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.
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.
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