Today we begin a new 2-part series on one of the most innovative ways in which to do a 1031 exchange: bifurcation with a Deferred Sales Trust (DST). In Part 1, we’ll explain how a bifurcation works. In Part 2, we’ll explain an alternative you may wish to consider.
As you likely already know, Internal Revenue Code, Section 1031, allows you to defer your capital gains taxes when you sell substantially appreciated investment property and buy “like kind” property in exchange.
Suppose, for instance, you own investment property you bought while living in Hawaii. Now you want to sell that property, move to Nashville and purchase investment property there. However, what you’d really like to do is invest part of your sale proceeds in financial investments so as to achieve a side income stream. You have the following three questions:
- Can you do this?
- Are you limited as to the types of financial investments you can make?
- Do you get to have any input into the types of financial investments you make?
The answer to all three questions is yes. A bifurcation between your 1031 exchange and a Deferred Sales Trust can accomplish your investment goals.
The 1031 Portion
Assuming your Hawaii investment property is real estate, you can choose from one of four types of 1031 exchanges:
- Simultaneous
- Delayed
- Reverse
- Construction
Keep in mind that the 1031 portion of your sale must stand on its own and follow all of the 1031 rules and short time limits and restrictions. Consequently, you’ll want to make sure to select Nashville property that is not only of “like kind” to the Hawaii property you’re selling, but is also of equal or slightly higher value. Usually this means property the selling price and/or debt of which is at least equal to the property you’re relinquishing.
Since you want to bifurcate, however, instead of investing all of your sale proceeds in the replacement property, you could choose to invest only part of the proceeds there, thus increasing the amount of debt on the replacement property, placing the balance in a Deferred Sale Trust.
The DST Portion
Once you engage with the Reef Point’s Estate Planning Team and its tax attorneys, they will set up a DST for you that meets all the legal requirements. The DST portion of your sale proceeds will then go into a controlled custodial (e.g. Schwab, TD Ameritrade, etc.) account owned by the DST Trust and managed by its vetted, trained and approved Trustee. While the DST legally owns the assets you place into it, the Trustee may only make investments that approved by you. Nor do you have any restrictions as to these investment types. In other words, they need not be “like kind” property to the Hawaii property you sold. They can be such things as stocks, bonds, commodities, investment real estate, even life insurance.
A bifurcated 1031 exchange is only one of the creative ways you can use a DST to help you maximize your investments while deferring your capital gains taxes. Contact Reef Point today to learn more.
Check back next week for Will a Bifurcated 1031 Exchange Achieve Your Investment Goals – Part 2.