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- I currently own investment real estate and am considering selling it. Is a 1031 exchange an investment opportunity I should consider?
- What does pre-capitalized mean, and why is it important?
- What is a like-kind property?
- I just entered into an agreement for the sale of my investment property and the amount of capital gains tax I'll owe is outrageous. Am I too late to complete a 1031 exchange?
- Is it necessary for me to locate someone to swap properties with when considering a 1031 exchange?
- Why should I consider a 1031 exchange into a FORT property?
- What are some basic 1031 exchange rules?
- How long do you have to complete a 1031 exchange?
- Are there any regulations regarding the identification of a replacement property?
- What are the benefits of investing in a FORT?
- What purchase amounts are ordinarily required for FORT investment?
- What happens if I fail to close on my 1031 exchange?
- Is FORT financing non-recourse?
- What happens to my FORT investment if I die?
- What happens at the end of the investment cycle?
- Why choose FORT Properties?
- I currently own investment real estate and am considering selling it. Is a 1031 exchange an investment opportunity I should consider?
Yes. Section 1031 represents an outstanding opportunity for taxpayers in any tax bracket to build wealth by deferring taxes. By properly completing a 1031 exchange, a taxpayer may dispose of income or investment property and acquire replacement property, thus qualifying for non-recognition of capital gain, effectively deferring capital gains when calculating their income tax. At FORT Properties, our offerings are designed to accommodate virtually any individual or institution looking to make intelligent investments in institutional quality real estate.
- What does pre-capitalized mean, and why is it important?
TIC sponsors that are pre-capitalized invest their own capital to buy the property that will be featured in the TIC investment. Because the sponsor owns the property featured in the fractional investment, the transaction is not contingent upon raising enough capital to find a "like-property" to invest in within the mandated time frame. This helps to reduce the risk of closing the transaction according to the established regulations and offers advantages to both sellers and buyers compared to sponsors that are not pre-capitalized.
- What is a like-kind property?
In a 1031 "Like-Kind" exchange a seller can exchange any real property held for investment for any other property within the United States or its possessions if the properties are held for productive use in trade or business or for investment purposes. Examples of qualified 1031 like-kind properties; any of which could be exchanged into a FORT:
Apartment building
Office building
Raw land
Unimproved property
Oil & gas rights
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Farm/ranch/orchard
Hotel
Retail space
Vacation property
Industrial property
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Examples of non like-kind properties include primary residences, stocks and bonds, notes, partnership interests, developed lots held primarily for sale and property to be resold immediately after initial purchase or completion of improvements.
- I just entered into an agreement for the sale of my investment property and the amount of capital gains tax I'll owe is outrageous. Am I too late to complete a 1031 exchange?
No, not until you close escrow on the property you are selling ("relinquished property"). You should contact a professional Qualified Intermediary (links to some of the best in the industry are provided in the Events/Links section of this website) as soon as possible to ensure that you comply with all of the proper exchange agreements and procedures.
- Is it necessary for me to locate someone to swap properties with when considering a 1031 exchange?
No. Although a swap of properties where trading parties exchange deeds, a simultaneous exchange, is recognized for non-recognition of gain treatment under section 1031, there are other options. The preferred form of exchange, the delayed (a.k.a. Starker) exchange, allows you to sell your relinquished property and locate replacement property within a prescribed timeframe. Another option is a reverse exchange where you purchase desired replacement property first and subsequently sell your relinquished property.
- Why should I consider a 1031 exchange into a FORT property?
There are several reasons to consider a 1031 exchange into a FORT property:
- Defer paying capital gains taxes from the sale of property.
- Allow the investor to hold real estate and collect monthly income without the responsibilities of property management. The lessee takes the responsibility to sublet and maintain the property allowing an individual investor to avoid most of the day-to-day management headaches.
- Upgrade or consolidate property.
- Diversify your portfolio by owning multiple properties rather than just one.
- Change property types among residential, commercial, retail, and industrial.
- What are some basic 1031 exchange rules?
The property that is being sold and the property being purchase must both be held for productive use in a trade or business or for investment purposes and thus making them "like-kind".
The proceeds from the sale must go through the hands of a qualified intermediary and not through your hands or the hands of one of your agents or the proceeds may become taxable.
The replacement property must be subject to an equal level or greater level of debt than the relinquished property or the buyer will either have to pay taxes on the amount of the decrease or have to put in additional cash funds to offset the lower level of debt in the replacement property. All the cash proceeds from the original sale must be reinvested in the replacement property - any cash proceeds that you retain may be taxable.
- How long do you have to complete a 1031 exchange?
Identification Period: Within 45 days of selling the relinquished property an investor must identify suitable replacement properties. This 45 day rule is very strict and is not extended should the 45th day fall on a Saturday, Sunday, or legal holiday.
Exchange Period: The replacement property must be received by the taxpayer within the "exchange period," which ends within 180 days after the date on which the taxpayer transfers the relinquished property, or the due date for the taxpayer tax return for the taxable year in which the transfer of the relinquished property occurs. This 180-day rule is very strict and is not extended if the 180th day should happen to fall on a Saturday, Sunday or legal holiday.
- Are there any regulations regarding the identification of a replacement property?
There are three common rules or regulations that investors should be aware of:
- 3-property rule: An investor may identify any three properties of any value as possible replacements for the relinquished property.
- 200% rule: An investor may identify any number of properties as possible replacements for the relinquished property as long as the aggregate value of those properties does not exceed 200% of the value of the relinquished property.
- 95% exemption: An investor may identify any number of properties as possible replacements for the relinquished property as long as the buyer ends up purchasing at least 95% of the aggregate value of all properties identified.
- What are the benefits of investing in a FORT?
There are several benefits to FORT's ownership:
- Access to institutional quality properties - Because ownership of institutional quality commercial properties usually requires a large amount of capital, the average investor may have a hard time entering these types of investments. Through FORT ownership institutional quality properties become easily accessible. Besides projected stable income and growth potential, FORT properties may include tenants with greater financial strength and stability than possible for the individual landlord.
- Ownership - As an alternative to sole ownership of real estate, a FORT investor can take ownership in a large commercial property along with other unrelated buyers, not as limited partners, but as individual owners.
- No On-Site Management - A FORT investor avoids the time and frustration of managing multiple tenants/properties. The investor no longer must handle all the tenants' requests and receives monthly rental income from its investment.
- Flexible Investment Amounts - In a FORT investment, you can typically purchase any amount above the minimum. For example, if you have $1,000,000 of equity from the sale of a previous property you can invest $1,000,000 or more of equity in a FORT investment.
- Diversification - A FORT investor may mitigate risk by diversifying into different properties in various marketplaces.
- Deeded Interest - A FORT investor receives a deeded interest. You can transfer this interest by gift, sale, inheritance, assignment, etc., subject to lender requirements. Such transfer does not need to coincide with the transfer of all TIC interests in the property.
- No Special Allocations - FORT investors receive monthly rental payments, sale proceeds and the depreciation tax benefits in proportion to their percentage ownership in the property.
The use of a Qualified 1031 Exchange Intermediary is essential to completing a successful 1031 exchange process. The QI performs several important functions in the 1031 exchange process including creating the exchange of properties, holding the 1031 exchange proceeds and preparing the legal documents.
- What purchase amounts are ordinarily required for a FORT investment?
Revenue Procedure 2002-22 issued by the IRS allows up to 35 TIC (Tenants-in-Common) owners in any one
property. Minimum purchase requirements are structured to meet this limitation. Acquiring an entire commercial building, typically requires a much larger dollar amount, but through FORT ownership, an individual investor with less capital may be able to enjoy ownership in an institutional-quality property. Besides projected stable income and growth potential, these properties are able to attract tenants with greater financial strength and stability than possible for the individual landlord.
- What happens if I fail to close on my 1031 exchange?
The investor attempting to complete a 1031 exchange may have to pay the capital gains taxes from the sale of the property. Failure to close is the number one reason clients end up paying capital gains. By identifying a FORT property, an investor can reduce potential tax risk, and avoid a failed exchange.
- Is FORT financing non-recourse?
FORT financing is typically non-recourse and the FORT debt structure generally allows for the debt financing being
assumed.
- What happens to my FORT investment if I die?
Ownership interest will pass to the investor's heirs just like any other asset. Check with a CPA because the estate tax code provides that the beneficiaries may also receive a stepped-up tax basis to fair-market value, but not all circumstances are alike.
- What happens at the end of the investment cycle?
Once the investment cycle ends for a FORT investment, the investor can do one of two things. One option is to roll the investment into another TIC investment or other like-kind property, and continue to defer taxes. The second option is to cash out the original investment, in which case the investor will be responsible for the capital gains taxes that had been deferred.
- Why choose FORT Properties?
The answer is as easy as PIE:
- Pre-capitalized: Eliminates risk of closing on a desired property.
- Institutional Quality: All FORT offerings reflect features and benefits associated with institutional quality assets.
- Experience: Real estate professionals with impeccable track record and unparalleled experience
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