1031 Exchange Overview for Student Housing

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What is a 1031 Exchange

A 1031 Exchange (a Section 1031 of the IRS Code) allows investment property owners to sell their property through an “exchange” by purchasing a “like- kind” property and defer up to 100% of the capital gains taxes which would otherwise be due upon the sale of their property.

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3 Steps to Completing a 1031 Exchange

1. Retain a Qualified Intermediary

to sell your existing property and hold the sale proceeds in escrow.

 

2. Identify a Replacement Property

from Nelson Partners within 45 days after the sale of your property.

 

3. Purchase Your Replacement Property

to complete your exchange within 180 days after the sale of your property.

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Benefits of a 1031 Exchange

Learn how investing in a 1031 property exchange can benefit you!

Defer Your Capital Gains Tax

Allows investors to defer capital gains on the sale of their real estate.

 

Monthly Cash Flow

Investors can sell a little/no income producing property (e.g. land) and purchase property(s) with greater cash flow performance (e.g. student housing).

 

Consolidation

Investors can sell smaller properties and purchase one larger property to maximize ownership benefits and reduce management responsibilities.

 

Estate Planning

Investors may continue to replace properties through consecutive 1031 exchanges, preserving profits until and estate can be passed down tax free (if under the tax cap).

Leverage

Funds saved by deferring capital gains and other taxes, investors have increased funds to purchase a larger property.

 

Increase Depreciation

Investors can exchange from a non-depreable property (e.g. land) to a property that can be depreciated (e.g. student housing).

 

Property Management Relief

Investors who no longer want to manage high-maintenance properties can reinvest in properties requiring little or no management.

 

Portfolio Diversification

Investors can expand the number or types of property in their portfolio in addition to investing in various markets and/or states.

1031 Exchange Ownership Options

You can own a 1031 property one of two ways:

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Full Ownership

Sole Owner

Buy the entire invest property and be the sole owner.

 

-OR-

Fractional Ownership

TIC: Tenant-in-Common

Investors are considered co-owners and hold a direct ownership position in the property.

DST: Delaware Statutory Trust

Investors buy an ownership interest in a trust that holds title to the property.

1031 “Like-Kind Property Types

The term “like-kind” refers to the nature or character of the property, rather than its grade or quality. The relinquished or replacement property cannot be the investors primary residence.

  • Apartment Buildings
  • Condominiums
  • Duplexes & Triplexes
  • Hotels & Motels
  • Industrial Properties
  • Office Buildings
  • Rental Resort
  • Retail Centers
  • Senior Housing
  • Single-Family Rentals
  • Student Housing
  • Vacant Land
  • Warehouses
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1031 Exchange Guidelines

The term “like-kind” refers to the nature or character of the property, rather than its grade or quality. The relinquishedor replacement property cannot be the investors primary residence.

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  • Sales proceeds must go directly to accommodator
  • 45 days from close to identify replacements
  • 3 rules for Identification: 3-property, 95%, 200%
  • 180 days from sale to close on replacement(s)
  • Must maintain the same ownership entity
  • “Upleg” must have same sales price or higher

1031 Exchange Property Identification Rules

When you identify potential replacement properties for your 1031 exchange, you must comply with one of  the following three rules or your identification will fail.

3-Property Rule

Most investors use this option. This rule allows you to identify up to three potential replacement properties regardless to their fair market value and acquire any or all of them.

200% Fair Market Value Identification Rule

An investor may identify any number of potential replacement properties as long as their combined value (purchase price) is less than 200% of the sale price of the relinquished property by the end of the identification period.

95% Rule Identification Exception

Similar to the 200% rule, the 95% rule allows your to identify any number of replacement properties without regard to price as long as you actually purchase 95% of the value you identify.

1031 Exchange Terminology

Learn the the most utilized 1031 Exchange terms that are used today.

QUALIFIED INTERMEDIARY

The entity that is hired, by the exchanger, to facilitate the exchange. This entity is often times referred to as accommodator, facilitator, or qualified intermediary.

CONSTRUCTIVE RECEIPT

This term refers to the control of proceeds by an exchanger whether the exchanger has physical possession of the funds or not. Any time the IRS can deem that the exchanger has either constructive receipt or actual possession of the funds from the sale of the Relinquished Property, then a capital gain is due to the IRS. 

RELINQUISHED PROPERTY

The property “sold” by the Exchanger. Prior to the 1991 amendment of the Section 1031 code, this was often referred to as the “down-leg” of the exchange.

IDENTIFICATION PERIOD

The period during which the exchanger must identify replacement property in the exchange. The identification period starts on the day the exchanger transfers the first relinquished property and ends at midnight on the 45th day thereafter.

EXCHANGER

The taxpayer/seller of property. This person is the party that desires to defer capital gains taxes through the use of an IRC Section 1031 Exchange. The tax code 1031 refers to this person as the Taxpayer. 

LIKE-KIND PROPERTY

This term refers to the nature or character of the property, not its grade or quality. However, real property is “like-kind” as to all other real property as long as the intent is to hold the properties for investment purposes or for productive use in a trade or business. Personal Property can also be exchanged for other personal property.

REPLACEMENT PROPERTY

The property “acquired” by the Exchanger. Prior to the 1991 amendment to Section 1031 code, this was often referred to as the “up-leg” of the exchange.

EXCHANGE PERIOD

The time period during which the exchanger must acquire replacement property. The exchange period starts on the date the exchanger transfers the first relinquished property and ends on the 180th day or the due date (including extensions). If this date falls on a weekend or a holiday, you will have to fall back to the prior business day, in which case you will have less than 180 days.

PROPER TITLE HOLDING

You must purchase and take title to your new property exactly as your old property title.

DELAYED EXCHANGE

An exchange where the closing of the relinquished property can occur up to 180 days after the closing of the replacement property.

1031 Exchange Potential Risks 

All real estate involves risk. Properties can be subject to market fluctuations, seasonal fluctuations, vacancy, higher-than-expected expenses, and other risks. In some cases this may lead to a reduction in distribution levels or even foreclosure in extreme cases. Please consult the Private Placement Memorandum (PPM) of any 1031 Exchange offering for a more complete list of potential risk factors.

Nelson Partners 1031 Exchange Solutions for Student Housing

NP puts together 1031-eligible investments in real estate.

Enable smaller investors to own institutional-grade properties.

Properties can be turnkey, with loan, price and strategy in place for potentially simpler 1031.

Eliminates the hassles of tenants for landlords.