Taxes are just part of the deal when you invest in real estate. As property prices rise, so do property taxes. Already, Texas is known for having some of the highest property tax rates in the United States. This is because, in order to support economic and population growth, the state requires more tax revenue. But if you choose to diversify your investments with real estate using a 1031 exchange in Houston, you are able to defer capital gains taxes. This happens when exchanging properties that are like-kind in the eyes of the IRS. Let’s think about what 1031 exchange opportunities are available to investors, including Delaware Statutory Trusts.

MAIN TYPES OF 1031 EXCHANGES

Coming from Section 1031, Title 26 of the Internal Revenue Code, a 1031 exchange allows taxpayers to exchange real estate assets held for investment. It is a useful tool for those who want to reinvest the proceeds into like-kind assets. You will be moving from one investment property to another while deferring tax liability on your capital gains. Here are the four ways to complete a 1031 exchange in Houston, depending on your circumstances as a taxpayer.

Delayed Exchange

In this type of 1031 exchange in Houston, real estate investors sell their original property, which is known as relinquished property. Then, they direct the proceeds to an experienced qualified intermediary. A qualified intermediary may also be referred to as a facilitator or accommodator. They are an entity that facilitates Section 1031 of the Internal Revenue Code. Funds are held in escrow while a replacement property is located. There is an aggressive timeline that comes from a delayed exchange, so investors must search for replacement properties prior to the relinquished property’s close. The taxpayer has options to choose from, which they should discuss with their professional broker.

Reverse Exchange

Say that you, as a real estate investor, do acquire a desirable property prior to selling your original property. A reverse exchange may be the right fit for you. With this type of 1031 exchange in Houston, you must not purchase your new property directly. The reason for this is that you cannot own both properties at once. Instead, your qualified intermediary will temporarily hold your new property’s title as a buyer is located for the relinquished property. Much like with a delayed exchange, a reverse exchange will fail if the relinquished property is not sold in a predetermined amount of time.

Simultaneous Exchange

The oldest type of 1031 exchange in Houston is a simultaneous exchange. Here, you can see the unusual case scenario of buyers and sellers completing same-day transactions in a direct swap. There is no need for a qualified intermediary. However, real estate investors still do have the option to involve a qualified intermediary, should they find that it is difficult to find another party who wants to swap. A qualified intermediary will prepare the simultaneous exchange agreement, along with any other necessary documents, to insulate the taxpayer from constructive receipt issues. The replacement property must be valued at the same or higher price than the relinquished property.

Improvement Exchange

With an improvement exchange, a real estate investor must improve the replacement property prior to taking possession of it. This 1031 exchange in Houston involves completing the improvements while the qualified intermediary holds it. The qualified intermediary may even say for those improvements. They do this by using proceeds from the relinquished property’s sale. For this type of exchange to be successful, the replacement property must have work done within 180 days following the sale. It must also be of equal or greater value than the relinquished property.

WHAT IS A DST 1031 EXCHANGE?

A Delaware Statutory Trust is a legal entity that is growing in popularity among real estate investors across the country. It is a real estate ownership structure in which multiple investors are involved. Following the identification and acquisition of real estate assets, a professional real estate company establishes a trust. Each investor holds an undivided fractional (or beneficial) interest in a trust’s holdings. This interest entitles the investors to their pro-rata share or income and appreciation in the assets.

The purpose of a Delaware Statutory Trust is to defer capital gains when selling an investment property. This can be any type of commercial property, ranging from retail spaces to office buildings to industrial parks. An expert commercial real estate brokerage can easily help you through this 1031 exchange in Houston.

PROS OF DELAWARE STATUTORY TRUSTS

A major benefit of Delaware Statutory Trusts is that they offer real estate investors access to triplet net leased (NNN) properties. A triple let lease is an agreement between a tenant and a property owner where the tenant pays all expenses of a property. This includes property taxes, maintenance upkeep, and insurance premiums. Depending on the particular investment, Delaware Statutory Trust investments can offer access to triple net leased properties from five to 20 years.

You will also benefit from a DST 1031 exchange in Houston because of its potential for a passive income stream. This is popular among investors who are transitioning away from an active real estate management role. An investor is able to utilize this exchange to acquire a professionally managed asset without worrying about the time-consuming occupation of real estate management on their own end.

CONS OF DELAWARE STATUTORY TRUSTS

When you use a DST 1031 exchange in Houston, be mindful of the risks associated with it. For instance, there are material risks. A commercial real estate brokerage should set you on the right track with their knowledge of general market conditions. However, these conditions, paired with interest rate risks and unforeseen vacancies, could spell trouble for your investment.

Another point of hesitation is that this exchange requires time for due diligence. Unlike other liquid investments, which are able to be bought and sold fairly easily, Delaware Statutory Trust interests cannot be sold in a day. Because there are multiple parties and financial institutions involved, these illiquid investments should be held for the full investment cycle. This cycle could be several years.

Commercial Industrial Properties is a full-service real estate firm. We offer land advisory, asset management, tenant representation, and so much more. With an average tenure of 20-plus years amongst our team, our clients have peace of mind every time they make an investment. If you are considering a 1031 exchange in Houston, contact us to find out more about what we can do for you.