Estate & Corporate Planning
1031 Exchange Funds
What is a 1031 Exchange Fund?
IRS Code Section 1031 allows the deferral of capital gains and depreciation recapture when an owner sells commercial or rental real estate if a like replacement property is identified and acquired according to certain timing and guidelines. Some firms specialize in creating funds that hold replacement properties that can satisfy these requirements when properly executed. Other firms called "Qualified Intermediaries" must be engaged as a kind of escrow to manage the transaction from start to finish. Subscribers share in a percentage of monthly income and appreciation in value.
Why use 1031 Exchange Funds?
If an owner of rental real estate or commercial property wishes to exit the role of being a landlord, but does not want to face the tax consequences, they can use one of these funds to avoid directly investing in a new property and still defer the taxes and depreciation recapture. Then their entire net proceeds can be reinvested. It can also provide an opportunity for more diversification by investing in properties that are much larger, and in geographical areas and industries that may not otherwise be available to them. Although there are several vendors who have launched thousands of these offerings successfully over many decades, they are still considered high risk investments and are available only to "accredited investors," that is, investors who meet certain minimums, such as $1M net worth independent of the property being sold or $200k individual or $300k joint spousal annual income. Under current law, if held for life, the fund will experience a "step up in basis" in the decedent's estate and avoid tax on the deferred gains from the original sale. A series of these offerings may be used in succession to continue to defer the tax and receive the income and appreciation.