1031 Exchanges
What is a 1031 Exchange?
A 1031 Exchange gets its name from Section 1031 of the U.S. Internal Revenue Code. It allows investors to sell a property and reinvest the proceeds in a new (like) property, deferring all capital gain taxes.
Versity 1031 Solutions
- Versity puts together 1031-eligible investments in real estate.
- Enable smaller investors to indirectly own interests in 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.
Keys to a Successful 1031
- 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.
Benefits to 1031 Exchange
- Defer capital gains taxes by reinvesting in real estate.
- Keep money potentially working on growing for you.
- Exit strategy for highly appreciated equity that may help eliminate the hassles of tenants.
1031 vs Paying the Tax
- 32% to 37% is the average tax hit factoring in state/federal capital gains recapture taxes.
- The 1031 allows investors to keep that money working and growing for them if the properties are reinvested.
- By paying the tax, an investor should consider and calculate how long it would take a new investment to make up funds paid in taxes.
- Then factor in potential returns on the new 1031 property and factor how long new investments would take to catch up.
Versity focuses on assets and the firm belief that they may be less correlated to the economy and to financial markets. The goal is to secure properties that have a track record of stable occupancy in what Versity views as steady markets.
While every property offered is different, Versity typically targets properties that are well-occupied and/or that have demonstrated stable occupancy and profitability. With today’s lower interest rates and cap rates still relatively high in certain markets, Versity believes this may be an excellent time to pursue income-oriented assets.
Versity employs a variety of strategies to potentially increase the value of a target property. In some cases, Versity may use renovations or upgrades in an attempt to increase rental rates or may simply buy and hold a property we believe to be in a higher growth market. While Versity targets appreciation in value as a high priority, appreciation tends to be speculative and market-driven, and therefore difficult to forecast or project.
Historically, most Versity properties have allowed for pass-through depreciation to investors. In these cases, Versity will provide Grantor Letters or a K-1 that help investors defer income taxes by depreciating hard assets on a preset schedule. It is our goal to continue this trend.
All real estate involves risk. Properties can be subject to market fluctuations, seasonal fluctuations, vacancy, higher-than-expected expenses, or 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 Versity offering for a more complete list of potential risk factors.
Our strategy is to be disciplined in assets that fit a carefully crafted set of criteria that can potentially help deliver on these benefits.
We look for universities that have shown consistently inclining enrollment, even during times of recession or a struggling real estate cycle.
Properties are acquired based on the net operating income in relation to the sales price. Inherently, most of the properties we buy are already profitable and producing income each month. From there, our goal is to maintain high occupancy to preserve the cash flow and do all we can to potentially increase the income through rental-rate growth, efficiency operations, etc.
With each property, we see an opportunity to potentially grow income and add value. This may be through steady rental growth in a tight market where demand is growing but supply is limited. Or, it may be a more assertive strategy where we’re initiating substantial renovations to upgrade and modernize a property.
We like properties that have demonstrated a track record of consistently high occupancy in markets where their nearest competitors have also performed well historically. Further, we try to single out properties that we feel have a sustainable competitive advantage (such as a location within walking distance to campus) that may be difficult to replicate. That way, we think the property can maintain steady performance.
A dollar saved can be a dollar earned. Real estate is unique in that it may be one of the few assets that tend to appreciate over time but that the IRS will allow depreciation to write off the usage of the property. We tend to favor property with lower land costs, written off at the 27.5-year schedule allotted by the IRS. For most of our current properties, this practice has enabled us to shelter up to 100% of the income on the majority of our assets. It’s a huge but oft-overlooked benefit.
Student Housing Strategy
Versity believes that well-positioned housing for students near campus can leverage the economic stability of a major university and cater to a demand with less volatility than the macro-economy.
Our strategy is to target the well-located properties within walking distance to growing universities that fit within our proprietary buying model. In particular, we will emphasize value-added opportunities, targeting well-located properties that can be upgraded from extensive renovations with a more contemporary look and feel.
The key will be to make cost-effective improvements that students could potentially be willing to pay a higher premium for; helping to raise rents, grow income, and appreciate property value.
1031 Risk Disclosure
- There is no guarantee that any strategy will be successful or achieve investment objectives;
- Potential for property value loss – All real estate investments have the potential to lose value during the life of the investments;
- Change of tax status – The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;
- Potential for foreclosure – All financed real estate investments have potential for foreclosure;
- Illiquidity – Because 1031 exchanges are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments.
- Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;
- Impact of fees/expenses – Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits
