10 REASONS TO EXCHANGE INTO PASSIVE PROPERTIES
Conducting a 1031 exchange? Before buying another apartment building to own and operate, consider an alternative 1031 solution: passive replacement programs. EXAMPLES OF PASSIVE REPLACEMENT STRATEGIES: ✓ Delaware statutory trusts (DST) 1 ✓ Tenants-in-common (TIC) ✓ DST conversions to umbrella partnership real estate investment trusts (UPREIT) 2 ✓ Ground lease interests in development (GLIDE) 3 ✓ Pooled oil/gas royalties 4 Today, one of the more common of these options is the DST. In 2004, the IRS issued Revenue Ruling 2004-86, which affirmed that a taxpayer may exchange investment property for an interest in a DST. The program must invest only in real estate with one lease, one loan, one round of investors, and one portfolio. All potential net income must be distributed to investors with no expenditures for major improvements. 5 In 2021, over $10 billion of real estate was acquired via §1031-qualified DST programs, almost entirely by individual investors. 6 Prior to the Great Recession, a common form of syndicated §1031 programs was the TIC structure, in which multiple investors each owned, on title, a fractional interest in a property. But by 2010, DSTs had supplanted TICs as a solution among §1031-qualified real estate securities.
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