Little Rock, AR 1031 Exchange

[Carson Sweezy]

Greetings BP Arkansas,

I am looking for some advice ion 1031 exchanges in Little Rock. A family member of mine may be looking to sell a rental property. Does the same 45 day exchange rule typically apply? What options are there in Little Rock for investment properties to purchase within the deadline?

I appreciate your responses. 

[Geoff Flahardy]

Originally posted by @Carson Sweezy:

Thanks for the detailed reply @Dave Foster. Do you know of any investment strategies that look to reinvest into different assets to retain the benefits of 1031, in the case of a new property not being identified in time?

As Bill Exeter mentioned, a DST can be a back-up option when completing an exchange. The advantage to a DST is that the DST already owns the real estate. There is no real estate closing per se, but rather a transfer of ownership from the issuer to the investor. This eliminates the risk of certainty of closing.

There are several considerations when thinking this through. First, an investor must be accredited to qualify for the DST. A DST is a Private Placement/Reg D security. Therefore, investors must have a net worth of $1M or more exclusive of their home or meet the income requirement of $200k/year for the last 2 years with the reasonable expectation of the same in the current tax year for an individual or $300k/year for a married couple. While this qualifies an taxpayer to invest in a DST it is important to note that they might not be suitable for the investment. 

Investors in DSTs must expect and plan for a long-term, illiquid investment where they must give up control to the issuer/sponsor. I usually recommend investors plan on a 7-10 year hold. A good question to ask yourself is if the investment held for 10 years without any possibility for liquidity, would you still make the investment? The DST structure does not permit voting rights so investors do not have control over operations or timing of sale. For many investors this is a wonderful solution as they are looking for a very passive vehicle to generate income throughout retirement. Others do not like this option because they still wish to be an active landlord/manager.

It is important that an investor work with seasoned professionals with the DST. These are complex investment vehicles that can have pitfalls. One of which is making sure that if a DST program is listed as a back-up, that the whole exchange will qualify under one of the three identification rules if the DST option is not selected. Some DSTs hold multiple properties exceeding the 3-property Rule and also carry leverage over 50%. This means listing a DST could exceed the 200% Rule if the relinquished property has no or low leverage making the entire exchange subject to the 95% Rule. Also, DSTs are quite popular investments and have a finite amount of capital they are collecting from investors. This means that a program selected as a back-up may not be available to you when you reach for it.

Because of these factors and others that should be considered, it is recommended you work with a strong Qualified Intermediary and advisors to help make the best decision for you and your family. I hope this helps. Feel free to call if you would like to discuss more in detail.