Completing a 1031 exchange is not a “go it alone” process and investors need to take the time to assemble the right team to ensure the likelihood of a successful outcome. Having completed my first 1031 exchange while still in my teens and assisting many thousands of clients to successfully complete their exchanges since founding First Guardian Group, I would like to offer my suggestions on the key positions that I would plan to fill.
An experienced real estate agent or broker who understands investment properties.
The first step in planning for the sale of your rental property is to determine the potential net proceeds and begin the process of exploring reinvestment options. You should engage an agent/broker with substantial prior experience in working with investors, assisting with 1031 exchanges, and helping you assess potential new investments. Ideally, that person personally owns investment properties and has completed their own 1031 exchanges.
A Real Estate Tax Advisor
Since the objective of completing a 1031 exchange is to defer paying taxes, investors need to know their potential tax liability to plan the next steps. The tax liability on the sale of investment properties can range to as high as 40% of the gain – however, there may be factors that can reduce the overall liability and possibly even lead to a conclusion that a 1031 may not be needed. Even if you do your own taxes, we highly recommend that you engage a knowledgeable real estate tax specialist to help you better understand your options.
Closing Agent
An experienced closing agent will assist with developing a closing statement, ensuring that all documentation has been correctly completed, and disbursing funds. The closing process for a 1031 exchange can be complex and you want a solid lead person that you can count on to deliver flawless execution.
Qualified Intermediary
To complete a 1031 exchange, you will need to hire a Qualified Intermediary (QI) or Accommodator to receive and hold funds from your sale until you identify and reinvest funds in qualifying new properties. The ideal QI will know the current rules that you will need to follow for a successful exchange, help prepare and file the necessary documents, and alert you to any potential issues that might impact your exchange.
Experienced Real Estate Attorney
While many of our clients’ complete successful exchanges without an attorney, we recommend at least identifying one who may be able to advise any gray areas or in areas involving estate planning. Remember that an attorney is the only person on your team that is allowed to give legal advice.
Engaging in a 1031 exchange using a Delaware Statutory Trust (DST) requires you to work with several additional key players. Here’s a closer look at the “who’s who” of DST 1031 exchanges.
Registered Representative
A DST is a regulated security that can only be acquired through a properly licensed person or entity which is commonly referred to as a registered representative. These are securities professionals who hold licenses (e.g., Series 7, 63, or 22) and who must complete ongoing educational training that allows them to sell DST properties to qualified investors. While any professional with the appropriate licenses can sell a DST, it’s often best to work with one who specializes in these types of investments. Similar to selecting an ideal real estate agent/broker, we think it is best to work with a registered representative who has personally invested and managed investment properties. They’re most likely to have the knowledge and experience to help you select the right option for your needs. A well-versed registered representative can serve as a valuable resource for you as you begin to explore your DST options.
Securities Broker-Dealer
The broker-dealer oversees the sales and marketing of DST 1031 offerings. They’re also responsible for supervising licensed registered representatives and providing support for securities-related matters.
Broker-dealers analyze and vet sponsor companies and their DST offerings. In some cases, they’ll handle all the due diligence in-house, while other times they will outsource this task to a third party.
Once a broker-dealer has analyzed a DST and determined that it’s an appropriate offering, they’ll enter into a selling agreement with the DST sponsor company. This allows the broker-dealer’s registered representatives to start offering the DST to their clients.
It’s important to note that a broker-dealer’s due diligence doesn’t mean that an investment is “safe.” It also doesn’t ensure profits, protect against losses, or guarantee that a DST won’t have problems in the future. It simply means that the broker-dealer has determined that a DST meets its criteria at the time the due diligence is performed.
DST Sponsor Company
The real estate sponsor company is the entity that creates the DST. There are many complex steps involved including sourcing, vetting, financing, structuring, and packaging the DST. This includes reviewing and analyzing potential properties, evaluating the property’s financials, and doing a significant amount of due diligence.
Once a property has been fully vetted, the real estate sponsor company will either make a cash purchase or negotiate and arrange financing with potential lenders and then take ownership of the property.
When a DST is ready to go to market, the sponsor company reaches out to broker- dealers and registered representatives to resell interests to investors. After the offering is sold out, the sponsor company remains involved as an asset manager. This role involves overseeing the property manager and managing the legal and financial issues pertaining to the properties and their tenants and determining when to sell the property.
In some cases, the sponsor company will also act as the property manager, while in other cases, they will outsource this function to a third-party firm.
Learn More About 1031 Exchanges Today!
If you’re interested in learning more about 1031 exchanges and exploring the DST options currently available to you or need assistance assembling your dream team, FGG team members are here to help! Contact us today to schedule a consultation.
Please feel free to download our FREE ebook to learn more about real estate tax deferral strategies!
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