DST

The Biggest and Most Common Error in 1031 Exchange

Understanding the difference between permissible and non-permissible selling expenses is difficult. The line between the two is not well defined in law or most cases. However, the consequences certainly are. In the worst case, a failed exchange. In the less extreme, “boot” for the investor to pay tax on.

However, there are enough guidelines to avoid the grey areas of an exchange.

The following are permissible and non-permissible expenses:

Permissible

  • Escrow agent, settlement agent or closing attorney fees

  • Real estate broker's commissions

  • Tax advisor fees related to the disposition or acquisition

  • Attorney fees and costs related to the disposition or acquisition

  • 1031 Exchange Qualified Intermediary fees

  • Finder fees or referral fees

  • Recording or filing fees

  • Documentary transfer taxes

  • Owner's title insurance premiums

Non-permissible

  • Financing or lender costs such as loan fees, loan points, appraisal fees, mortgage insurance premiums, lender's title insurance policy premiums, and other loan processing fees and costs

  • Insurance premium payments

  • Repairs and/or maintenance costs

  • Prorated Property taxes

  • Prorated rents

  • Security deposits

  • Payoff of credit card balances

This simple list does no justice to the potential complexities of this transaction. There is no substitute to engaging tax, legal and financial 1031 experts prior to starting your exchange. Most non-permissible items can be avoided with a properly structured deal.

Best

Josh

Need Cash? DST Should Not be the Option

Our prospective 1031 Exchange / DST clients come to us with all sorts of goals. For some folks, it is retiring. For others, it is a desire to stop managing property.  

Yet for some - it’s more simple: they need Cash.  

Needing cash for another property, business investment, or personal goal?  Selling an investment property seems to make sense.  However, many forget about the tax bill.  Seeking tax deferral, they often show up at our door looking for a solution.  

Very often DST isn’t it.  Instead, a cash-out refinance might be the better move.  

You cannot remove cash from a 1031 exchange without incurring a taxable event. This cash removed from the exchange is known as “boot”. Think about what 1031 exchange / DST is for.  It’s for a life change, it’s a tax deferral tool, and it’s a planning tool.  If your goal is short term cash, cash-out refinance of your current property may be a better move.  If you are already selling your property and need some cash from the sale, then a combo strategy might make sense. But let’s talk DST when your goals align with the solution. 

Best,

Josh