1031 Exchange Examples

While we have been helping clients with 1031 exchanges for years and have seen many different situations, one thing is certain: no two exchanges are the same. Below you will find a few example exchanges. None of these details are of specific exchanges we have done, though the concepts and strategies used are designed to provide helpful insight into the exchange process.

Roger and Jan

The first exchange example is Roger and Jan who invested in two DST investments.

Roger and Jan, both in their 70s, have decided it is time to sell a rental house that they have owned for over 30 years. While managing the property has been profitable and for the most part enjoyable, they want to move away from all management responsibility. They also want to simplify their estate for their three children who are set to inherit the property upon their passing.

Roger and Jan are under contract to sell their property for $500,000 and they have no debt on the property. When they consult with their tax advisor, they find they will have substantial taxes to pay when they sell the property. In order to defer those taxes, their tax advisor suggested they consider completing a 1031 exchange. After some discussion and research, Roger and Jan decide to move forward with an exchange with Chicagoland 1031 Exchange.

Together with our team, Roger and Jan evaluate DST investments to use as replacement properties. In the end, Roger and Jan complete their 1031 exchange and invest in two DST offerings: $300,000 in a no debt medical office offering and $200,000 in a no debt retail offering, with strong tenants and long leases.

By completing a 1031 exchange, Roger and Jan were able to avoid paying taxes on the sale of their property. They also were able to simplify their estate, diversify their real estate holdings, avoid future management responsibilities and generate income from their new investments.

Mary

The second exchange example is Mary who completed a 1031 exchange of her farmland.

Mary has owned farmland for years. One day, she is approached by a developer who wants to build on the land and is willing to purchase it for $2 million. After speaking with her accountant, Mary determines she wants to complete a 1031 exchange rather than pay the taxes.

Upon sale, Mary has net proceeds of $1 million, as $1 million of debt was relinquished on sale. To complete her exchange, Mary will need to invest $1 million and purchase real estate worth $2 million. Mary has had her eye on a rental property in her town, so she decides to purchase the property for $500,000 dollars, using $250,000 in equity and a loan for $250,000. After this purchase, Mary has $750,000 of proceeds remaining and $1.5 million worth of real estate to buy. Mary decides to invest her remaining proceeds in a multi-family DST with a loan to value of 55%.

In this situation, Mary was able to complete her exchange by meeting (and in this case exceeding) the leverage that was needed while investing all of her proceeds. She decided she wanted to manage one property on her own and invest the rest in a DST. Mary will be able to manage her own property as she wishes and she will be receiving income from her investment in the multi-family DST.

Mike and Steve

The third exchange example is Mike and Steve, real estate professionals who completed a DST investment.

Mike and Steve are business partners and seasoned real estate professionals. They are selling an office property they purchased a number of years ago for a sizeable profit. They sell their property for $10 million with net proceeds of $8 million. For a number of reasons, including a desire to simplify their estates and to spend more time with their families, they decide they want to exchange into real estate where they can be passive owners.

Mike and Steve work with the team at Chicagoland 1031 Exchange to purchase a custom Health Care DST, in which they are the only owners, for $5 million with no debt. They invest the remaining $3 million in three different multi-family DST investments in three different states. The average leverage on these investments is 50%.

Mike and Steve still own other real estate that they actively manage together but are glad to have one less property to take care of—freeing up time to be with family and friends. By completing the exchange they deferred their taxes and are now generating income from their replacement properties.