of the states involved. This step involves researching property laws, tax codes, and recent legislative changes that may affect the exchange process.

A clear understanding of the timelines, especially the stringent 45-day identification period and the reinvestment requirement, is crucial. Misinterpreting these rules can lead to the disqualification of the exchange and the immediate imposition of capital gains taxes.

Preparation and Execution with Precision

The process of a 1031 exchange is highly structured, with rigorous deadlines and specific procedures. When you’re venturing across state lines, preparation becomes doubly important.

Successful exchange execution requires the coordination of multiple parties—including real-estate agents, property managers, and lenders—across different state jurisdictions. Clear communication and strict adherence to the timetable are non-negotiable.

One misjudged step could lead to dissolution of the entire exchange, raising the specter of immediate tax liabilities. Investors must be meticulous in their approaches, prepared for unexpected delays, and able to respond to any legal and regulatory challenges that may arise.

Addressing Common Concerns and Questions

Some common questions often pop up, so let’s explore them.

How Does Local Taxation Affect a 1031 Exchange?

State tax laws can significantly affect the financial benefits of a 1031 exchange. While the exchange defers federal capital gains tax, investors must consider how local taxation will influence their effective tax rate and overall tax liability.

Which States Are Particularly Beneficial or Punitive for 1031 Exchanges?

Certain states, such as Florida and Texas, are advantageous for 1031 exchanges due to their absence of state income taxes. Conversely, states with high property or income tax rates, such as California and New York, can diminish an exchange’s tax deferral benefits.

How Can I Mitigate the Risk of Legal Issues When Executing a Cross-State 1031 Exchange?

Engaging with qualified legal professionals who specialize in real-estate transactions within the relevant states is essential. These professionals can offer guidance, perform extensive due diligence, and ensure compliance with local laws to protect against potential legal entanglements.

What Are the Typical Costs of Executing a 1031 Exchange Across State Lines?

The costs can vary widely, but they often include legal fees, intermediary charges, and expenses related to selling and acquiring properties. Investors should create detailed budgets considering known costs and potential contingencies.

In real-estate investment, opportunity knows no boundary—but neither does the potential for complexity. A 1031 exchange across state lines is a strategic decision that can yield significant rewards, but it requires careful planning, meticulous execution, and a profound understanding of the terrain.

If you still have questions and want a reliable fiduciary to help you through this complicated process, contact Sera Capital. Our knowledgeable, reputable company understands Delaware Statutory Trusts, 1031 exchanges, and more. Go ahead and call us for your free 30-minute consultation.

Navigating the world of real-estate investment is akin to a strategic chess game, where every move has the potential to significantly affect your financial future. This analogy is particularly accurate when you’re considering the intricate interplay between asset management and tax implications. One strategic move that has garnered attention, particularly among real-estate investors, is using 721 UPREIT exchanges to defer significant taxes.

This detailed exploration dives into this method’s mechanics, advantages, and accompanying pitfalls. Continue reading to explore the pros and cons of deferring taxes with a 721 UPREIT exchange.

The 721 UPREIT Exchange, Unboxed

The 721 UPREIT (umbrella partnership real-estate investment trust) exchange is a tax-deferred strategy that allows real-estate investors to exchange their direct ownership in real estate for shares in a partnership. This partnership is generally a publicly traded REIT that functions as a tax-deferred exchange under Section 721 of the Internal Revenue Code. An REIT creates a temporary Delaware statutory trust (DST), allowing 1031 exchangers to invest or purchase in the DST under section 1031. Once the process is complete, the 1031 exchanger owns the REIT.

Grasping the foundational concept behind the 721 UPREIT exchange is vital. This transaction involves contributing property to an operating partnership in exchange for units or shares. You can transfer property values from a lump sum to smaller regular payouts. This mechanism is known for its tax-deferment advantage and its ability to enhance portfolio diversification.

The proposition of deferring capital gains tax recognition on their initial real-estate investments can entice investors. But the question remains: Does the reward outweigh the risk?

The Benefits of Deferring Taxes

Real-estate investors appreciate 721 UPREIT exchanges because of their tax mitigation strategies. So what are some of the benefits that these exchanges offer?

Immediate Tax Relief

One of the most tangible benefits of employing a 721 UPREIT exchange is the immediate relief from hefty capital gains taxes that the investor would typically incur upon the sale of a property. By converting the asset into partnership units rather than cash, investors can sidestep these taxes, effectively deferring them to a later date.

Portfolio Diversification

By converting direct real-estate holdings into a more liquid form of ownership within a REIT, investors can expand and diversify their portfolios’ scope without the burden of immediate capital gains taxation. This maneuver permits participation in real-estate markets that may have been previously inaccessible.

Enhanced Cash Flow Potential

Switching to REIT ownership can often lead to an improved cash flow, thanks to the steady distributions these trusts produce. This stable income stream can be attractive, especially for investors with a lower risk tolerance or a need for regular cash disbursements.

The Drawbacks of Tax Deferral

A 721 UPREIT exchange offers incredible advantages, but there are some disadvantages you need to know about, too.

Decreased Control Over Investments

Transitioning to a UPREIT structure means relinquishing direct control and ownership over specific real-estate assets. Decision-making authority now rests in the hands of the partnership, potentially leaving the investor at the mercy of unfamiliar management practices or strategic realignment.

Future Tax Implications

The immediate burden of capital gains tax is relieved, but it’s crucial to note that this deferral is not a permanent exclusion. The taxable gains are simply postponed until the point of sale or liquidation of the partnership shares, which could lead to an underestimation of tax liability.

Exchanging for Complexity

The 721 UPREIT exchange is not for the faint of heart, nor is it a straightforward process. Navigating the regulatory, legal, and tax landscapes associated with this transaction can be intricate, and it often necessitates the involvement of skilled tax professionals.

Case Studies and Real-World Examples

Looking at some real-world examples can help an investor decide if this is the right opportunity for them.

A Distinguished San Francisco Developer

Consider the case of a seasoned developer in San Francisco who utilized a 721 UPREIT exchange to divest a significant portion of their real-estate holdings. By converting these into partnership units, the developer realized a substantial tax deferral and further diversified their investment strategy—all while simplifying and streamlining their portfolio management.

A Multifamily Asset Manager

For the multifamily asset manager who yearns to expand their geographical footprint or asset class exposure, the 721 UPREIT exchange offers a viable path. By taking advantage of this tactic, multifamily real estate professionals could transition from a concentrated market focus to a broader national or international portfolio.

The Suburban Investor

Conversely, a suburban investor with a prefabricated portfolio heavily weighted toward local property holdings might leverage the 721 UPREIT exchange to escape the confines of a single geography, gaining access to diverse real-estate ventures across the REIT market.

Strategic Implementation and Oversight

The decision to undertake a 721 UPREIT exchange requires meticulous planning and foresight. Essential to this strategy is the establishment of investment criteria and discerning between the various REIT options available. Additionally, ongoing monitoring and reassessment are key to aligning with evolving financial goals and market conditions.

Preparing for the Exchange

Thorough due diligence is necessary to evaluating the suitability of the UPREIT structure for your particular investment scenario. This planning involves detailed financial analysis, identification of qualifying property interests, and critical introspection regarding long-term taxation and investment tolerances. Hire a 721 exchange advisor for effortless guidance through the process.

Selecting the Right REIT

The success of a 721 UPREIT exchange hinges on the selection of a REIT that aligns with your investment objectives and offers a sound financial foundation. Criteria for REIT evaluation should encompass asset quality, geographic distribution, and historical distribution performance.

Ongoing Management

Postexchange, active management and regular review of the REIT’s performance are imperative. This ongoing management includes participating in investor calls, staying apprised of company strategy, and ensuring the partnership meets your financial expectations.

End of the Game

As with any investment strategy, the 721 UPREIT exchange warrants careful consideration of its benefits against the backdrop of its complexities. It’s a strategic tool that, when wielded wisely, can confer substantial tax advantages and supportive investment opportunities.

The Verdict

After you weigh the pros and cons of deferring taxes with a 721 UPREIT exchange, the decision is ultimately yours. A 721 UPREIT exchange is an instrument ripe with potential. However, the pathway to realizing this potential requires a deep understanding of the exchange’s intricacies and a rigorous approach to tax-planning. When you’re exploring this approach, your game plan should hinge on a well-thought-out strategy encompassing thorough financial analysis, diligent investor preparation, and vigilant postexchange oversight.

For seasoned investors and first-time players alike, the counsel of a skilled tax professional is indispensable. Their expert guidance can illuminate the tax implications specific to your situation, fortifying your position on the investment board. With due diligence and foresight, the 721 UPREIT exchange can serve as a lucrative maneuver in the real-estate investment chess game, positioning you to not only defer taxes but also chart a more robust financial future. Contact Sera Capital today for your free consultation. You’ll quickly discover why we’re the best fiduciary financial advisors out there.

Are you considering using a 721 exchange UPREIT DST as an exit strategy? This move can be smart for investors transitioning from managing their own properties to selling their real estate investments. But as with any financial decision, it’s important to understand the process and potential pitfalls before moving forward. In this blog post, we’ll explore tips for effectively using 721 exchange UPREIT DSTs to achieve your investment goals.

What Is a 721 Exchange UPREIT DST?

Before diving into the tips, let’s first define a 721 exchange UPREIT DST. A 721 exchange allows investors to contribute their real estate investment, such as a rental property or commercial building, into a publicly traded real estate investment trust (REIT). The REIT then issues operating partnership units (OP units) in exchange for the contributed property. These OP units are essentially shares of the REIT and allow investors to retain ownership in the property without having to manage it themselves.

A Delaware Statutory Trust (DST) is a type of REIT commonly used in 721 exchanges. It offers several benefits for investors, including potential tax advantages and limited liability protection.

Now that we have a basic understanding of what a 721 exchange UPREIT DST is, let’s take a look at some tips for using it as an exit strategy.

Tip #1: Verify the Eligibility of the REIT or DST

Before initiating a 721 exchange, it’s essential to verify that the REIT or DST you’re considering is eligible for this type of transaction. Not all REITs or DSTs allow for 721 exchanges, and some may have specific requirements for the properties they accept. Additionally, your personal financial situation may also affect your eligibility for a 721 exchange.

Consult with a 721 exchange advisor or tax professional who has experience with 721 exchanges to ensure that you’re making the right decision. They can help you determine if a specific REIT or DST is a good fit for your investment goals and if it’s eligible for a 721 exchange. They’ll also help you work through the process and ensure you do everything correctly. Plus, an advisor will take care of all the challenging parts.

Tip #2: Understand the Tax Implications

As with any financial transaction, it’s crucial to understand the potential tax implications before moving forward. While a 721 exchange can offer tax benefits, such as deferring capital gains taxes, there may also be tax consequences to consider.

For example, if you sell your property through a 721 exchange and then later decide to sell your OP units, you may be subject to capital gains taxes. Additionally, the REIT or DST may require documentation for tax purposes, so keeping accurate records throughout the process is important.

Tip #3: Research the REIT or DST

Before investing in a specific REIT or DST through a 721 exchange, it’s essential to gain a thorough understanding of your options. This investigation includes understanding the management team, the portfolio of properties, and the overall financial health of the REIT or DST.

You should also consider the fees associated with investing in a REIT or DST. These may include upfront costs, ongoing management fees, and potential exit fees. Understanding these expenses can help you make an informed decision about whether a specific REIT or DST is right for you.

Tip #4: Be Aware of Potential Risks

As with any investment, there are potential risks associated with 721 exchange UPREIT DSTs. For example, the value of your OP units may fluctuate based on market conditions and the performance of the REIT or DST. It’s important to consider these risks carefully and ensure they align with your investment goals and risk tolerance.

Additionally, as mentioned earlier, there may be tax implications to consider both in the short-term and long-term. Make sure you understand these potential consequences before making a decision.

Tip #5: Consult With Professionals

As we’ve mentioned throughout this blog post, it’s crucial to consult with professionals who have experience with 721 exchange UPREIT DSTs. This meeting can include financial advisors, tax professionals, and real estate attorneys. These experts can help ensure that you’re making a well-informed decision and that you execute the transaction correctly.

Benefits of Using a 721 Exchange Exit Strategy

There are several advantages to using a 721 exchange UPREIT DST as an exit strategy. Explore some notable benefits below.

Diversification

You can diversify your real estate holdings by rolling your investment into a UPREIT DST. REITs often hold a variety of properties in different sectors and geographical locations, reducing the risk associated with owning a single property.

Access to Institutional-Quality Real Estate

Investing in a UPREIT DST offers the opportunity to own a share in institutional-quality real estate that may be otherwise out of reach for individual investors. This investment can include large-scale commercial properties, high-rise buildings, and other high-value assets.

No Direct Management Responsibilities

With a 721 exchange, you convert from direct property ownership to owning shares in a REIT. This conversion means you won’t have to handle the everyday tasks of property management, including maintenance, tenant issues, or rent collection.

Increased Liquidity

While direct real estate investment can be illiquid, shares in a REIT are much easier to buy and sell. This liquidity can increase your financial flexibility, particularly if you need to access your investment quickly.

Potential for Regular Income

REITs are required to distribute a high percentage of their taxable income to shareholders, usually in the form of dividends. This distribution can provide a stable income stream, which is particularly beneficial for investors seeking regular returns.

However, it’s vital to remember that while these benefits are attractive, a 721 exchange may not be the best fit for everyone. It’s crucial to consult with financial and tax professionals to determine if this strategy aligns with your overall investment goals and financial situation.

Final Thoughts

A 721 exchange UPREIT DST can be a useful tool for investors looking to exit their real estate investments without losing ownership in the property. However, it’s important to thoroughly understand the process before moving forward. A professional advisor can help you with anything you’re having a difficult time navigating. By verifying eligibility, understanding tax implications, being aware of potential risks, and consulting with professionals, you can make a well-informed decision about whether a 721 exchange UPREIT DST suits you.

1031 exchanges offer numerous benefits for investors who want to swap one real estate investment property for another. But can you turn a 1031 exchange into a joint venture? Let’s find out.

1031 Exchanges and Their Qualifications

1031 exchanges allow investors access to exceptional tax advantages and other investment portfolio perks. Under Section 1031 of the IRC, like-kind exchanges involve exchanging real properties often used as investments for other businesses or investment properties or used for similar businesses.

1031 exchanges have specific rules and timelines investors must follow. The 45-day rule involves the sale of your property, designating a replacement property, and specifying the acquired property. As for the 180-day rule, it’s a delayed exchange action related to closing. Investors must close on their new properties within 180 days of the old property sale.

LLCs, Trusts, and Partnerships

1031 exchanges can become partnerships with LLCs, trusts, and partnerships, as these entities exchange one property for another as the same entity. As such, entities don’t become starting partnerships and end up as a trust. 1031 exchanges can occur if entities relinquishing the original property become the same entity acquiring a replacement property.

Can a 1031 Become a Joint Venture?

The main question is whether a 1031 can become a joint venture. Simply put, no, it cannot. More specifically, entities must be the same throughout the 1031 exchange processes. Joint ventures can create conflicts in partnerships and LLCs, as disagreements between entities and people can occur. As such, it can become problematic if an investor wants to pursue a 1031 exchange but others don’t.

Luckily, there are solutions to get around this problem; in an instance where a partnership includes multiple people, partnerships can convert interest into real property interest. As such, the partners own the property as a tenancy in common (TIC), each owning interest portions on the property. This concept is known as a drop and swap.

Sera Capital provides 1031 exchanges for investors who want to invest in like-kind properties for business opportunities. We aid investors with highly-appreciated assets who seek guidance and support to reach their financial goals. Our Delaware Statutory Trust 1031 specialists help investors receive tax deferment on highly appreciated investments or commercial real estate. If you have any questions about our services, contact our Sera Capital professionals today.

Fiduciary consultants are individuals or organizations with the legal duty to act in the client’s best interest. They create a trustworthy bond with a client while avoiding conflicts of interest. Fiduciary financial advisors must recommend investments and other financial planning that fits their client’s needs.

The person or entity required to act as a fiduciary holds responsibilities assigned to them or holds specific roles within their line of profession. They’re necessary for their high level of trust, such as trustees owning fiduciary duties to beneficiaries or board members with specific fiduciary duties to their companies. Here’s what you should expect when hiring a fiduciary consultant.

Questions To Ask Your Fiduciary

When hiring a fiduciary consultant, you should prepare questions to guide you in the right direction regarding your financial goals. Some questions you should ask include the following:

• Where and how much money should I invest?
• When and how much money do I need?
• How much should I invest for short and long-term goals?
• Can I afford retirement?
• What is my existing net worth?

It’s best to inquire about the consultant’s profession, how they’ll work alongside you, the services they can provide, their investment philosophy, and their investment performance tracking. You don’t want to hire a fiduciary consultant on a whim.

Benefits of Fiduciary Consultants

Some benefits to expect when hiring a fiduciary consultant include full disclosure by being compliant with the rules and regulations of their governing body. They can give you access to any information that’s relevant to your investments.

Fiduciary consultants can help you increase your saving potential. They’ll prepare you for retirement by maximizing your savings through accountability, behavioral coaching, and a personalized financial strategy. Your consultant will also free up additional funds and put them toward your savings.

Finding the Right Fiduciary

When choosing a fiduciary consultant, do your research and consider your options. You’ll want to find a consultant who understands your financial situation and lifestyle. Furthermore, their personality and style should align with your interests; how they seem like on paper may not reflect them in person.

If you’re looking for a professional fiduciary consultant, we can help. Our experienced, fee-only fiduciary consultants at Sera Capital can guide you in the right direction with your highly appreciated assets for better savings and retirement goals. Schedule a 30-minute call with us today if you have any questions.

Sera Capital is a wealth management consulting firm specializing in all aspects and all available tax-efficient exit options for business owners, real estate investors, and developers. Our team works with you and your advisors to examine all available solutions, including 1031 Exchanges, Delaware Statutory Trusts, 721 UPREITS, Opportunity Zone Funds, and Section 453 Installment Sales, including Deferred Sales Trusts and Structured Installment Sales. We have two mottos. The first is “We help landlords and business owners exit tax efficiently,” and our second is “When you want out, call us in.” 

If you want to explore your options, make a no-obligation appointment with us today. Discover the possibilities.     

When investors search for alternatives to defer capital gains taxes without having a strict time frame, 721 exchanges make for an optimal choice. Also known as a UPREIT (umbrella partnership real estate investment trust), this option comes with many benefits and fulfills the needs that 1031 exchanges can’t.

However, is a 721 exchange the best option for your investments? Let’s review how 721 exchanges work, the differences between 1031 and 721 exchanges, the rules, and the various benefits that come with them. With a 721 exchange, you won’t have to think about capital gain taxes.

What Is a 721 Exchange?

721 exchanges follow the IRS code section 721, allowing investors to transfer property held in a like-kind exchange for shares in a Real Estate Investment Trust. Also referred to as a REIT, it which won’t trigger the need to pay capital gains taxes. It’s a mechanism long used by institutional investors, but individual investors are less likely to have familiarity with the concept.

Because it is an IRS-sanctioned process, investors utilize 721 tax deferred exchange to manage cash flow and then reinvest in other properties without needing direct sales taxes. Furthermore, 721 exchanges apply for consolidating multiple properties into a larger singular property. This aspect can help investors with reducing overall investment portfolio sizes.

Differences Between 1031 and 721 Exchanges

So, what are the differences between 1031 and 721 exchanges? Firstly, 1031 exchanges work for real estate investors, helping trade one investment property for another while deferring capital gains tax. Similar to 721 exchanges, the IRC (Internal Revenue Code) Section 1031 requests to find like-kind replacement assets to meet 1031 exchange qualifications. There are fundamental differences between 1031 and 721 exchanges, including ownership, liquidity, income, diversification, and responsibility.

While 721 exchanges take away ownership from investors, 1031 exchanges offer complete decision-making control, making the investor the direct owner. However, 1031s must control maintenance and management as active owners, while 721 removes those burdens. In addition, because 1031s allow investors to own investment properties, they receive regular rental incomes, while 721 exchanges earn passive income.

721 Exchange Rules To Follow

Several rules embedded in the IRS publication 721 require investors to understand how to carry out section 721 exchanges properly. The subcategories include General Rule, Special Rule, Regulations, and Transfers of Intangibles. The General Rule states that no gain or loss shall have recognition to partnerships or any involved partners. This is in cases of a contribution of property to the partnership in exchange for an interest in a partnership.

The Special Rule states that subsection (a) in the Section 721 exchange shall not apply to gain realized on property transfers to partnerships. As such, it would become treated as an investment company if parentship becomes incorporated. Regarding certain transfers to partnership, investors shall not apply to gain on property transfers to a partnership if such gain becomes includible in a person’s gross income. Lastly, the Secretary may provide regulations in the rules of paragraph (2) or Section 367. It applies to the transfer of intangible property by a United States person to a partnership. It is in the circumstances consistent with the purpose of transfers to intangibles.

Benefits of 721 Exchanges

Many benefits come with 721 exchanges. Read on to explore the various benefits that this option brings to the table.

Increased Liquidity

While real estate can typically categorize as an illiquid asset, the asset can become tied up for a substantial amount of time. However, transactions through a 721 exchange allow investors to potentially increase liquidity.

This process converts some or all the OP Units into shares of the REIT. As such, they can then become sold. However, keep in mind that it can create a taxable event.

Estate Planning

721 exchanges allow investors to pass their assets to their chosen heirs. Upon death, shares can become split equally and either remain held or liquidated by the trust’s beneficiaries. In addition, because the shares pass through a trust, beneficiaries receive a step-up in bases and defer capital gains taxes and depreciation recapture with little hassle.

Tax Advantages

When real estate sells, investors pay taxes on capital gains realized, along with depreciation recapture. As a result, this process leaves investors with less capital for their retirement.

Thankfully, 721 exchanges allow investors to defer hefty taxes through a tax-deferred exchange of appreciated real estate for shares in operating partnerships. Share in operating partnerships, also known as OP Units, which converts to REIT shares or contributed property, becomes sold by the acquiring operating partnerships.

Diversification

Because the 721 UPREIT exchanges allow investors to purchase REIT shares, REIT shareholders don’t have their interests tied up in a single asset. Instead, a REIT generally has properties in different locations, along with possibilities of having industry, asset, and tenant class diversification. Through diversification, this option can help investors manage potential risks.

Passive Investing

While property management typically associates with owning a real estate property, REIT shareholders don’t need to worry about it. Managers have responsibility for the portfolio of assets of the REIT and oversee operations. While maintaining control over acquisitions, dispositions, and distributions, investors don’t become involved in other decisions.

Potential Income

Because of the changes in the market, cash flow through rental properties can change, producing less rental income than initially anticipated. Thankfully, REITs typically pay dividends to shareholders.

Are 721 Exchanges Right for Me?

So, is a 721 exchange right for you? With the previously mentioned benefits, rules, and differences between 1031 and 721 exchanges, it can benefit you greatly. However, it can become a complicated process involving several requirements.

Thankfully, speaking to a 721 exchange advisor can help guide you in the right direction and help educate you on successfully deferring capital gains taxes. They can even help with turning a 1031 exchange into a REIT.

Sera Capital specializes in exit planning for clients selling highly appreciated real estate, concentrated stock positions, and businesses. As fiduciaries, we are not beholden to any product sponsor or institution for client solutions. Our 721 exchange advisors allow investors to transfer property held in a like-kind exchange for shares in a REIT without needing to pay capital gains taxes. For more information, reach out to our professionals today at Sera Capital for a free 30-minute phone call.

Are you considering a 1031 exchange but need help determining where to go? Here are the different types of 1031 exchanges explained.

Two-Party Simultaneous Exchange

A simultaneous exchange occurs when a replacement property and a relinquished property close on the same day. There are three ways for a simultaneous deal to occur:

• Completing a two-party trade, when two parties “swap” or exchange deeds
• An accommodating party facilitates the transaction for the exchanger in a simultaneous manner, resulting in a three-party exchange
• Using a qualified intermediary to handle the exchange process

Delayed 1031 Exchange

Another type of 1031 exchange is a delayed exchange, which is the most common. Exchangers must identify a like-kind replacement property within 45 days, then close the property within 180 days.

A delayed exchange occurs when an exchanger relinquishes the original property before acquiring a replacement property. The two timelines have a non-negotiable relationship with the Internal Revenue Service.

Reverse Exchange

A reverse exchange is when a client acquires the replacement property through an exchange accommodation titleholder before exchanging the previously owned property. In short, it means to buy first and then exchange later. They aren’t the most common because these exchanges require cash, as banks generally won’t offer loans for reverse exchanges.

There are two differences: 45 days to identify the forfeited property and 180 days to complete the sale and close the reverse 1031 exchange via purchasing a replacement. Taxpayers must choose which investment properties suit the exchange, as failure to close a forfeited property within the 180-day window will result in forfeiture of the exchange.

Construction or Improvement Exchange

When choosing the construction or improvement 1031 exchange, exchangers can improve on a target using their generated equity from the exchange. They can either refurbish, make capital improvements to existing properties, or build from the ground up. From there, these exchanges can considerably enhance the value of an acquired property.

There are three requirements if investors want to defer all gain and use it as part of the construction or improvement. Firstly, the entire exchange equity must be used on completed improvements or as a down payment by the 180th day. Additionally, the taxpayer must receive “like-kind” property that becomes identified by the 45th day. Lastly, the replacement property must have equal or greater value when deeded back to the taxpayer, along with improvements made before the taxpayer takes the title back.

When looking for a 1031 exchange, our experts at Sera Capital can help clients manage money with proper investment education, advice, and management. We focus on individuals, couples, and industry professionals learning about investments through books, videos, blogs, newsletters, and guides to overcoming investment obstacles.

Our 1031 Delaware Statutory Trust specialists developed a process that sticks to our fiduciary roots and helps clients understand the best investment options rather than steer clients towards deals with high commissions. Contact us today if you would like to know more!

The year 2017 marked a turning point in taxes—the Tax Cuts and Jobs Acts established a tax rule allowing investors to defer their capital gains taxes. In addition, it allowed them to reinvest their capital gains into Qualified Opportunity Zones via Opportunity Funds. But what exactly are Opportunity Funds, and are they right for you?

Before jumping into Opportunity Fund Zones, clients must consider long-term investment goals. Clients then select a Qualified Opportunity Fund (QOF) that aligns with said goals. This opens up opportunities for reaching your financial goals. So let’s review what Opportunity Funds and Zones are and tips for choosing the best ones for your desired financial results.

What Are Qualified Opportunity Funds and Zones?

Qualified Opportunity Funds are investment vehicles designed to invest in business developments or real estate in Opportunity Zone areas. Opportunity Zones focus on specific geographic areas designated to different economic regulations than other country or state regions. Therefore, tax incentives for investments in Opportunity Zones include potentially reduced and delayed taxes on capital gains.

Opportunity Funds came about as a part of the 2017 Tax Cuts and Jobs Act (TCJA), encouraging investment in underfunded, distressed, and low-income communities. The state must designate communities classified as Opportunity Zones, and the secretary of the US Treasury must subsequently certify them via the IRS. Then, a partnership or corporation creates an investment fund established as a Qualified Opportunity Fund by filing IRS Form 8996 with their federal income tax return. Once designated, 90 percent of the fund’s assets become invested in designated Opportunity Zones to receive preferential tax treatment.

Benefits of Qualified Opportunity Funds

Regarding the US federal tax perspective, investing in QOF provides considerable benefits. Firstly, Opportunity Zone provisions allow investors to reinvest their recently generated capital gains into a QOF within 180 days of the sale or exchange of a capital asset. This allows the investors to defer the US federal capital gain until December 31, 2026.

Additionally, if an investment goes through an investor into a QOF before December 31, 2021, capital gain tax liability reduces by 10 percent and gets recognized on December 21, 2026. Another benefit is that investors holding their interest in a QOF for 10 or more years may become permanently exempt from US federal tax on the QOF investment gains.

Steps To Invest in Qualified Opportunity Funds

Before investing in QOF, clients must follow the rules. Considering all potential implications, filling out the appropriate paperwork, and consulting a tax or financial advisor with QOF knowledge can help streamline the investment process.

Understanding Opportunity Fund Qualifications

Each Qualified Opportunity Fund facilities investments into properties or businesses within Qualified Opportunity Zones. States can nominate low-income communities as Opportunity Zones.

However, the US Treasury Department must certify the nomination. Once a location receives approval, QOFs can begin investing in businesses and properties within the Opportunity Zone for improvement.

Weigh Your OF Against Other Money Goals

It’s vital to ensure all other financial priorities take place. Clients should start by doing the following things:

• Paying all living expenses on time
• Paying down high-interest debt
• Making contributions to retirement accounts
• Funding emergency funds fully
• Planning and saving for significant purchases

Set an Opportunity Fund Target

Once clients get their finances in order, the next step is determining how large the Opportunity Fund should be. Typically, taking an initial investment and cutting it by half is a safe action for investing in an Opportunity Fund. The client can then start by earmarking in small amounts, then by adding to the fund until it’s used or the size they desire.

Decide Where and How To Deposit It

Once clients begin their Opportunity Funds, the next action to take is to decide where to keep them. Ideally, keeping them in a high-interest savings account first can help reach the target amount.

Afterward, moving the Opportunity Funds into a longer-term investment can prevent them from going to waste. In addition, there are many low-cost funds to keep the money until another investment opportunity arises.

Tips for Choosing the Right Option

So how do clients choose the right Opportunity Fund for their QOF? Let’s look at the various tips to make the process less complicated.

Review the Firm’s History

While it’s challenging to search for a fund manager’s history with QOFs, clients can look to a firm’s track record in its area of expertise. Researching qualified real estate development firms make for the best first decision due to QOFs concentrating on real estate. Questions regarding their past choices, the yield for netting investors, and their demonstration of capabilities are necessary to pivot new forms of investment and opportunities.

Understand the Firm’s Track Record

Because thousands of development tracts can qualify under federal regulation Opportunity Zones, virtually any state in the country can offer an Opportunity Zone for investment. However, it is entirely unpredictable whether funds in the zones can become invested. Therefore, only the client and the qualified financial advisor can assess the individual QOF merits.

Proven real estate development presence in particular areas is a measure of possible success. Development firms with constructed properties are more likely to fit all QOF parameters in areas of established operation. Meanwhile, real estate developers don’t have the ability to deliver opportunity zones, despite their knowledge of their local ordinances.

See How They Measure Up

One crucial aspect of choosing a qualified opportunity fund is whether new QOFs have the approval of nonprofit organizations looking to ensure the success of opportunity zones for societal betterment. A review of the National Council of State Housing Agencies (NCSHA) Opportunity Zone Directory provides clients with nonpartisan lists of who’s in the industry.

Consider the funds provided on the nonpartisans lists and conduct due diligence. The site itself doesn’t endorse qualified Opportunity Zones but comprises a digestible, comprehensive list to help clients further understand and narrow down their choices.

We at Sera Capital offer exit planning for clients focused on selling highly appreciated real estate, businesses, and concentrated stock positions. We strive to work with individuals as fiduciaries and not behold to any product sponsor or institution for client solutions. In most cases, the appropriate choice is to choose a 1301 exchange, but not all clients are the same. Our specialty Opportunity Zone investment services are alternatives to 1031 exchanges to better suit our clients’ interests. If you would like to know more about Qualified Opportunity Zone Funds, schedule a free 30-minute phone call with us at Sera Capital today.