FAQ

To accomplish a full tax deferral on the sale of rental property you must follow the IRS Section 1031 Guidelines. Corcapa 1031 Advisors recommends the following:

• Be in communication with your Corcapa 1031 Advisors representative well ahead of your proposed relinquished property sale closing date so we can begin to research and identify potential replacement property.

• Be sure to select and assign a Qualified Intermediary “QI” or Accommodator to receive the sale proceeds from escrow. Corcapa can recommend QIs for you. Be sure to research the financial backing of QIs before selecting them. Be especially careful to NOT take personal receipt of the funds or your exchange will be invalidated.

• From the day you close your relinquished property, you will have 45 days to identify your replacement property(ies). This identification must be in writing, and can follow one of three possible identification rules:

1. 3-property rule: Up to three properties are identified no matter what their value.
2. 200 percent rule: Any number of properties is identified as long as their combined fair market value (FMV) does not exceed 200% of the FMV of the relinquished properties.
3. 95 percent rule: Any number of properties are identified no matter what the aggregate FMV, provided 95% of the value of the identified properties is acquired.

• The investor must close on the identified replacement property(s) within 180 days from the close date of the relinquished property. This is an additional 135 days from the end of the 45 day period in which to close on your replacement property(ies).

• Additionally, for full tax deferral you must purchase equal or greater purchase price, equal or greater debt and reinvest all cash.

• Please review the IRS publication here for further details: https://www.irs.gov/newsroom/like-kind-exchanges-under-irc-code-section-1031

While Corcapa is happy to refer you to accommodators, we cannot provide accommodator/Qualified Intermediary services. We specialize in the replacement properties for our clients’ 1031 exchanges.

The Revenue Ruling 2004-86 issued by the IRS governs how the DST should be structured so that the real estate program is likely to fit within the guidelines of a 1031 exchange. TICs have a Revenue Procedure 2002-22 that discusses the 15 structure points TIC programs should have in order to receive a “should level” tax opinion. Corcapa works with sponsors of DST and TIC offerings who structure the offerings with a legal opinion from experienced industry attorneys for 1031 exchange purchases. We recommend that you discuss this with your tax and legal advisors and we will provide all documentation to these advisors to use in analyzing your replacement property options.

Yes, DST ownership is similar to traditional real estate ownership and the year-end tax reporting will detail your share of the depreciation expenses.

Projected cash flow begins the very next month after investment. For example, if you close on your DST purchase on August 15th, you will typically receive a distribution on September 15th for all the days you were invested in August. The October distribution would be a full month distribution for all of September and so forth. Investors can elect to receive the distributions via direct deposit or a mailed check, although almost all investors choose direct deposit. A projected cash flow of a 1031 property is not a certain or guaranteed payment and payment is not assured.

You must report an exchange to the IRS on  Form 8824, Like-Kind Exchanges and  file it with your tax return for the year in which the exchange occurred.

Form 8824 asks for:

• Descriptions of the properties exchanged
• Dates that properties were identified and transferred
• Any relationship between the parties to the exchange
• Value of the like-kind and other property received
• Gain or loss on sale of other (non-like-kind) property given up
• Cash received or paid; liabilities relieved or assumed
• Adjusted basis of like-kind property given up; realized gain

If you do not specifically follow the rules for like-kind exchanges, you may be held liable for taxes, penalties, and interest on your transactions.

Most of the DSTs have loans associated with the properties to help the clients meet the debt needs of their relinquished property. These loans are typically Non-Recourse which means the investor does not sign off on guarantees of the loan. The Lender makes a loan to the Trust, who is the sole borrower. If the Trust should ever default on the loan, the only liability is your initial investment.

We also have no debt – all cash – properties for investors who do not have debt to replace on their exchange or who simply choose to maintain an all cash DST ownership.

Some investor choose to pay the taxes on the sale of their property feeling that the tax will eventually be due so why not now. However, many investors take the “Swap Until You Drop” approach which means they will continually 1031 exchange their real estate until they pass away allowing their heirs to receive the “stepped-up” basis in value and significantly reducing or elimination any federal and state tax burden.

Yes, DST ownership is similar to traditional real estate ownership and the year-end tax reporting with your share of the depreciation expenses.

Corcapa does not provide individual tax advice but total tax can exceed 40% depending on how long the property has been owned, depreciation claimed and remaining basis. If you are a resident of a tax-free state then your tax bill is often less than 40%.

Federal Taxes:

15 – 20% tax on capital gain. Capital gain tax rate increases from 15 – 20% when Adjusted Gross Income (AGI) exceeds $418,400 per 2017 tax reform.

Or

Depreciation is taxed at 25%. The gain from sale is primarily capital gain as described above but some will be taxed at 25% federal rates.

And

3.8% Medicare Surcharge, often referred to as Obamacare tax.

State Taxes:

The gain and/or depreiation described above is also taxed by the states at the individual state level.

Corcapa strongly recommends that you discuss the actual tax bill with your tax advisor.

Investors will receive either a 1099 or Substitute 1099 or a Profit and Loss statement (PnL) that contains the information for your tax advisor to input on schedule E of the 1040 tax return. You will not receive a K-1 as K-1s report partnership income and partnerships are not eligible for 1031 exchange.

See this Inland video on understanding the tax document:  http://go.inland-investments.com/Substitute-1099-1098

Basis from the relinquished (sold) property to the replacement (new) property must be carefully tracked and calculated by your tax professional to ensure a successful 1031 exchange.

In 1031 exchange your gain is deferred until a sale occurs or there is a step up in basis.

A very simple basis can look something like this: the price you paid for the property, less depreciation claimed over the years of ownership, plus any improvements to the property, plus any additional adjustments.

One way to garner additional depreciable basis, and subsequently shelter to cash flow, is to acquire debt with leveraged DSTs. This debt brings risk that would not occur in an all cash property but the benefit is the potential shelter of income.

When the new replacement property is sold in the future (assuming no further 1031 exchange), the original deferred gain, plus any additional gain realized since the purchase of the replacement property, is subject to tax.

No. If you pay one state taxes due, then typically your home state will give you a credit on what may be owed in that state. For example, California taxes can be 9 – 13.3%. If you pay 4% tax in Colorado, then the difference would be due to the California Franchise Tax Board.

A DST is an acronym for a Delaware Statutory Trust which is fractional ownership, a separate legal entity created as a trust under the laws of Delaware in which each owner has a beneficial interest in the DST for federal income tax purposes and is treated as owning an undivided fractional interest in the property” In 2004 the IRS issued a Revenue Ruling clarifying the terms on structuring a DST investment for 1031 purposes. Please review the IRS Revenue Ruling 2004-86.

Corcapa 1031 Advisors is the California Branch Office of DAI Securities, LLC and is currently registered to do business in 40 states. We broker your DST transaction but are not the sponsor.

The Sponsor is the real estate firm that has sourced and structured the DST investment and will serve as the property manager (if not outsourced) and the asset manager. The sponsor will send the quarterly reporting, host conference calls about property performance and send year-end tax information.

An accredited investor is an individual, or Revocable Living Trust, with a net worth of at least $1,000,000 (excluding the equity in your home) OR net income the last two years of $200,000 or greater ($300,000 if joint income with spouse) with an expectation of equal or greater earnings in the current year.

Entities such as Corporations and LLCs require a $5,000,000 minimum net worth or you can do a “pass-thru” test to qualify if all the individual members of the entity are accredited with a net worth of at least $1,000,000 (excluding the equity in your home) OR net income the last two years of $200,000 or greater ($300,000 if joint income with spouse) with an expectation of equal or greater earnings in the current year.

Irrevocable Living Trusts must have at least $5,000,000 gross net worth.

To accomplish a full tax deferral on the sale of rental property you must follow the IRS Section 1031 Guidelines. Corcapa 1031 Advisors recommends the following:

• Be in communication with your Corcapa 1031 Advisor representative well ahead of your proposed relinquished property closing so we can begin to research and identify potential replacement property.
• Be sure to select and assign a Qualified Intermediary “QI” or Accommodator to receive the sale proceeds from escrow. Corcapa can recommend QIs for you. Be sure to research the financial backing of QIs before selecting them. Be especially careful to NOT take personal receipt of the funds or your exchange will be invalidated.
• From the day you close your relinquished property, you will have 45 days to identify your replacement property(ies) and can use one of three rules: The three property ID rule, the 200% rule, or the 95% rule.
• You have an additional 135 days from the end of the 45 day period in which to close on your replacement property(ies).
• Additionally, for full tax deferral you must purchase equal or greater purchase price, equal or greater debt and reinvest all cash.

The Revenue Ruling 2004-86 issued by the IRS governs how the DST should be structured so that the real estate program is likely to fit within the guidelines of a 1031 exchange. TICs have a Revenue Procedure 2002-22 that discusses the 15 structure points TIC programs should have in order to receive a “should level” tax opinion. Corcapa works with sponsors of DST and TIC offerings who structure the offerings with a legal opinion from experienced industry attorneys for 1031 exchange purchases. We recommend that you discuss this with your tax and legal advisors and we will provide all documentation to these advisors to use in analyzing your replacement property options.