Three Rules for Avoiding Boot in a 1031 Exchange
When executing a 1031 Exchange, one of the most important factors to consider is how to avoid boot—any cash or non-like-kind property received as part of the transaction. Boot can trigger capital gains taxes, reducing the full tax-deferral benefits of the exchange. For California real estate investors, where property values and gains can be substantial, understanding boot is especially important.
To avoid boot and maintain full tax deferral benefits under a 1031 exchange, follow these three rules:
Rule 1: Purchase replacement property of equal or greater value than the relinquished property.
Rule 2: Reinvest all net proceeds from the sale of the relinquished property into the replacement property.
Rule 3: Ensure the debt on the replacement property is equal to or greater than the debt on the relinquished property.
Using DSTs to Mitigate 1031 Exchange Boot
Delaware Statutory Trusts (DSTs) offer a potential solution to help Sacramento and California investors avoid boot and preserve the full benefits of their 1031 Exchange. By reinvesting excess cash or debt boot into a DST, investors can maintain the tax deferral benefits of their exchange and gain the potential for passive income.
At Legacy, we work with you to build a 1031 Exchange strategy tailored to your unique goals and specific needs. Give our knowledgeable team a call to learn more about the potential benefits of utilizing the Delaware Statutory Trust to mitigate boot.
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There are material risks associated with investing in private placements, Delaware Statutory Trusts (“DSTs”) and real estate securities including the potential loss of the entire investment principal, illiquidity, tenant vacancies impacting income and revenue, general and real estate market conditions, lack of operating history, interest rate risks, competition, including the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and investors should read the PPM carefully before investing paying special attention to the risk section. This material is not to be interpreted as tax or legal advice. Please speak with your own tax and legal advisors for advice/guidance regarding your particular situation. Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services offered through Concorde Asset Management, LLC (CAM), an SEC registered investment adviser. Legacy Investments & Real Estate is independent of CIS and CAM.