200% Rule

(One of three replacement property identification rules)

The Exchanger may identify more than three properties, but the total fair market value of what is identified cannot exceed 200% of the fair market value of the relinquished property.

45 day Identification period (the 45 day rule)

The exchanger must identify all potential replacement property within the first 45 days of the 180 day exchange period.

Delaware Statutory Trust (DST)

A Delaware Statutory Trust is a separate legal entity created as a trust under Delaware statutory law. (DST) 1031 exchange is a purchase by an investor of beneficial interests in the Trust. Where the investor receives a Certificate of Beneficial Interests. Bankruptcy creditors of the beneficiaries cannot reach the DST’s property. The Trustees have powers with respect to the real estate operations and the holders of the beneficial interests have no powers. Each PPM contains a legal opinion discussing the structure and its compliance with IRS Revenue Proclamation 2004-86 which dictates the requirements necessary to satisfy IRS’s ruling.

IRC SECTION 1031

Section 1031 of the Internal Revenue Code allows an owner of investment property to exchange property and defer paying federal and state capital gain taxes (15-20%+ applicable state taxes) and taxes on gain from depreciation (25%) and the Obama Care tax (3.8%) when required if they purchase a “like-kind” property following the rules and regulations of the Internal Revenue Code. This allows investors to use all of their proceeds from their sale to leverage into more valuable real estate, potentially increase cash flow, diversify into other properties, reduce management or consolidate into one property.

Non-recourse leverage

A loan where the note holder can only look to the property for security if his note is not paid. Non-recourse does not protect the payer of the note from fraud.

Private Placement Memorandum (PPM)

Private Placements are exempt from registration under the Securities Act of 1933 and most are offered under Regulation D. The offering memorandum for a property includes disclosures of information obtained from the issuer including the nature, character, and risk factors relating to the offering. It is prepared by legal counsel from information provided by the issuer.

Qualified Intermediary (Accommodator, Facilitator)

Qualified Intermediary prepares the necessary documentation, holds and protects the exchange proceeds and oversees each closing.

Risks

Clients should keep in mind the following possible risks:

  • Potential for property value loss.
  • Possible change in tax status.
  • Potential for lack of disclosure.
  • Illiquidity.
  • Potential reduction or elimination of monthly cash flow distributions.
  • Adverse impact of fees and expenses.
  • Loss of management control.

Sponsor (or the Manager)

The Sponsor is an entity that offers to Exchange a DST interest in real property to complete their exchange. The Sponsor has either placed the property under contract, built it or purchased it for an exchange. If a purchase, before committing to the purchase the Sponsor analyzes leases, ascertains structural soundness, assesses deferred maintenance and conducts in depth studies of market trends, demographics and tenant needs to determine whether or not the property is a desirable investment purchase. The Sponsor secures non-recourse financing, prepares a Private Placement Memorandum and after acquisition manages the property.

The 180 Day Exchange Period

The Exchanger must identify the potential replacement property (ies) within the first 45 days of the 180 day Exchange Period.

Three Property Rule

The Exchanger may identify up to three properties of any value.