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When it comes to tax strategy, few tactics are more important for real estate investors than the 1031 exchange. It’s not uncommon for clients to ask us for help shifting out of one real estate investment and into another, so we want to take a moment to dive into 1031 exchanges. We’ll cover what they are, how they work (planning ahead is essential), and how we approach 1031 Exchanges at Quorum Private Wealth.

What is a 1031 Exchange?

A 1031 exchange can help you avoid paying capital gains taxes on an investment property, so long as you reinvest the money in a “like-kind” property.

The rule, which is named after Section 1031 of the tax code, is often referred to as a “like-kind” exchange.

Generally, these properties need to be of the same general type. That said, you may be able to swap an apartment building in the suburbs for office space downtown. You typically can’t use a 1031 exchange for a primary residence, vacation home, or if you plan to flip the house. Additionally, the properties must be in the U.S.

And, as with any tax provision, you must follow the rules closely to enjoy the benefit.

How do 1031 Exchanges work?


You must plan ahead to use a 1031 exchange—it’s not something you can file retroactively. The IRS requires you to use an intermediary and follow several rules around timing.

For example, you must identify a new property to buy within 45 days of the sale, and close on that property within the next 135 days. The intermediary holds your money between the sale of the original property and the purchase of the new asset.

The intermediary is what makes the transaction an exchange; you never take ownership of any potential profits between the sale of one asset and purchase of another.

On that note: You also want to get strategic about your sale price and the price of any new property you buy. If the new real estate is worth less than the sale of the original property, you may need to pay capital gains tax on the difference. However, there are several strategies we can look at, from a tax planning perspective, to help manage potential capital gains taxes.

Quorum Private Wealth and 1031 Exchanges

We know that 1031 Exchanges can be a powerful tax tool, but life matters more than taxes. Sometimes, clients want to sell their commercial real estate because they’re tired of the responsibility that comes with owning, or managing, property. For those folks, switching to a different type of property isn’t necessarily appealing.

We understand that sentiment and can work to accommodate clients. Consider Sam and Sally Davis,* a retired couple who were tired of managing three apartment buildings in Vermont. The assets had depreciated fully, and their cost basis was now zero, but, more importantly, the Davises wanted out of real estate management.

Selling the properties outright would have led to a substantial capital gains tax. And, while the couple had heard of 1031 Exchanges, they didn’t think they’d qualify without taking on the responsibility of another property, which they didn’t want.

After meeting with the couple, the Quorum team recommended a Delaware Statutory Trust (DST) 1031 Exchange. With this tool, property owners can use the proceeds from a commercial real estate sale to buy into a diversified fund of professionally managed commercial real estate. For the Davises, this was ideal—they maintained exposure to real estate without the responsibility of property management.

There are several companies that offer DST 1031 Exchanges, so our team worked with the Davises to identify the best fit for them—a provider that combined timing, reputation, past performance, expected yield, and service.

Keep in mind that as good as DST 1031 Exchanges sound, they can be incredibly complex.

A traditional 1031 Exchange is largely focused around two steps—selling the original property and buying a like-kind property. With a DST 1031 Exchange, there’s another step. Essentially, you purchase a specific pre-selected property. After two to four years, that property is purchased by the real estate investment trust (REIT)—it’s “up-REITed.” That transaction gives the Davises a stake in the REIT.

The Quorum team worked closely with the Davis’s tax advisors and spent time to plan ahead and make sure the couple understood the transaction. We also work to be as transparent as possible at every stage of this process.

The couple was thrilled to no longer be managing properties and, because their REIT shares are divisible and saleable, they have more options when it comes to estate planning and leaving a legacy for their family. After closing on their DST 1031 Exchange in August 2021, the couple is happily collecting yield and enjoying retirement.

Curious how Quorum may be able to help you with a 1031 Exchange? Schedule a meeting.



*We changed the couple’s name to protect their privacy.


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Tax location: What it is and why it matters

The tax surprise lurking in bonuses

The subject matter in this communication is educational only and provided with the understanding that neither Quorum Wealth nor Sanctuary Wealth is rendering legal, accounting, investment advice, or tax advice. You should consult with appropriate counsel, financial professionals, or other advisors on all matters pertaining to legal, tax, investment, or accounting obligations and requirements.