For investors looking to defer capital gains taxes through a 1031 exchange, the journey can become more complex when dealing with properties that have mortgages. This is because Section 1031 of the U.S. Tax Code mandates that the replacement property purchased must have a value equal to or exceeding that of the relinquished property.
This stipulation requires investors to not only reinvest the net proceeds from their property sale but also to replace any mortgage debt that was settled during the sale. Given the current state of the lending market, many investors are encountering difficulties in securing the necessary financing to fulfill this debt replacement requirement.
However, there is a silver lining. Alternative solutions like investing in a Delaware Statutory Trust (DST) can provide a viable path for investors to meet their debt replacement obligations and successfully navigate their 1031 exchange. This option is dependent on meeting certain accreditation standards and ensuring suitability for the investor's financial goals.
In the past, securing a mortgage to meet the 1031 exchange debt requirement was straightforward for creditworthy borrowers. However, the landscape has changed. With major lenders tightening lending criteria, some investors are finding it difficult to access traditional mortgage loans. This makes completing a full 1031 exchange challenging.
DSTs offer a passive investment approach, where lenders interact directly with the trust. This setup allows the DST to carry the necessary debt, relieving investors from the burden of securing a loan themselves. Since the debt is pre-packaged within the investment, acquiring a portion of a DST can precisely fulfill the debt replacement requirement.
Selecting the appropriate replacement property to satisfy your debt obligations can be daunting. It's advisable to seek guidance from an experienced professional before proceeding. If you're keen on exploring further, we invite you to schedule a consultation with us.
To learn more about leveraging a 1031 exchange for tax deferral, download our free e-book today!
General Disclosure
Please note that this information is for informational purposes only and does not constitute individual investment advice. It should not be relied upon as tax or legal advice. Consult the appropriate professional regarding your individual circumstances.
Diversification does not guarantee profit or protect against loss in a declining market. It is a method used to help manage investment risk.
Investing in DST properties and real estate securities involves material risks such as liquidity, tenant vacancies, market conditions, competition, interest rate risks, and the risk of losing the entire investment principal. DST 1031 properties are available only to accredited investors and accredited entities. Verify your accredited investor status with your CPA and attorney.
Not an offer to buy, nor a solicitation to sell securities. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Any information provided is for informational purposes only. Securities offered through Arkadios Capital, member FINRA/SIPC. Advisory Services offered through Arkadios Wealth. Wealthstone Group and Arkadios are not affiliated through any ownership.