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9 Important Things To Know About The California IRS 1031 Exchange Tax Extension

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The California IRS 1031 Exchange Tax Extension will end on October 16, 2023. To help you remain prepared, we have assembled together a list of commonly asked questions and answers. It is recommended to consult with your CPA/tax professional regarding the IRS Natural Disaster Extension prior to making any decisions. 

Table of Contents

1. Did you sell a rental or investment property earlier this year?

If you sold a rental or investment property in California earlier this year and you had the funds sent to an Exchange Accommodator/Qualified Intermediary, you may still be eligible to utilize a 1031 exchange thanks to the IRS California Natural Disaster Deadline Extensions.

A 1031 exchange could allow you to defer all applicable taxes from the sale of your property (federal and state capital gains, depreciation recapture and when applicable the NIIT tax of 3.8% on investment assets sold over $450k).

Please refer to the IRS website for more information regarding the California announcement.

2. When do monies need to be in the proper account?

Typically, 1031 exchanges have a 45-day ID window and a 180-day timeframe to complete the replacement/close on new assets. The current Natural Disaster Extensions have extended those deadlines in California to October 16th, 2023.

For additional guidance on timing, consult your CPA/tax professional and see the IPX (a Fidelity family company) guidelines on IRS Natural Disaster timing.

3. Can I choose any real estate investment to identify?

Yes.

The replacement rules do allow for any like-for-like, real estate for real estate, transactions to qualify for replacement. This includes purchasing interest in a Delaware Statutory Trust, or DST. 

Versity Invest has recently introduced an increased yield enhancement feature from 4% to 6.5% for two of their DST offerings. 

4. Can I identify more than one replacement/DST option?

Yes. When identifying a replacement or replacements, be sure to utilize either the 95%, 3 property, or 200% rules and have the ID Letter on file with your QI prior to your 1031 ID deadline. Think of this ID Letter as a ‘shopping list’ of sorts; after your deadline you may only successfully 1031 exchange with those properties listed/identified – any other property purchase will not qualify for 1031 exchange/successfully defer taxes. To learn more about identifying 1031 exchange properties, consider referring to this guide from IPX 1031.

5. What are the pros and cons of a DST replacement property?

Pros: As a beneficial owner, many DST investors enjoy regular income without the day-to-day headaches of property management that come with the ‘toilets, trash, and tenants’ of regular ownership. Similarly, as DST ownership interest qualifies in a 1031 exchange, remaining tax deferred can be a powerful investing tool in an investor’s toolkit.

Cons: Traditionally, DST interests are illiquid, costly, and come with no voting or controlling interest. Similarly, they can lose investor funds and come with their own real estate and securities risks.

6. What happens if I don’t identify a replacement property by 10/16?

Failure to fully replace a relinquished (sold) property, or identify its replacement, by October 16th may very well negate your ability to successfully conduct a 1031 exchange, resulting in some or all taxes owed.

When identifying a replacement or replacements in your ID Letter, be sure to utilize either the 95%, 3 property, or 200% rule.

To learn more about identifying 1031 exchange properties, consider referring to this guide from IPX 1031.

7. Do I have to replace my debt in a 1031 exchange?

Yes.

The 1031 exchange requires you to replace any existing debt from the relinquished property; failure to do so may result in taxable debt ‘boot’ (funds that are taxable).

If you are purchasing a new property to replace the relinquished, be sure to know your LTV (loan-to-value) ratio and have a new loan/mortgage on the new asset that meets the LTV ratio.

8. Can I replace debt without taking out a new loan/mortgage?

Yes.

When utilizing a DST property that already has debt on it, investors may participate in the debt of the DST without having to apply/take out a loan of their own, keeping the liability off their personal balance sheet.

9. Do I have to pay taxes when I 1031 exchange?

No, not in a full replacement.

Partial replacements may result in equity or debt ‘boot’ scenarios wherein you may still owe some taxes.

1031 Exchanges and deadlines utilize IRS tax code and as such you should always consult a tax professional prior to any tax decisions. This content is not intended to offer tax advice and is not an offer to buy or sell
securities.

Kevin Kensinger

Senior Vice President, Operations and Internal Sales Manager

Offering Disclosure:
The contents of this communication: (i) do not constitute an offer of securities or a solicitation of an offer to buy securities, (ii) offers can be made only by the confidential Private Placement Memorandum (the “PPM”) which is available upon request, (iii) do not and cannot replace the PPM and is qualified in its entirety by the PPM, and (iv) may not be relied upon in making an investment decision related to any investment offering by an issuer, or any affiliate, or partner thereof (“Issuer”). All potential investors must read the PPM and no person may invest without acknowledging receipt and complete review of the PPM. With respect to any “targeted” goals and performance levels outlined herein, these do not constitute a promise of performance, nor is there any assurance that the investment objectives of any program will be attained. All investments carry the risk of loss of some or all of the principal invested. These “targeted” factors are based upon reasonable assumptions more fully outlined in the Offering Documents/ PPM for the respective offering. Consult the PPM for investment conditions, risk factors, minimum requirements, fees and expenses and other pertinent information with respect to any investment. These investment opportunities have not been registered under the Securities Act of 1933 and are being offered pursuant to an exemption therefrom and from applicable state securities laws. All offerings are intended only for accredited investors unless otherwise specified. Past performance are no guarantee of future results. All information is subject to change. You should always consult a tax professional prior to investing. Investment offerings and investment decisions may only be made on the basis of a confidential private placement memorandum issued by Issuer, or one of its partner/issuers. Issuer does not warrant the accuracy or completeness of the information contained herein. Thank you for your cooperation.

Securities offered through Wealthforge, LLC Member: FINRA/SIPC. Only available in states whereWealthforge, LLC is registered. Wealthforge is not affiliated with any other entities identified in this communication.

Real Estate Risk Disclosure:
  • There is no guarantee that any strategy will be successful or achieve investment objectives including, among other things, profits, distributions, tax benefits, exit strategy, etc.;
  • 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;
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  • 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;
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