1031 Exchange Guide: Utilizing Trusts | DST Investment
If you are looking to sell an investment property, you may be wondering if you can take advantage of the tax benefits available through a 1031 exchange. Under Section 1031 of the Internal Revenue Code, investors who exchange property for “like-kind” property can defer the capital gains taxes on their profits. This is referred to as a “1031 exchange.”

There are a few things to keep in mind when completing a 1031 exchange. For starters, the property being sold must be an investment or business property. The proceeds from the sale of the property must be reinvested in “like-kind” property within a certain timeframe. And finally, you must use a qualified intermediary to complete the transaction. This article will help you to better understand how trusts can be used in a 1031 exchange transaction.

Trust Basics

A trust is a legal arrangement in which one person (the trustee) holds property for the benefit of another person or persons (the beneficiaries). A trust can be revocable or irrevocable, and it can be set up as a standalone entity or as part of a larger organization. If there is more than one beneficiary, the trust is typically divided into separate trusts for each beneficiary.

There are a number of reasons why someone might choose to set up a trust. Perhaps you want to ensure that your children will inherit your property regardless of what happens to you. Or maybe you need to protect your assets from creditors or from being seized by the government. In some cases, trusts can be used to reduce or avoid estate taxes.

There are several different types of trusts that can be used in a 1031 exchange transaction. Let’s take a closer look at each type:

Living Trusts

A revocable trust, also known as a living trust, is a trust that can be amended or revoked by the person who created it (the grantor). This type of trust is popular among married couples, as it allows them to share assets and property while still retaining control over those assets. A revocable trust can also be used to avoid probate upon the grantor’s death.

A revocable trust is not a separate legal entity, so the trustee and the beneficiaries are all one and the same. This means that the trustee has complete discretion over how the trust property is used. The grantor can also serve as the trustee, which makes things easier for him or her.

Disregarded Entities

A disregarded entity is an entity that is treated as a sole proprietorship for tax purposes. This type of entity is popular among small business owners, as it allows them to keep their business and personal finances separate.

It is possible to utilize a disregarded entity in a 1031 exchange transaction. The entity must be wholly owned by the taxpayer who is exchanging the property. The property being exchanged must also be held by the disregarded entity. Many people find this confusing, so it is important to speak with a tax professional if you are considering using a disregarded entity in a 1031 exchange.

Land Trusts

A land trust is a type of trust that is used to hold real estate. It is popular among property investors because it allows them to keep their property off the market while waiting for the right buyer.

There are two types of land trusts: revocable and irrevocable. A revocable land trust can be amended or revoked by the grantor at any time. An irrevocable land trust cannot be amended or revoked without the approval of the beneficiaries.

Like a living trust, a land trust is not a separate legal entity. The trustee and the beneficiaries are all one and the same. This means that the trustee has complete discretion over how the trust property is used. The grantor can also serve as the trustee, which makes things easier for him or her.

Irrevocable Trusts

An irrevocable trust is a trust that cannot be amended or revoked without the approval of the beneficiaries. This type of trust is popular among estate planners, as it allows them to minimize or avoid estate taxes.

There are two types of irrevocable trusts: living and testamentary. An irrevocable living trust is a trust that is set up during the grantor’s lifetime. An irrevocable testamentary trust is a trust that is set up in a will and goes into effect after the grantor’s death.

Both types of irrevocable trusts are separate legal entities, which means that the trustee and the beneficiaries are not the same people. This gives the trustee a lot of autonomy in how he or she manages the trust property. The grantor cannot revoke or amend the trust without the approval of the beneficiaries.

As you can see, there are a number of different trusts that can be used in a 1031 exchange transaction. It is important to speak with a tax professional if you are considering using a trust in your exchange. Trusts can be complex, and there are many rules and regulations that govern their use. By working with a professional, you can ensure that your trust is set up correctly and that you are taking full advantage of all its benefits.

Important Facts to Remember

· A 1031 exchange must be conducted in like-kind property.

· The taxpayer who is exchanging the property must own the property being exchanged.

· The property being exchanged must be held by a qualified intermediary.

· The taxpayer can only use certain types of trusts in a 1031 exchange transaction.

Reach out to a Professional Firm

If you would like more information on 1031 exchanges or trusts, please contact our office. We would be happy to answer any of your questions and help you get started on your exchange. These types of real estate transactions can be complicated, so it is important to work with a professional firm that has experience in this area. At our company, we have years of experience helping taxpayers take advantage of 1031 exchanges and trusts. We would be happy to put our knowledge to work for you.

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