<p paraeid="{fadaaa7e-5975-4ad7-83d5-95394795dd62}{21}" paraid="1145039661">Real estate investors understand the importance of strategic decisions to enhance their portfolios and maximize returns, but the owner of one business property or family-owned land might not be as familiar with these practices. One powerful tool at a property owner’ s disposal is a 1031 exchange, a provision in the Internal Revenue Code that allows you to defer capital gains taxes, depreciation recapture, state tax, and net investment income tax when selling an investment or business property and reinvesting the proceeds into qualified replacement property. In this article, we'll look at different scenarios of selling a property held for investment or business use and utilizing a 1031 exchange to reinvest in various property asset classes, including a rental house, an industrial warehouse, and a Delaware Statutory Trust (DST).&nbsp;</p>

<h2 aria-level="2" paraeid="{fadaaa7e-5975-4ad7-83d5-95394795dd62}{27}" paraid="1663958951" role="heading">Understanding a 1031 Exchange&nbsp;</h2>

<p paraeid="{fadaaa7e-5975-4ad7-83d5-95394795dd62}{37}" paraid="1991610238">Before we dive into the specifics of each asset class, it's crucial to understand the fundamentals of a 1031 exchange. This tax deferral strategy enables investors to defer taxes that would otherwise be associated with the sale of the property, by reinvesting the sale proceeds into qualified replacement property within a specified time frame. To qualify for a 1031 exchange, the Relinquished Property and the Replacement Property must both be held for productive use in a trade or business or for investment and held by the same tax entity.&nbsp;</p>

<h3 aria-level="3" paraeid="{fadaaa7e-5975-4ad7-83d5-95394795dd62}{43}" paraid="776916789" role="heading">Key Requirements for a 1031 Exchange:&nbsp;</h3>

<p paraeid="{fadaaa7e-5975-4ad7-83d5-95394795dd62}{49}" paraid="544208538"><strong>Like-Kind Property:</strong> The Replacement Property must be of like-kind to the Relinquished Property, but this does not necessarily mean identical. For example, you can exchange a commercial property for a residential property. For purposes of a 1031 exchange, all business or investment property is like-kind.&nbsp;</p>

<p paraeid="{fadaaa7e-5975-4ad7-83d5-95394795dd62}{75}" paraid="39075156"><strong>Identification Period:</strong> Within 45 days of selling the Relinquished Property, you must identify potential Replacement Property(ies) in writing, following one of the three available <a href="https://www.accruit.com/blog/what-are-rules-identification-and-receipt-… rules</a>.</p>

<p paraeid="{fadaaa7e-5975-4ad7-83d5-95394795dd62}{112}" paraid="1958832294"><strong>Closing Period:</strong> The Replacement Property must be acquired, and the exchange completed, within 180 days from the sale of the Relinquished Property.&nbsp;</p>

<p paraeid="{fadaaa7e-5975-4ad7-83d5-95394795dd62}{140}" paraid="987274700">Now, let's explore the potential of reinvesting in different asset classes as Replacement Property in a 1031 exchange.&nbsp;</p>

<h2 aria-level="2" paraeid="{fadaaa7e-5975-4ad7-83d5-95394795dd62}{150}" paraid="1949574642" role="heading">Potential 1031 Exchange Reinvestment Scenarios&nbsp;</h2>

<p paraeid="{fadaaa7e-5975-4ad7-83d5-95394795dd62}{160}" paraid="1573088936">Before we dive into examples of reinvestment options through a 1031 Exchange, let’s look at investment scenarios that do not involve a 1031 Exchange.&nbsp;&nbsp;</p>

<p paraeid="{fadaaa7e-5975-4ad7-83d5-95394795dd62}{166}" paraid="774419975">Let’s assume a property owner inherited family land and has personally owned, or held, the land for 20 years. Due to urban expansion, the property owner has been offered $2 million by a developer to sell the land. The value of land when inherited was $1.2 million, so upon the sale of land, roughly $230,000 would be owed in Capital Gains Tax, State Tax, and Net Investment Income Tax without a 1031 Exchange. The property owner has reinvestment options that do not involve like-kind property. Some of the most common avenues include, stocks and bonds, mutual funds, and Exchange-Traded Funds (ETFs).&nbsp;&nbsp;</p>

<p paraeid="{fadaaa7e-5975-4ad7-83d5-95394795dd62}{202}" paraid="197689945">Let’s look at the estimated annual returns for each of these avenues. Note, the total reinvestment into these avenues is roughly $1,770,000 due to the taxable event without a 1031 Exchange.&nbsp;&nbsp;<br />
&nbsp;</p>

<p><strong>Stocks and Bonds:&nbsp;</strong></p>

<p style="margin-left: 50px;"><strong>Average Return</strong>: Stocks historically yield an average annual return of 7-10%, while bonds offer a more conservative but stable return ranging from 2-5%.&nbsp;</p>

<p style="margin-left: 50px;"><strong>Total Annual Return:</strong> Based on the above averages total annual returns could be expected from $35,400-$177,000 annually.&nbsp;<br />
&nbsp;</p>

<p><strong>Mutual Funds:&nbsp;</strong></p>

<p style="margin-left: 50px;"><strong>Average Return:</strong> Historical average annual returns for mutual funds typically range between 5-8%.&nbsp;</p>

<p style="margin-left: 50px;"><strong>Total Annual Return</strong>: Based on the above averages total annual returns could be expected from $88,500-$141,600 annually.&nbsp;<br />
&nbsp;</p>

<p><strong>Exchange-Traded Funds (ETFs):&nbsp;</strong></p>

<p style="margin-left: 50px;"><strong>Average Return:</strong> Historical average annual returns for well-diversified ETF portfolios tend to align with stock market performance, around 7-10%.&nbsp;</p>

<p style="margin-left: 50px;"><strong>Total Annual Return</strong>: Based on the above averages total annual returns could be expected from $123,900-$177,000 annually.&nbsp;</p>

<p paraeid="{34703980-e088-489d-87eb-c104e79d3ab6}{111}" paraid="273631279">&nbsp;</p>

<h2 aria-level="2" paraeid="{34703980-e088-489d-87eb-c104e79d3ab6}{115}" paraid="1585139260" role="heading">Potential 1031 Exchange Reinvestment Scenarios&nbsp;</h2>

<p paraeid="{34703980-e088-489d-87eb-c104e79d3ab6}{121}" paraid="69114261">Now, let's explore the potential returns of reinvesting in different asset classes as Replacement Property in a 1031 Exchange. By utilizing a 1031 Exchange for the real estate transaction the reinvestment requirement for full tax deferral is the $2 million sale price.&nbsp;&nbsp;</p>

<p aria-level="3" paraeid="{34703980-e088-489d-87eb-c104e79d3ab6}{127}" paraid="589979257" role="heading"><strong>Rental House Investment:&nbsp;</strong></p>

<p>One of the most common choices for investors utilizing a 1031 exchange is the acquisition of a rental house. Residential real estate offers stability, potential for appreciation, and a consistent income stream through rental payments.&nbsp;</p>

<p><em>Potential Annual Returns:&nbsp;</em></p>

<p style="margin-left: 50px;"><strong>Appreciation:</strong> Historically, residential real estate has shown steady appreciation. On average, the annual appreciation rate for single-family homes in the United States has hovered around 3-5%.&nbsp;</p>

<p style="margin-left: 50px;"><strong>Rental Income:</strong> The rental market's performance varies by location, but a well-chosen property in a desirable area can provide a steady rental income. A conservative estimate for annual rental yield is between 4-6% of the property's value.&nbsp;</p>

<p style="margin-left: 50px;"><strong>Total Annual Return:</strong> Based on the above averages for Appreciation and Rental income, a total between 7% - 11% annual returns could be expected, equating to $140,000-$220,000 annually.&nbsp;</p>

<p style="margin-left: 50px;"><strong>Tax Benefits:</strong> Besides deferring capital gains taxes, rental property owners can benefit from tax deductions, such as depreciation, mortgage interest, property taxes, and operating expenses.&nbsp;</p>

<p><br />
<strong>Industrial Warehouse:&nbsp;</strong></p>

<p>Investing in industrial real estate, particularly storage warehouses, offers unique advantages. The growing demand for e-commerce and logistics has increased the appeal of this asset class, providing investors with the potential for both appreciation and robust rental income.&nbsp;</p>

<p><em>Potential Annual Returns:&nbsp;</em></p>

<p style="margin-left: 50px;"><strong>Appreciation:</strong> Industrial real estate has witnessed strong appreciation in recent years due to the increasing reliance on online shopping and the need for efficient logistics. Annual appreciation rates can range from 6-8%.&nbsp;</p>

<p style="margin-left: 50px;"><strong>Rental Income: </strong>Industrial storage warehouses can generate substantial rental income, especially in prime locations. Rental yields may range from 6-8%, depending on the specific market and property characteristics.&nbsp;</p>

<p style="margin-left: 50px;"><strong>Total Annual Return:</strong> Based on the above averages for Appreciation and Rental income, a total between 12% - 16% annual returns could be expected, equating to $240,000-$320,000 annually.&nbsp;</p>

<p style="margin-left: 50px;"><strong>Long-Term Leases:</strong> Industrial tenants often sign long-term leases, providing stability and a consistent cash flow for investors.&nbsp;</p>

<p style="margin-left: 50px;"><strong>Tax Benefits:</strong> Similar to a rental home, an industrial warehouse would also provide benefits from tax deductions, such as depreciation, mortgage interest, property taxes, and operating expenses.&nbsp;<br />
&nbsp;</p>

<p aria-level="3" paraeid="{b6f45eac-3420-4a1c-9b60-0c6b5c23e8a6}{34}" paraid="1222930741" role="heading"><strong>Delaware Statutory Trust (DST):&nbsp;</strong></p>

<p paraeid="{b6f45eac-3420-4a1c-9b60-0c6b5c23e8a6}{40}" paraid="2128076233">For investors seeking a passive approach to real estate ownership, Delaware Statutory Trusts (DSTs) offer an intriguing option. A DST is a legal entity that holds title to real estate assets, allowing investors to own a fractional interest in a larger, higher quality property than they could purchase on their own, without the day-to-day management responsibilities.&nbsp;</p>

<p aria-level="4" paraeid="{b6f45eac-3420-4a1c-9b60-0c6b5c23e8a6}{46}" paraid="979654800" role="heading"><em>Potential Annual Returns:&nbsp;</em></p>

<p style="margin-left: 50px;"><strong>Appreciation:</strong> Historically, institutional-grade properties including apartment complexes, retail centers, and commercial buildings of properties have shown average annual appreciation rates ranging from 3% to 5% in stable markets over the long term.&nbsp;&nbsp;</p>

<p style="margin-left: 50px;"><strong>Annual Return:</strong> DSTs typically focus on income-producing properties, such as apartment complexes, commercial buildings, or retail centers. Investors on average can expect between a 4-9% annual rate of return.&nbsp;&nbsp;</p>

<p style="margin-left: 50px;"><strong>Total Annual Return:</strong> Based on the above averages for Appreciation and annual return income, a total between 7% - 14% annual returns could be expected, equating to $140,000-$280,000 annually.&nbsp;</p>

<p style="margin-left: 50px;"><strong>Tax Benefits:</strong> DST investors generally receive an annual statement from the Sponsor allocating the investors share of depreciation, mortgage interest, property taxes, and other tax benefits.&nbsp;</p>

<p style="margin-left: 50px;"><strong>Diversification:</strong> DSTs provide diversification by allowing investors to own a portion of multiple properties within a single investment. This diversification can mitigate risks associated with a single property or market.&nbsp;</p>

<h2 aria-level="2" paraeid="{b6f45eac-3420-4a1c-9b60-0c6b5c23e8a6}{100}" paraid="1260724357" role="heading"><br />
1031 Exchanges Impact on Return on Investment&nbsp;</h2>

<p paraeid="{b6f45eac-3420-4a1c-9b60-0c6b5c23e8a6}{106}" paraid="1784503568">In conclusion, utilizing a 1031 Exchange to transition from one property to another is a strategic move for property owners or investors looking to optimize their real estate investments. By carefully considering the potential returns and characteristics of traditional investments compared to like-kind real estate investments, investors can increase their reinvestment and tailor their real estate investments to align with their financial goals and risk tolerance.&nbsp;</p>

<p paraeid="{b6f45eac-3420-4a1c-9b60-0c6b5c23e8a6}{118}" paraid="449325913">Before embarking on a 1031 Exchange, it is crucial to consult with tax professionals, legal advisors, and real estate experts to ensure compliance with regulations and to make informed decisions. Additionally, market conditions and investment landscapes can change, so staying informed about current trends and conducting thorough due diligence is essential for long-term success in real estate investing.&nbsp;</p>

<p paraeid="{b6f45eac-3420-4a1c-9b60-0c6b5c23e8a6}{124}" paraid="204711031">A well-executed 1031 Exchange can not only defer four levels of tax but also serve as a catalyst for diversification, capital growth, and enhanced income streams within a carefully curated real estate portfolio.&nbsp;</p>

<p paraeid="{b6f45eac-3420-4a1c-9b60-0c6b5c23e8a6}{130}" paraid="1635996167">&nbsp;</p>

<p paraeid="{b6f45eac-3420-4a1c-9b60-0c6b5c23e8a6}{138}" paraid="1282354210"><em>The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.&nbsp;</em></p>

<p>Section 1031 Exchanges, also known as Like-Kind Exchanges, are among the most powerful tax planning tools available to real estate investors. A properly structured 1031 exchange can potentially defer four levels of taxes – federal capital gains tax, federal depreciation recapture tax, state tax, and net investment income tax. While most people understand capital gains and depreciation recapture taxes, there is some level of confusion regarding the net investment income tax.</p>

<h2>Net Investment Income Tax Overview</h2>

<p>The Net Investment Income Tax came about as part of the Health Care and Education Reconciliation Act of 2010, amending the Affordable Care Act, sometimes called “Obamacare Act”, effective as of January 1, 2013.</p>

<p>Net investment income tax is tax that applies to only to Net Investment Income. In general, Net Investment Income (NII) includes interest, dividends, capital gains, rent and royalty income, and other items specifically outlined in IRC Section 1411. Gains from the sale of stocks, bonds, mutual funds, investment real estate, interests in partnerships and S corporations, along with capital gains from mutual fund distributions are also included in NII.</p>

<p>Wages, unemployment compensation, Social Security benefits, alimony, tax-exempt interest, self-employment income and other items outlined in Section 1411 are specifically excluded from NII. NII also does not include any amount that is covered by the statutory exclusion under Section 121 related to the sale of a primary residence, which excludes the first $250,000 of gain recognized on the sale of a residence by an individual, or $250,000 in the case of a married couple.</p>

<h2>Who Pays Net Investment Income Tax?</h2>

<p>The Net Investment Income Tax (“NIIT”) is 3.8% applied to the net investment income of individuals, estate, and trusts that have income above limits set by the statute.</p>

<p>When the investor owns their real estate in a single-member limited liability company (LLC), that LLC is usually treated as a disregarded entity for income tax purposes. Thus, the investment income is reflected on the individual’s personal income tax return, and remains subject to the NIIT. However, multi-member LLCs are treated as partnerships for income tax purposes, and the distributions of the partnership’s business income are typically treated as self-employment income, which is exempt from the NIIT.</p>

<h2>How is Net Investment Income Tax Calculated?</h2>

<p>Individuals and married couples who have net investment income, will owe NIIT if their modified adjusted gross income is above these limits:</p>

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<p><em>It is recommended that you review any tax related information with your tax and/or legal counsel to determine whether the NIIT applies to your specific situation.</em></p>

<p>For purposes of the NIIT, modified adjusted gross income (MAGI) is the taxpayer’s adjusted gross income (Form 1040, Line 37) increased by the amounts of certain specified deductions or other exclusions. A shorthand analysis would be that if an individual reports income over $200,000 on their tax return, or a married couple reports income over $250,000, the NIIT probably impacts them.</p>

<p>A couple of examples may assist in understanding the application of the NIIT:</p>

<ol>
<li>Taxpayer, a single filer, has wages of $180,000 and $15,000 of dividends and capital gains. Taxpayer’s modified adjusted gross income is $195,000, which is less than the $200,000 statutory threshold. This Taxpayer is not subject to the Net Investment Income Tax.<br />
&nbsp;</li>
<li>Taxpayer, a single filer, has $180,000 of wages. Taxpayer also received $90,000 from a passive partnership interest, which is considered NII. Taxpayer’s modified adjusted gross income is $270,000. Taxpayer’s modified adjusted gross income exceeds the threshold of $200,000 for single taxpayers by $70,000. Taxpayer owes NIIT of $2,660 ($70,000 x 3.8%).</li>
</ol>

<p>As always, taxpayers are encouraged to discuss their plans with their tax and legal advisors before they embark on the path toward the sale of an investment or business use property, and to engage the services of a Qualified Intermediary, such as Accruit, before the first closing that will effectively start their 1031 Exchange.</p>

<p>&nbsp;</p>

<p><em>The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified&nbsp;Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.</em></p>

<p>It’s tax time – individuals and businesses are collecting their various 2023 tax documents, receipts, etc. to get their 2023 tax returns filed by their corresponding due dates. For any Exchangers having started or completed a 1031 Exchange in 2023 there are some specific reporting requirements for their 2023 tax return.</p>

<h2>2024 Tax Filing: Reporting a 1031 Exchange</h2>

<p>A successful 1031 Exchange allows for the deferral of capital gains, depreciation recapture, state, and net investment income taxes, yet there are still tax filing obligations for the Exchanger to ensure the 1031 Exchange is properly recognized and documented for the IRS.</p>

<p>If a 1031 Exchange was completed in 2023, the Exchanger must submit a <a href="/blog/reporting-1031-exchange-irs-form-8824" title="Form 8824 for reporting 1031 Exchange on Tax Return">Form 8824</a> along with their 2023 tax return.</p>

<p>If a 1031 Exchange was started in 2023, but not completed by the end of 2023, the Exchanger must file a Form 6252 to provide the IRS with information related to their receipt of the 1099 showing the sale of Relinquished Property in 2023. In other words, without further tax filing, the Service would be expecting that tax reporting related to the 1099 to be reflected on the 2023 tax return.</p>

<p>If a 1031 Exchange was started in 2022, but failed, or was completed with “boot” in 2023 the default reporting is to report the exchange transaction in the second year (2023). However, if an Exchanger had losses in the first year (2022), they may have elected to treat the exchange as though it took place in first year to offset the taxable event with the losses.</p>

<h2>1031 Exchange Specific 2023 Tax Return Due Dates</h2>

<p>Below are the specific dates that a 1031 Exchange should be reported based on the type of entity that completed the 1031 Exchange.</p>

<p><em><strong>Reminder: For 1031 Exchange started in the fourth quarter of 2023, specifically after October 18, 2023, if you will need the full 180-day exchange period for your 1031 exchange, your 1031 exchange period will end on your tax due date, April 15, 2024, unless you file an extension on your 2023 taxes. (Taxpayers who live in Maine or Massachusetts have until April 17, 2024 to file their Federal returns. Some states - including Delaware, Iowa, Louisiana, and Virginia – have different deadlines for filing state tax returns.)</strong></em></p>

<p><strong>March</strong><br />
March 15, 2024: Partnerships and S corporations, must file a 2023 calendar year return (Form 1065) and provide each partner with a copy of their Schedule K-1 (Form 1065) and if applicable Scheduled K-3. If needed, file Form 7004 for an automatic 6-month extension to file the return.</p>

<p>If a partnership or S corporation engaged in a 1031 Exchange, this is the due date by which they must file one of the above-mentioned items pertaining to the exchange.</p>

<p><strong>April</strong><br />
April 15, 2024: Most Individuals, living and working in the US, must file their 2023 tax return, Form 1040 or 1040-SR and pay any tax due. If you want an automatic 6-month extension, file a Form 4868, and pay what you estimate you will owe to avoid any penalties and interest.</p>

<p>April 15, 2024: Corporations, must file a 2023 calendar year income tax return (Form 1120) and pay any tax due. To file an automatic 6-month extension file Form 7004 and deposit what you estimate you owe in taxes to avoid any penalties and interest.</p>

<p>If an Individual or Corporation engaged in a 1031 Exchange this is the date by which they must report the exchange to the IRS.</p>

<p>April 17, 2024: Individuals living in Maine or Massachusetts, must file their 2023 tax return, per the above.</p>

<h3>Due Dates for Extensions</h3>

<p><strong>September</strong><br />
September 15, 2024: Partnerships and S corporations, if you requested a timely 6-month extension back on March 15, 2024, you must now file your 2023 calendar year return, Form 1065, and pay any difference in tax owed from the payment you made back in March.</p>

<p><strong>October</strong><br />
October 15, 2024: Due date for Individual and Corporations that filed an extension back in April, they must now file their 2023 Tax Return.</p>

<p>For a comprehensive list of dates associated with filing taxes in 2024, visit the <a href="https://www.irs.gov/pub/irs-dft/p509--dft.pdf&quot; title="IRS 2024 Tax Due Dates">IRS website</a>.</p>

<h2>Other Tax Filing Considerations</h2>

<p>In addition to the above, any Exchangers that invested into a Delaware Statutory Trust (DST) or Tenants-In-Common (TIC), must also file a state tax return in the state in which the property(ies) are located.</p>

<p>As always, we recommend Exchangers work closely with their tax preparer, CPA, tax advisor, etc. in the preparation of their tax return to ensure they have accurately recorded and reported their 1031 Exchange to ensure compliance with the IRS.</p>

<p>&nbsp;</p>

<p><em>The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified&nbsp;Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.</em></p>

<h2>1031 Exchange Eligible Ag Land in America</h2>

<p>By definition, all Ag land is eligible for a 1031 exchange. Ag land includes pastureland, cropland, woodland, other land types and any improvements situated on or appurtenances to the land. In 2022, Ag land in the United States totaled 893 million acres, a decrease of 22 million acres from 2012. Total Ag land decreased 14.5 million acres from 2012 to 2017, double the rate of decrease compared to the previous 5-year period in which Ag land decreased 7.5 million acres from 2007 to 2012.</p>

<p>With an average price per acre over the 10-year span of $1348/acre, that equates to a total of $29.6 Billion dollars in sales of Ag land that would have been eligible for a 1031 exchange and which would have resulted in a conservative $11.8 Billion in tax deferrals based on the four levels of tax deferral associated with a 1031 exchange.</p>

<h2>What is happening to Ag Land?</h2>

<p>There are a variety of factors contributing to the decrease in Ag land over the last decade. Some of the most common reasons landowners are selling Ag land include:</p>

<ul>
<li>The Aging Producer/Landowner: 82% of principal operators of Ag land are 55+ years old and 38% of all Ag land is intended to be sold within the next 5-years.<br />
&nbsp;</li>
<li>Encroaching Development: The main drivers of land conversion in the last decade were low-density residential areas, urban developments, and energy production.<br />
&nbsp;</li>
<li>Increased Conservation Efforts: In 2021, the America the Beautiful initiative was introduced to conserve 30% of American land by 2030.</li>
</ul>

<p>Regardless of the reason or motivation, a profit from the sale of land creates a likely sizeable taxable event for the landowner. A 1031 exchange provides tax deferral to the landowners of Ag land upon the sale, which is often indefinite if the property is held until death and passed onto heirs.</p>

<h2>The Future of Ag Land in America</h2>

<p>In the coming years, the transfer of Ag land will continue. According to the 2014 Tenure, Ownership and Transition of Agricultural Land Survey conducted by the USDA, 38% of principal Ag land operators intend to sell their land, which equates to roughly $236.3 Billion dollars in 1031 exchange Value, and approximately $94.5 Billion in associated taxes due without a 1031 exchange.</p>

<p>From 2015 to 2023 a total of 27.3 million total acres were protected through state PACE (Purchase of Agricultural Conservation Easement) programs alone, with an average annual increase of 4%. If historical trends remain consistent, that is an estimated 3.6 million acres will enter Conservation Easements in 2024 through state PACE programs alone. With the 2023 average price per acre of pastureland at $1760, that is roughly $2.2 Billion in potential exchange value for land entered into Conservation Easements. It is important to note that most conveyances of Conservations Easements for Ag land by landowners will allow the sale price of the Conservation Easements to be used to acquire other real property interests in a 1031 exchange.&nbsp;</p>

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<p>Finally, the development of land will continue to impact agribusiness property into the future. From 2001 to 2016, 2,000 acres per day of Ag land was lost or developed. If that trend continues by 2040 an additional 18.4 million acres of Ag land will be converted into urban and rural developments triggering taxable events for the property owners of the Ag land sold. 1031 exchanges provide owners of Ag land the ability to make the right decisions for the future of their land without the tax consequences of the real estate transaction.</p>

<h2>Unique Considerations for Agribusiness Property in a 1031 Exchange</h2>

<p>While tax deferral with a 1031 exchange is not unique to agribusiness land, there are some unique considerations for owners of agribusiness property to be aware of to ensure they are getting the fullest extent of tax deferral possible under IRC Section 1031.</p>

<h3>Improvements to Land</h3>

<p>Additional guidance was provided in the 2020 Treasury Regulations regarding what can be eligible for 1031 exchange treatment outside of the traditional view of real property. The regulations state that to be part of real property, improvements to land must be <u><strong>permanently affixed</strong></u>. Affixation is considered permanent if it is reasonably expected to last indefinitely based on all the facts and circumstances. Ask the following questions to help determine whether the improvement qualifies as real property:</p>

<ul>
<li>How is it affixed to the real property?</li>
<li>Was it designed to be removed or remain in place?</li>
<li>What damage would removal cause to the improvement or real estate?</li>
<li>What time and expense would be associated with removal?</li>
<li>Is it documented by a fixture filing under state law?</li>
</ul>

<p>Some common agribusiness examples of improvements to land that qualify for 1031 exchange treatment include:</p>

<ul>
<li>Center pivot irrigation systems</li>
<li>Fencing and livestock handling facilities</li>
<li>Wells, water lines and other water developments</li>
<li>Septic systems</li>
<li>Streambank preservation and erosion control structures</li>
<li>Foundations</li>
<li>Shops and Outbuildings including grain storage facilities</li>
</ul>

<h3>Intangible Real Property Interests</h3>

<p>Similar to improvements to land, there are <a href="/blog/often-overlooked-section-1031-property-rights" title="Intangible Real Property Interests Eligible for a 1031 Exchange">additional interests</a>&nbsp;that are deemed as real property for 1031 exchange purposes and as a result an Exchanger can receive tax deferral for transactions involving the specific interests.</p>

<p>Some of the most common types of like-kind intangible real property associated with agribusiness real estate transaction include:</p>

<ul>
<li>Perpetual Easements: Some of the most popular easements include Conservation Easements, Drainage Easements, Pipelines, Solar, Wind, and Billboards;</li>
<li>Water and ditch rights and oil, gas and mineral rights;</li>
<li>Leases and Permits: Federal or state grazing permits, special land use permits for cell tower or wind and solar farms</li>
</ul>

<p>There are many additional <a href="/resources/kind-intangible-assets-and-other-real-property-1031-exchange" title="Accruit Intangible Real Property Interests in a 1031 Exchange Flyer">like-kind real property interests</a> that are eligible for 1031 exchange treatment, as well.</p>

<h3>Mixed-Use Properties</h3>

<p>It is not uncommon for an agribusiness property to be <a href="/blog/section-1031-exchange-primary-residence" title="Mixed Use Property in a 1031 Exchange">mixed-used</a>, meaning that while a portion of it is used for business or investment use, the remainder might be used for personal use, such as a primary residence. For example, a 100-acre plot that includes 95 acres of farmland and 5 acres which includes a primary residence.</p>

<p>Since only business or investment use property qualifies for a 1031 exchange, the personal use portion of a mixed-use property must be excluded from the total 1031 exchange value. Section 121 does however allow the property owner to exclude up to $250,000 (or $500,000 if married and filing jointly) on the gain of the sale of a primary residence which could provide full or partial tax deferral on the primary residence portion of the transaction. A 1031 exchange could be used for the remainder property achieving full tax deferral.</p>

<p>In conclusion, Agribusiness land will continue to be the subject of real estate transactions for a variety of reasons and without the proper knowledge and education, landowners could be subject to paying upwards of 40% of their land sale proceeds in taxes without a 1031 exchange.</p>

<p>It is important for a landowner to understand all of their options prior to entering into a real estate transaction and our dedicated team of 1031 Exchange Land experts are available to educate and consult Agribusiness property owners to help them maximize the value of their land, that in many cases, has been passed on generation to generation.</p>

<p>&nbsp;</p>

<p><em>The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.</em></p>

<h6>Sources:</h6>

<h6><a href="https://www.nass.usda.gov/&quot; title="National Agricultural Statistics Services USDA">National Agricultural Statistics Services | USDA</a></h6>

<h6><a href="https://farmlandinfo.org/&quot; title="Farmland Information Center">Farmland Information Center</a></h6>

<h2>Review of 1031 Exchange Requirements</h2>

<p>First, we must review the requirements set forth within IRS Code §1031. Although the nature of the REIT asset is real estate, the investor receives shares in the REIT which is treated as owning under a partnership and that is not compatible with IRS Code §1031 which effectively requires a more direct interest such as a deeded interest in real estate. So, without more, a real estate investor or business property owner cannot trade directly from the property into a REIT through a 1031 Exchange. However, if investment in a REIT is the ultimate goal, a property owner can accomplish such by first completing a 1031 Exchange into a DST and then completing a 721 UPREIT Exchange from the DST into a REIT, though careful consideration and planning are critical to the success of this process.</p>

<h2>Tax Deferred Transaction into REIT</h2>

<p>For real estate investors looking to move from a property into a REIT, one possible way to accomplish the movement with taxes deferred is via IRS Code §721, known as a <a href="/blog/what-difference-between-1031-exchange-and-721-exchange" title="721 Exchange Versus 1031 Exchange">721 Exchange</a>. REITs often hold the real estate assets in an Umbrella Partnership Real Estate Investment Trust, referred to as an “UPREIT.” If a property owner happens to own a significant piece of property that might meet the criteria of the type of property that a particular UPREIT owns in its investment portfolio, the REIT might be willing to acquire the property using a 721 Exchange for an equal value of operating units in the UPREIT operating partnership which can then shortly after be converted to direct shares in the REIT. But as one can imagine, a lot of things have to line up and your average property investor is unlikely to be able to take advantage of this structure due to their property not meeting all criteria set forth by the REIT.</p>

<h2>1031 Exchange into a DST Followed by a 721 Transaction into a REIT</h2>

<p>Fortunately for the average investor or business property owner who is unable to affect a trade directly with a REIT there is another practical solution utilizing a 1031 Exchange. Specifically, a property owner can use a 1031 Exchange and buy into a <a href="/blog/delaware-statutory-trusts-1031-exchange-investments" title="Delaware Statutory Trust 1031 Exchange">Delaware Statutory Trust (DST)</a> as the Replacement Property. Although DSTs are very popular investments across the board for 1031 investors, in this case, the DSTs in questions are ones that are affiliated with the REIT sponsor.</p>

<p>This transaction is begun like any other 1031 Exchange where the Exchanger sells the Relinquished Property to the buyer of choice. The exchange proceeds are then utilized to acquire the DST, which is allowed per §1031 based on the legal structure of a DST interest. The investor is considered to be acquiring a direct interest in real estate, unlike a REIT where the interest being acquired is a partnership interest (and not real estate). As the link above explains in greater detail, the DST share holds a fractional share of one or more properties based on the amount invested, together with other people, but the investor does own his or her real estate interest personally. It is somewhat similar as a REIT, but one qualifies as Replacement Property for a 1031 Exchange and the other does not.</p>

<p>Once the DST interest is held for several years or more, the UPREIT 721 process described above can take place and the property owner can exchange the DST interest for the UPREIT interest via a 721 UPREIT Exchange. Basically, by using the DST, the REIT is able to acquire the property that fits into their REIT portfolio instead of the property originally being sold by the investor. Everyone can have their cake and invest it too.</p>

<p>Many property owners, simply trade into a DST and that is the end of that specific 1031 exchange transaction. From there they can continue to trade into future exchanges out of the DST. But from those interested in an ultimate investment in REIT, they can take the further step.</p>

<h2>Considerations of 1031 Exchanges, DSTs and REITS</h2>

<p>There are advantages to continuing to do 1031 Exchanges each time a property is sold to continue to defer the taxes that would otherwise become due, which among other things allows the investor to benefit from the time value of money. Additionally, should the investor pass away without having cashed out of their exchange property, the heirs would receive a stepped-up basis and any of the deferred taxes would become non-payable (https://www.accruit.com/blog/video-step-basis-1031-exchange).</p>

<p>REITs too have many benefits, but once the 1031 link is cut via the conversion to the REIT, any subsequent sale of the REIT shares are fully taxable at the basis carried over from the original exchange(s) - further tax deferral is not possible.</p>

<p>As always it is important to discuss tax deferral strategies and options with your CPA, Tax Advisor, or Financial Advisor to ensure you are making the most educated decision and that proper planning is in place.</p>

<p>&nbsp;</p>

<p><em>The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.</em></p>

<p>What is a 1039 exchange? It has over 880 searches per month across the internet, but what is it? There is no such thing as a "1039 exchange" in the Internal Revenue Code or within the real estate and tax industries. The most closely related concept is a 1031 exchange. When people search for 1039 exchange, they are looking to find information about 1031 exchanges.</p>

<p>A 1031 Exchange, named after Section 1031 of the Internal Revenue Code, is a tax-deferred real estate transaction that allows an investor to sell qualifying property and reinvest the proceeds into a new property without immediate tax consequences including capital gains, depreciation recapture, state, and net investment income taxes. The primary purpose of a 1031 exchange is to encourage the continued investment in real estate by providing a mechanism for deferring capital gains and other taxes associated with real estate transactions. To learn more about the specifics of a 1031 exchange, check out <a href="/what-is-1031-exchange" title="1031 Exchange Explained">What is a 1031 Exchange?</a></p>

<h2>Additional search terms mistaken for 1031 exchange</h2>

<p>In addition to 1039 exchange, there are many other search terms that the general public mistakes for 1031 exchange, whether it's misinformation, a typographical error, or a combination of both. Some of the other most commonly searched terms that don't exist as far as an exchange within the Internal Revenue code include:</p>

<ul>
<li>1030 exchange</li>
<li>1021 exchange</li>
<li>1301 exchange</li>
<li>1231 exchange</li>
</ul>

<p>The following terms are also commonly misused when referring to a 1031 exchange:</p>

<ul>
<li>1099 exchange</li>
<li>1040 exchange</li>
</ul>

<p>While there are 1099 and 1040 tax forms that serve different purposes in the U.S. tax system, they are not exchanges. 1099 and 1040 tax forms are used by different entities for distinct tax reporting requirements, but they do not have a direct correlation with a 1031 exchange.</p>

<p>The number 1099 comes from the 1099 tax form which is used to report various types of income received by individuals other than regular salary or wages. These forms are crucial for tax reporting purposes, allowing the Internal Revenue Service (IRS) to track and assess tax on income that falls outside traditional employment. The 1099 tax forms are not directly associated with a 1031 exchange.</p>

<p>Just like the “1099 exchange,” a “1040 exchange” does not exist. The 1040 number likely comes from the 1040 tax form - the main form used by individuals in the United States to file their annual income tax returns with the IRS. The form is officially titled "U.S. Individual Income Tax Return" and serves as the primary document for reporting various types of income, deductions, credits, and calculating the amount of taxes owed or refunded. There is no intersection between the 1040 tax form and a 1031 exchange; the tax form related to a 1031 exchange is <a href="/blog/reporting-1031-exchange-irs-form-8824" title="Form 8824 used to report 1031 Exchange to IRS">Form 8824</a>.</p>

<h2>Why are people searching for information around 1031 Exchanges?</h2>

<p>Whether the correct term is searched or a mistaken variation of digits + exchange like the list of examples above, 1031 exchanges are a powerful tax deferral strategy that provide real estate investors with numerous benefits including the following:</p>

<ol>
<li><strong>Leverage Cashflow</strong>

<ul>
<li>Tax Deferral: Investors may be interested in deferring capital gains and other associated taxes on the sale of investment properties. A 1031 exchange allows them to reinvest the proceeds from the sale into a like-kind property, thereby delaying the payment of taxes.</li>
</ul>
</li>
<li><strong>Portfolio Diversification</strong>
<ul>
<li>Property Upgrade: Investors may want to exchange properties for properties of different types to diversify their real estate portfolio without incurring immediate tax consequences.</li>
</ul>
</li>
<li><strong>Estate Planning</strong>
<ul>
<li>Wealth Transfer: Individuals engaged in estate planning might use 1031 exchanges as part of their strategy to transfer wealth to heirs while minimizing tax liabilities.</li>
</ul>
</li>
<li><strong>Financial Planning</strong>
<ul>
<li>Tax Efficiency: Individuals looking to optimize their tax position and maximize returns by exchanging a mostly or fully depreciated property might consider 1031 exchanges.</li>
</ul>
</li>
<li><strong>Retirement Planning</strong>
<ul>
<li>Income Stream: Real estate investors approaching retirement may use 1031 exchanges to transition from high-maintenance properties to passive income generating investments such as <a href="/blog/delaware-statutory-trusts-1031-exchange-investments" title="Delaware Statutory Trust as passive replacement property in a 1031 Exchange">Delaware Statutory Trusts (DSTs)</a>.</li>
</ul>
</li>
<li><strong>Capitalize on Growth Markets</strong>
<ul>
<li>Market Trends: Property owners in markets experiencing significant appreciation may explore a 1031 exchange to capitalize on the increased value of their assets without triggering immediate tax liabilities.</li>
</ul>
</li>
<li><strong>Educational Purposes</strong>
<ul>
<li>Real Estate Education: Attorneys, accountants, financial advisors, and real estate professionals can provide additional value to their clients with a solid knowledge of 1031 exchanges as a powerful tax deferral strategy.</li>
</ul>
</li>
</ol>

<h2>1031 Exchange Equals Tax Deferral</h2>

<p>To recap, thousands of property owners are searching for more information around tax deferral for investment real estate - 1031 exchange is the solution they are searching for. Yet, there remains a high volume of searches for 1039 exchange, 1030 exchange, 1021 exchange, and many other variations mentioned above. Regardless of if these searches are simply typos or just misinformation, they do not exist. 1031 exchange is the correct term to search for if you are looking to defer taxes on qualify real estate transactions.</p>

<p>As a Qualified Intermediary, Accruit specializes in facilitating all types of 1031 exchanges, we offer services to help property owners navigate what can be a complex process. Reach out to one of our 1031 exchange experts for any 1031 exchange questions or to learn more about Accruit's 1031 Exchange Qualified Intermediary services.</p>

<p>&nbsp;</p>

<p><em>The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified&nbsp;Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.</em></p>