Section 1031 End of the Year Deadline Approaches

As we enter November every year there are a variety of questions that come from investors involved in a §1031 exchange. Many are focused on trying to strike a deal for their replacement property before year end. Other investors may also be stressed to accomplish the closing of the replacement property prior to year end.

November 3, 2025

By Al DiNicola, AIF®
1031 Tax Deferred Exchange Specialists & DST Advisor
NAMCOA® – Naples Asset Management ~Company®, LLC
Securities offered through MSC-BD, LLC, Member of FINRA/SIPC

The title of this article is actually a false statement. While there are timing deadlines in a §1031 exchange, the end of a calendar (or tax year) is not a deadline.

So as a quick review, let’s look at the two key deadlines with regard to a §1031 exchange. The deadlines are from the date that you sell or close on your relinquished property. The first is the deadline to identify the potential replacement property (properties) that you may want to acquire. This deadline is 45 days from the date that you closed on the relinquished property. The second deadline is 180 days. The 180 days occasionally gets confused as to when the 180 days starts. Is it from the end of your 45 days or is it 180 days from when you closed on the relinquished property? Well, it’s 180 days from when you closed on the relinquished property. And those are total days. There’s no days off for holidays, weekends, your birthday or anything else. Repeated, 180 days from when you close on your relinquished properties. However, there are situations where you have less than 180 days to complete your exchange.

If the due date of your federal income tax return, which is typically April 15th, (plus a few days depending on the year), is before 180 days then you have less than 180 days. In this case, the exchange is shortened to the tax date that your filing is due. There is always the opportunity to extend your date for filing your taxes. Typically, there’s an automatic extension until October 15^th if you file for the extension. This may come in handy in the event you are closing near the end of the year or in the beginning of the year on your relinquished property.

So, let’s take a look an example. Let’s say you sell your property this year and you close on it December 15^th, 2025. Normally, your 180th day would be June 13th, 2026. But your tax return for 2025 is due April 15th, 2026. However, unless you file an extension, your exchange period ends April 15th, 2026. You can enjoy a total of 180 days by filing an automatic extension on your taxes for calendar year 2025. Please consult your tax consultant or CPA to ensure you file the right form. Form 4868 is for individuals and Form 7004 would be for entities.

There may be other reasons why the IRS could extend or shorten the exchange deadlines. These would be through special relief notices in the case of a disaster. We have seen this over the past few years with flooding in North Carolina, hurricanes in certain parts of the country and any other disaster, such as the wildfires in California last year.

So as a quick summary, you have less than 180 days to complete a §1031 exchange when your tax return date is due without extension that comes before the 180-day period ends.

So, the question we get often is regarding any advantage of completing your §1031 exchange in the same tax year as closing on the relinquished property? This is an excellent question, and occasionally investors may overlook this situation. There may be practical or strategic advantages and maybe in some cases, disadvantages of completing a §1031 exchange in the same tax year as your relinquished properties. There is actually no direct IRS benefit to completing the 1031 exchange in the same year.

There are potential advantages completing the exchange in the same tax years. Let’s take a little deeper analysis. Some CPAs would like for you to do this because it may simplify their tax reporting (if you hire someone to do your taxes). You would report the entire exchange on one tax return the same year as the sale. You only file Form 8828 which is a “like kind exchange” once converting both the relinquished and replacement property. The issue you would avoid would be filing for an extension and you could potentially deal with a completed exchange at tax times. For an example, if you sell a March of 2025 and you buy in July of 2025, all would be reported neatly on your 2025 returns. You as well as your CPA professional may enjoy not needing to file a tax return extension.

If your exchange goes into the next tax year, you’ll often need to file an extension to preserve the full 180 day. Completing the exchange in the same tax year avoids that stepped entirely. Please consult the right form for filing for individuals versus entities as previously mentioned. There may also be clearer or cleaner accounting and record keeping. Both transactions would fall into the same accounting year and this may make it easier for basis adjustments and property records. Booking for entities such as LLC, partnership etc. may become easier as well as making depreciation schedules a little easier.

When the sale and purchase occur in different years, it sometimes raises flags or could cause misunderstandings. If your return doesn’t clearly show the full picture of the exchange, there may be IRS scrutiny and confusion. Keeping both in one year keeps things straightforward.

There may be neutral points or potential disadvantages. The timing doesn’t change your deferral, so there’s no extra tax benefit. As long as the exchange meets the IRS requirement, it’s fully taxed deferred whenever it spans two tax years, not one. So, what about cash flow timing? If you close your sale late in the year, you might prefer to push your replacement purchases in the next year to manage cash flow or depreciation timing. Why would you want to do that? Well, you may for example want to start depreciation later or time to recognition income differently. There may also be time pressures for late sales in the end of the year November or December closings. You have limited time before tax seasons, potentially forcing you to choose between completing the exchange quickly or filing extension to keep the 180-day full window open.

Here is a summary table.

Area of Concern	Same Year	Two Tax Years
Deferral	No Difference	No Difference
Reporting	Simpler — one return	Requires extension or split-year tracking
Record-Keeping	Easier	More complex
Cash Flow Flexibility	Less	More
Deadline Management	Easier	Might require extension

What could the bottom line be? Well, potentially finishing your 1031 exchange in the same tax year is administratively simpler and offering cleaner for reporting. But remember, there’s no tax rate or deferral advantage. If your transaction timing naturally fits within one year, that’s great. However, the word of caution is it’s not worth forcing it for just that reason. Acquiring the correct replacement property or properties needs to be the primary focus of any 1031 exchange. Accredited investors who have completed their due diligence on Delaware Statutory Trust (DST) and work with a advisor who is focused on DSTs may provide for the quick delivery or solutions to closing on a replacement property.

As always contact us for more information and a complimentary consultation.

Alternative investments and DSTs are not for all investors. The acquisition of a certain alternative investments including DSTs is for accredited investors only. Contact your investment adviser for additional details on how a DST may be a solution to your §1031 Exchange and suited for your investment future. For more information on how to properly set up an IRC §1031Tax Deferred Exchange or if you are an accredited investor and would like additional information on a DST contact Al DiNicola at 239-691-8098 or email adinicola@namcoa.com.

NAMCOA® is a SEC registered investment advisory firm that provides comprehensive portfolio management, financial planning, and fiduciary decision-making services on behalf of retirement plan sponsors. Our Difference is summarized by our fiduciary approach which enables us to better meet portfolio and retirement plan objectives, resulting in stronger risk adjusted returns for investors and peace of mind for Clients. We also focus on alternative real estate investment. Many real estate investors are seeking tax deferred solutions utilizing §1031 exchanges or Opportunity Zones.

This is not an offer to purchase or solicitation to purchase any security, as such be made only through an offering memorandum or prospectus. Investing in securities, real estate, or any investment, whether public or private, involves risk, including but not limited to the potential of losing some or all of your investment dollars when you invest in securities. You should review any planned financial transactions that may have tax or legal implications with your personal tax or legal advisor. NAMCOA, LLC is a Registered Investment Advisor, regulated by SEC (Securities and Exchange Commission). Our corporate office is located at 999 Vanderbilt Beach Road, Suite 200, Naples Florida 34108. Securities Offered through MSC-BD, LLC, Member of FINRA/SIPC. 5 Centerpointe Drive, Ste. 400 Lake Oswego, OR, 97035MSC-BD, LLC and NAMCOA are independently owned and are not affiliated.

Thank you.

“Beyond the Classroom: Why Investors Are Studying DSTs This Fall”

Recently we published a three-part educational series called “Sharpening Your Portfolio IQ: The New Semester of Alternative Investment Strategies”. At a recent real estate and CPA conference there were continued concerns and interest about the sequence of events to properly position assets for a Section 1031 tax deferred exchange.

September 27, 2025

By Al DiNicola, AIF®
1031 Tax Deferred Exchange Specialists & DST Advisor
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC, Member of FINRA/SIPC

Investors are also taking a deeper dive into Delaware Statutory Trust (DSTs). There was a transition from confusion, concern, caution and then confidence in utilizing a §1031 tax deferred exchange with a DST.

It is appropriate to re-engage and review as we enter an energized time of the year. As we enter the fourth quarter of 2025, investors may be repositioning their real estate and investment holdings to make a move prior to year end or getting ready for 2026 (already).

The confusion was shared as to how Delaware Statutory Trusts (DSTs) qualify as replacement property for §1031 tax-deferred exchanges. As a refresher, this is permitted due to IRS Revenue Ruling 2004-86. The ruling in 2004 established permitting fractional ownership in a DST being considered direct ownership of real estate. Partnership interest would not qualify.

Why DSTs Qualify

IRS Guidance
- Revenue Ruling 2004-86 confirms that a beneficial interest in a properly structured DST represents direct ownership of real estate.
- Unlike partnerships or LLCs, DST investors are treated as owning an undivided interest in the underlying real property.
Like-Kind Property Requirement
- §1031 exchanges require the relinquished property and replacement property to be of “like-kind.”
- DST interests meet this definition since they are tied to actual real estate assets.
Compliance with IRS Restrictions (noncompliance is referenced as the Seven Deadly Sins)
DST trustees and sponsors must adhere to strict limitations to maintain compliance:
- No new capital contributions after the offering is closed.
- No refinancing after the initial loan is placed.
- No reinvestment of sale proceeds from disposed property.
- Limited ability to make structural changes, renegotiate leases, or enter new business ventures.
- Only normal repair, maintenance, and minor non-structural improvements are permitted.

§1031 Exchange Process Using a DST

Sell the relinquished property – proceeds are held by a Qualified Intermediary (QI) to avoid constructive receipt.
Identify replacement property (DSTs) – within 45 days of the sale of the relinquished property.
Close on the DST investment – within a total of 180 days of the sale of the relinquished property.
Ownership via beneficial interest – investor receives pro-rata share of income and appreciation, but no active management responsibilities.

Advantages of Using DSTs in §1031 Exchanges

Fast closing, useful for meeting tight IRS deadlines. DSTs are prepackaged and ready to close in a short period of time.
Access to institutional-quality real estate (multifamily, industrial, retail, medical office, self-storage, student housing, life science, and even land).
Passive income with professional management.
Ability to diversify by investing in multiple DSTs with smaller minimums. A $500,000 exchange may be reallocated into several DSTs. There would be added due diligence as well as additional paperwork. This may provide a level of diversification. Diversification does not eliminate risk but seeks to minimize risk.

What to Look for in a Good DST Professor (AKA Advisor)

When searching for an advisor you may approach the selection process by selecting an educational partner. Investors will go through an educational process and should seek an advisor who has specific DST / §1031 exchange experience. They should know the lifecycle, risks, and legal paperwork, sponsor reputations, fees, etc. Advisors who have interfaced with CPAs may also be able to assist since many CPAs may not deal with §1031 exchanges and DSTs on a regular basis.

A real estate broker typically is not licensed appropriately. Look for Registered Investment Advisors (RIAs), broker‐dealers, or financial professionals who can legally sell DST offerings. DST sponsors typically distribute their offerings through these channels.

An advisor should be selected who has a track record for a number of transactions completed or deals done, who is engaged in the selection process and who understands DSTs needed to balance debt requirements as well as potential diversification. Just as important is being transparent regarding fees and risks. Advisors who operate in a Fiduciary capacity or with aligned incentives is an advantage. Make sure there are no conflicts of interest (e.g. the advisor is also sponsoring the DST or gets paid extra for promoting certain ones).

Communication actually is a two-way situation. The advisor needs to be responsive, communicative, and educational. Advisors should take time to understand your goals, walk you through the pros/cons, help with due diligence. The investor needs to understand time constraints, especially with the 45-day identification period and returning documentation. This is especially important when investors contact us well within their 45-day identification period.

Advisors who adopt an educational attitude first and foremost may provide the most effective and efficient solution for the investor. Investors who begin their educational process with the right advisors will be in the best financial position as well as meeting timing constraints if utilizing a 1031 exchange.

As always contact us for more information and a complimentary consultation.

Thank you.

DST Equity Raise $1.38B Higher Year Over Year ~ August 2025 Landscape Review

There is a consistent steady absorption of Equity through August 2025. 2025 continues at a very smooth pace and producing sustained results 40% higher than 2024. Now that we have reached September, back to school, back to year end focus, the pace of equity absorption may increase. August recorded about $680 Million in equity absorbed. Delaware Statutory Trust (DSTs) capital raise rebounded from July with the over $680 Million. The total equity raised stands at $4.864 Billion. This is about $1.38 Billion higher than 2024 results during the same period.

By Al DiNicola, AIF®

September 5,2025
1031 Tax Deferred Exchange Specialists & DST Advisor
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC, Member of FINRA/SIPC

Our industry colleagues at Mountain Dell Consulting monitor activity from Sponsors of Delaware Statutory Trust (DST) and TIC Market Equity investment. This provides the metric for the 40% increase year-over-year. There have been many comments, webinars, articles and podcasts on the potential benefits of the OBBB Act. We did publish a series of articles dedicated to that on our website. There will be many opinions as to how to best position alternative investments for tax advantaged returns.

The ebb and flow of available equity is very dynamic and may seem calm on the surface. However, under the surface there are dynamic changes in all asset classes. With over $680M in equity subscribed to in August and new equity (aka new offerings) being brought onto the market there are a lot of moving parts. We will cover available equity later. The trend in the number of industrial offerings (in equity amount) continues to be constant, but the spread has been reduced. We have been following this trend for over two years. There are still more actual multifamily offerings than industrial. However, the size of the industrial offerings is larger. Details are below in the chart Mountain dell does provide an overall report on the equity raised. We started tracking DST equity raised in 2019 and continue to provide analysis on results, trends and projections. This enables us to align investors’ interest in alternative real estate investments for cash investors as well as §1031 tax deferred exchange investors. There is increased interest in Opportunity zones, IRA to ROTH Conversions (using alternatives) and Oil & Gas strategies. Top of mind is accredited investor suitability.

Yes, it all starts with the end in mind for the investors. Our complimentary consultation with investors seeking initial advice or last-minute advice as in the case of a §1031 exchange deadline is always available. The continued absorption of equity may be attributed to investors and buyers adjusting to the interest rate positions. However, it may be the underlying investor and consumer confidence. There are several important factors when reviewing the landscape. We analyze the overall equity that is available, the distribution among asset classes, the leverage factor and the investor suitability. Most of the equity being absorbed appears to be coming from the §1031 exchange investor sales. The consistent equity raised (averaging $600 Million per month) continues to support a revised projection of topping over $7.4 Billion- $7.5 Billion by year end. If that level is achieved, it would be the second largest equity raised in one year since the record shattering amount of $9.4 Billion in 2022.

2025 Post Mid-Year Trends

There has been a trend in the structure of the DST offerings. Industrial and Multifamily asset class dominate the offerings. Over the past few years, industrial asset class offerings have chipped away at the dominance multifamily asset class (50% of offerings in past years) has experienced. Industrial and Multifamily consistently represent 55% of all offerings combined in number of offerings. The other impressive statistics is that combining these two asset classes account for over 66% of all offerings in dollar amount. The number of offerings is nearly the same with industrial at 22 and multifamily at 25. The big takeaway for this specific reporting period is the dollar amount of current offerings for industrial and multifamily. The large separation in the dollar amount of available equity between industrial and multifamily has decreased. Last month there were $370M more industrial offerings than multifamily. That number has narrowed to $93M. Necessary retail still holds third place in all offerings at 16.28% (up slightly). There appears to be a trend to have more industrial offerings (including a variety of industrial) than in previous years. We have commented on demographic and economic drivers that may increase demand for certain product offerings.

Market Metrics.

We monitor the remaining inventory in each specific offering weekly. There is about the same amount of overall available equity now as compared to this time last year. The quick takeaways: small decrease in overall equity available, stable number of programs, average projected year 1 distribution ticked down a fraction. The number of all cash offerings continues to increase and currently is over 60% of all offerings. This means less leverage as a response to increased interest rates and potentially more conservative approach. This may create challenges for advisors attempting to balance the debt replacement needs for certain investors.

	End August 2025	Comments
Available Equity	$2,387,784,598	Decrease in overall but increase in multifamily and student housing
Number Programs	87	A net increase of 3 offerings
Days on Market	258	down 35 days
# Current Sponsors	46	increase of 12
Avg Yr 1 Return	4.88	slight decrease
All Cash	53	62%% of all offerings All Cash

Current Asset Class Metrics

Sponsors have entered a more conservative underwriting, reduced the LTV and increased the equity needed for each DST. We reported a blip of over 60% mid-month, and the trend is continuing.

Asset Class	# Programs	Available Equity	LTV	All Cash	$ as % of offerings	# as % of offerings
Energy	2	$ 13,384,990	0.00%	2	0.56%	2.33%
Hospitality	3	$ 32,032,616	25.93%	2	1.34%	3.49%
Industrial	22	$ 810,863,861	12.91%	16	34.01%	25.58%
Multifamily	25	$ 717,168,301	31.91%	8	30.08%	29.07%
Multi-Manufactured	0	$ –			0.00%	0.00%
Multi Student Housing	3	$ 69,491,877	46.76%	0	2.91%	3.49%
Office	2	$104,685,339	39.42%	0	4.39%	2.33%
Office-Medical	3	$ 201,233,901	18.87%	2	8.44%	3.49%
Other	7	$ 149,843,707	0.00%	7	6.28%	8.14%
Retail	14	$ 121,041,651	6.47%	11	5.08%	16.28%
Self-Storage	3	$ 64,579,494	0.00%	3	2.71%	3.49%
Senior Housing	2	$ 100,062,972	0.00%	2	4.20%	2.33%
Total	86	$2,384,388,709		53	100.00%	100.00%

We want to amplify the difference in the amount of equity available in the industrial asset classes compared to multifamily is shrinking on available equity. The $93 million difference is down considerably from the last report of $350M spread. This may be due to the full subscription of a few offerings in the industrial class. The size of the offering of industrial is also larger on average than multifamily. Industrial offering on average is over $110M offerings with a current average leverage of 12.91% that includes 22 offerings and 16 all cash. However, 45% of the total equity in the industrial asset class is comprised of two large offerings. When compared to multifamily the current average offering size is $58 million with an average leverage of 31.91%. This includes 25 offerings and only 8 all cash. The industrial offering size average has increased, and the Multifamily offering size has decreased. Noted in the chart above is the average LTV for each asset class. Investors who need debt replacement to satisfy 1031 exchange requirements are challenged. This challenge may funnel a certain amount of dollars into highly leveraged offerings to create balance. Understanding that when displaying an average there may be (depending on the asset class) an LTV of over 36%. Thus, for investors with a higher LTV need we have a few alternatives. When we assist an investor with a larger §1031 exchange ($1M and above) especially when debt needs to be replaced, we typically blend multiple DSTs with leverage to diversify the replacement portfolio for the investor. For investors with debt replacement requirements, we urge you to engage as soon as possible. Fewer DST with higher LTV offerings has become more in demand. The alternative for replacing debt is to bring more cash to the exchange. Many investors want to avoid this option. Please consult with us about our debt balancing strategy.

There are a few interesting takeaways from this chart as displayed. In looking at the number of programs offered by a single asset class multifamily with 25 is slightly outpacing the rest of the offerings. The Industrial Asset class continues to be attractive with 22 current offerings. Over the period last year there were as many industrial offerings as there were multifamily. The top three asset classes of Multifamily, Industrial and necessary Retail represent about 70% of all offerings. The limited supply of the other asset classes may increase demand, especially for all cash investors. There has been an increased absorption of industrial assets over the past few months. A note for retail which needs to be explained is that many of the offerings may be considered “necessary retail” such as grocery stores and needed facilities as compared to your department store retail offerings. Noticeably absent from this is manufactured housing. There are also many asset classes with single digit offerings. In addition, 7 offerings (of the 86) have less than $1M remaining. What is noticeable is an increase in the “Other” asset class category. These are specialty offerings and have unique positions. These include land offerings for vertically integrated sponsors with potentially shorter investment requirements.

An item which we do not report on too frequently is the inclusion of a §721 UPREIT at some point in time after the Delaware Statutory Trust is acquired. Some of the offerings will have optional §721 UPREITS, others will have mandatory upgrades. Look for more information on the advantages and disadvantages of the §721 UPREIT program. We previously reported two large institutional real estate REITs who have introduced DSTs as a path to the extremely large REIT. The interest of certain investors continues. Migration to the REIT (via 721 UPREIT) would happen after a two-year safe harbor holding period of the DST being acquired as in the case of a 1031 exchange. We have noticed more requests from our investors to fully understand this option.

Final DST Market Overview Comments

Recently attending several industry retreats and conferences there is optimism that the overall real estate markets will continue to improve in many areas of the country. We continue to research, review, and monitor all the major DST sponsors. We speak weekly with our sponsor contacts and conduct due diligence on DST offerings. Our continued research enables us to provide a quick response to investor questions regarding their cash investing needs as well as their §1031 tax deferred exchange. We are especially skilled at balancing the exchange debt equity requirements. We also specialize in the §1033 exchange in the case of natural disaster or eminent domain cases.

One Big Beautiful Future

We started to post articles on our website regarding the use of alternative investments in conjunction with the OBBB Act. Check under Recent Post on this link. DST News | DST Education and Market News. Currently, based on feedback from our involvement in the industry, it appears that the future of the §1031 exchange is safe to continue. This provides comfort for investors seeking to sell appreciated real estate and deferring capital gains. We have been plugged into the changes and modification of the Opportunity Zone legislation. There are investors requesting how to combine OZ with other tax strategies. Many have referenced the new Opportunity Zone legislation as OZ 2.0.

DSTs are not for all investors. The acquisition of a DST is for accredited investors only. Contact your investment adviser for additional details on how a DST may be a solution to your 1031 Exchange and suited for your investment future. For more information on how to properly set up an IRC 1031Tax Deferred Exchange or if you are an accredited investor and would like additional information on a DST contact Al DiNicola at 239-691-8098 or email adinicola@namcoa.com.

Thank you.

Understanding Cap Rates and their role in §1031s & DSTs~ Part 2

March 27, 2025

By Al DiNicola, AIF®
1031 Tax Deferred Exchange Specialist & DST Advisor/Specialist
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC, Member of FINRA/SIPC

In Part 1, we did an overview of understanding cap rates in their roles in 1031 exchanges as well as Delaware statutory trusts. In this part, we will dive a little deeper into the effects of cap rates over the period of ownership and how it may affect the exit or disposition of the real estate. Click this link to see Part 1. Understanding Cap Rates Part 1

There are several items and issues that may affect the investment. The net operating income or NOI of the property during the term of ownership may fluctuate. Individual investors simply take the rent rolls or rental income the previous owner of the property had and used that as a basis for projecting income over their ownership of the property. Sponsors of Delaware Statutory Trust, or DST will utilize a process that includes projections or proformas as they are known when developing a new property. For example, if a sponsor is acquiring a brand-new apartment complex, they will typically project a period on how long it will take to lease up the property. This projected “lease up” period may be anywhere from 18 to 24 months or longer. During that lease up the operating income will increase as more and more units are rented by individual tenants. Individual investors that buy existing rental properties or investment properties will hopefully experience renewals of leases to maintain their net operating income. Over the years many investors as well as sponsors have projected a spread between an increase in operating expenses and rent increases. An example may be operating expenses increasing 3% per year and rent increases 5% per year.

There are items that will affect this net operating income, specifically expenses. Operating expenses may expand or contract that will directly affect the “net” operating income. When an individual investor purchases a property, the local municipality may reevaluate the value of that property and increase the value which will have a direct effect on taxes due on that property. There have been several incidents where we have heard from investors whose property taxes have increased over a one-to-two-year period of owning the property. On the residential side, we have had investors in Florida who have purchased the property from a seller who owned the property as their primary residence. In Florida residents enjoy a designation called homestead exemption. That homestead exemption limits the amount of increased valuation year over year to 3%. This directly affects property taxes. When a new investor purchases the property, the valuation could increase drastically. Especially if the new investor is purchasing it as a rental property. The valuation of the property may be based on the sales price that the new investor has paid. The property as a homestead may have enjoyed years of only a 3% increase. We have seen the valuation double. There could be a 50% year-over-year increase in taxes. Many times, new investors do not anticipate this recalculation of the value of the property that’s being purchased.

Typically, sponsors will project increases in property valuations, especially in the case of a newly built multifamily apartment complex. However, there have been municipalities in several states that have increased valuations (above normal projections), which will have a direct impact on increased taxes. There are several petitions currently challenging the increased valuations.

Current Stress on Assets

There are a few asset classes including multifamily that are experiencing (what some experts suggest is temporary) is cap rate expansion. The rise in interest rates over the past few years as well as the number of new multifamily apartments being built and delivered is putting stress on ca rates. The rise in operating expenses (taxes & insurance) and the flat rental increases are causing the stress. The good news on the supply pipeline is that by mid-2025 there appears to be a dramatic reduction in future supply.

Cap Rate Compression vs. Expansion

Cap Rate Compression: Occurs when property values increase while NOI remains stable, reducing the cap rate. This often happens in low-interest-rate environments or when investor demand is high.
Cap Rate Expansion: Happens when property values decrease or NOI declines, leading to a higher cap rate. Rising interest rates, economic downturns, or oversupply of properties can drive expansion.
Remember- lower cap rate may increase value or price. There is an inverse relationship.

The Role of Cap Rates in §1031 Exchanges

A §1031 exchange allows investors to defer capital gains taxes by reinvesting proceeds from a sold property into a “like-kind” replacement property. Cap rates are crucial in evaluating replacement properties within the §1031 exchange process.

Current Market Trends & §1031 Exchanges

1. Rising Interest Rates & Cap Rate Expansion

With the Federal Reserve tightening monetary policy, borrowing costs have increased, leading to cap rate expansion across many asset classes. Investors selling properties purchased during a low-rate environment may face lower valuations on their replacements.

2. Shift in Investor Demand

While demand remains strong for high-quality assets like industrial and multifamily properties, certain sectors, such as office and retail, have seen cap rate expansion due to uncertainty and structural shifts in demand.

3. DSTs as a Potential Solution in a Volatile Market

Delaware Statutory Trusts (DSTs) provide an alternative investment option for §1031 exchange investors looking for diversification and stability in uncertain times. DSTs offer fractional ownership in institutional-quality real estate, managed by professional sponsors.

In a rising interest rate environment, investors may find it challenging to locate suitable replacement properties with favorable cap rates. DSTs allow investors to access pre-vetted properties with stabilized returns, reducing the risk of failing to complete a §1031 exchange within IRS timelines.

DSTs also offer a passive investment structure, removing the burden of active management, which can be appealing in an unpredictable real estate market.

However, investors should carefully evaluate each DST offering, including sponsor experience, underlying property performance, and potential risks. DST investments are subject to specific risks and may not be suitable for all investors. Consulting a financial professional is recommended before making investment decisions.

Key Considerations for §1031 Exchange Investors

Monitor Cap Rate Trends: Understanding whether cap rates are compressing or expanding can impact property valuations and investment decisions.
Evaluate NOI Growth: Properties with strong NOI growth potential may offset cap rate expansion concerns.
Consider DSTs for Diversification: DSTs can provide access to institutional-quality real estate and passive income potential.
Act Quickly in a Volatile Market: With shifting cap rates, §1031 exchange investors must be proactive in identifying replacement properties within IRS timelines.
Consult a Financial Professional: DSTs and other §1031 exchange options should be considered based on individual investment objectives, risk tolerance, and financial goals.

DSTs are not for all investors. The acquisition of a DST is for accredited investors only. Contact your investment adviser for additional details on how a DST may be a solution to your §1031 Exchange and suited for your investment future. For more information on how to properly set up an IRC §1031 Tax Deferred Exchange or if you are an accredited investor and would like additional information on a DST contact Al DiNicola at 239-691-8098 or email adinicola@namcoa.com.

This is not an offer to purchase or solicitation to purchase any security, as such be made only through an offering memorandum or prospectus. Investing in securities, real estate, or any investment, whether public or private, involves risk, including but not limited to the potential of losing some or all of your investment dollars when you invest in securities. You should review any planned financial transactions that may have tax or legal implications with your personal tax or legal advisor. NAMCOA, LLC is a Registered Investment Advisor, regulated by SEC (Securities and Exchange Commission). Our corporate office is located at 999 Vanderbilt Beach Road, Suite 200, Naples Florida 34108. Securities Offered through MSC-BD, LLC, Member of FINRA/SIPC. 5 Centerpointe Drive, Ste. 400 Lake Oswego, OR, 97035. MSC-BD, LLC and NAMCOA are independently owned and are not affiliated.

Thank you

Understanding Cap Rates and their role in §1031s & DSTs~ Part 1

March 23, 2025

By Al DiNicola, AIF®
1031 Tax Deferred Exchange Specialist & DST Advisor/Specialist
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC, Member of FINRA/SIPC

We review countless numbers of Delaware Statutory Trust (DST) offerings on a weekly basis. Included in the materials are references to acquisition cap rate and fully loaded cap rate. We will attempt to clarify in a two-part series.

What is a Cap Rate

The capitalization rate, or cap rate, is a key metric used in real estate to measure the expected rate of return on an investment property. It is calculated as Cap rate is equal to the net operating income divided by the current market value.

For example, if a property generates $50,000 in annual net operating income, or NOI and is valued at $1,000,000, the cap rate is 5%. Cap rates have provided investors somewhat of a “Rule of Thumb” when comparing multiple properties. Different asset classes will or may have a range of cap rates. Cap rates enable an investor to assess different types of properties. A lower cap rate may indicate a lower risk and potentially a more stable investment. Higher cap rate could indicate a riskier investment, however, with the potential greater return.

Delaware Statutory Trust (DST)

A DST is a legally recognized trust that allows investors to own fractional interests in real estate assets.
Often used for 1031 exchanges, allowing investors to defer capital gains taxes when selling real estate.
Managed by a sponsor, so investors have no active management responsibilities.
Typically, it holds institutional-grade commercial real estate like apartment complexes, office buildings, self-storage, industrial and other asset types.

How Cap Rates Apply to Investments and DSTs:

Lower Cap Rates: DSTs usually offer stable, income-generating properties with lower cap rates (typically 4%–6%), reflecting the lower risk of these institutional assets.
Market Influence: Cap rates for DSTs vary based on property type (multifamily, industrial, retail, etc.), location, and interest rate environment.
Trade-off: Lower cap rates often mean higher property values but lower relative returns for investors.

One of the items investors need to understand is the difference between the purchase price cap rate and the fully loaded cap rate. Investors will evaluate the current investment property they are purchasing. In addition, there are costs to acquire that property. Which may change the cap rate. When an investor looks at a property to acquire, the cap rate when negotiating the sale may change once the property is acquired. Will all the current tenants remain in place? How long are the remaining leases? NOI is prior to debt service (if any) on the property. The investor buyer will have additional cost involved in the acquisition of the property or cost of sale items. This includes commission, closing cost, etc. This would be a fully loaded cap rate.

Here is an example of a Purchase Price Cap Rate vs. Fully Loaded Cap Rate.

Purchase Price- Calculated by dividing the first year proforma net operating income of $185,917by the purchase price of $2,920,500. Calculated as 6.37%

Fully Loaded-Calculated by dividing the first year proforma net operating income of $185,917 by the Total Cost to acquire of $3,671,752. Calculated as 5.06%

SIDE BAR-There is an inverse relationship between the cap rate and purchase price. A lower cap rate typically indicates a higher purchase price.

Capitalization rates (cap rates) are influenced by several factors, including:

1. Interest Rates

When interest rates rise, cap rates tend to increase because investors demand higher returns to compensate for higher borrowing costs.
When interest rates fall, cap rates tend to decrease, making real estate investments more attractive.

2. Market Conditions

A strong economy with high demand for properties can lower cap rates as property values rise.
A weak economy or oversupply can increase cap rates as property values decline.

3. Property Type

Different property types (e.g., multifamily, office, industrial, retail) have varying levels of risk and return, leading to different cap rates.
More stable, lower-risk property types (e.g., multifamily) often have lower cap rates, while higher-risk properties (e.g., hospitality, specialty retail) tend to have higher cap rates.

4. Location

Prime locations with strong demand, good infrastructure, and low crime rates generally have lower cap rates.
Secondary or tertiary markets with higher risk or lower demand typically have higher cap rates.

5. Risk Perception

Properties with stable long-term leases and creditworthy tenants typically have lower cap rates.
Properties with higher vacancy risk or short-term leases tend to have higher cap rates.

6. Rental Income Growth

Properties in areas with high rental growth potential generally have lower cap rates.
If rental income is stagnant or declining, cap rates may increase.

7. Property Condition & Age

Newer, well-maintained properties typically have lower cap rates due to lower maintenance costs and higher desirability.
Older properties with higher capital expenditure requirements often have higher cap rates.

8. Supply & Demand Dynamics

If demand for real estate investments is high, cap rates decrease due to competition.
If supply exceeds demand, cap rates rise as property values drop.

9. Investor Sentiment

In a bullish market, investors may accept lower cap rates due to confidence in future growth.
In a bearish market, investors may demand higher cap rates as compensation for increased risk.

Conclusion

Cap rates play a crucial role in evaluating real estate investments and are especially relevant in the 1031 exchange process. With current market conditions showing signs of cap rate expansion, investors should stay informed, assess their options carefully, and consider alternatives like DSTs to navigate the changing landscape successfully. Given the complexities involved, working with a qualified financial professional can help ensure an informed investment strategy that aligns with financial objectives and risk tolerance. Part Two will explore cap rate compression and expansion.

DSTs are not for all investors. The acquisition of a DST is for accredited investors only. Contact your investment adviser for additional details on how a DST may be a solution to your §1031 Exchange and suited for your investment future. For more information on how to properly set up an IRC §1031 Tax Deferred Exchange or if you are an accredited investor and would like additional information on a DST contact Al DiNicola at 239-691-8098 or email adinicola@namcoa.com.

This is not an offer to purchase or solicitation to purchase any security, as such be made only through an offering memorandum or prospectus. Investing in securities, real estate, or any investment, whether public or private, involves risk, including but not limited to the potential of losing some or all of your investment dollars when you invest in securities. You should review any planned financial transactions that may have tax or legal implications with your personal tax or legal advisor. NAMCOA, LLC is a Registered Investment Advisor, regulated by SEC (Securities and Exchange Commission). Our corporate office is located at 999 Vanderbilt Beach Road, Suite 200, Naples Florida 34108. Securities Offered through MSC-BD, LLC, Member of FINRA/SIPC. 5 Centerpointe Drive, Ste. 400 Lake Oswego, OR, 97035. MSC-BD, LLC and NAMCOA are independently owned and are not affiliated.

Thank you.

Understanding §1031 Exchanges: “Swap and Drop” vs. “Drop and Swap”

March 20, 2025

By Al DiNicola, AIF®
§1031 Tax Deferred Exchange Specialist & DST Advisor
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC, Member of FINRA/SIPC

Some real estate advisors are anticipating the overall market to improve, creating a pipeline of real estate transactions in the second half of 2025. Anticipating this increase, investors who own real estate with other investors need to understand exit strategies when there are different goals and objectives of the individual investors.

Introduction

We continue to have comments on our previous post on a variety of topics. The conversations lately have included §1031, Delaware Statutory Trust, Opportunity zones and more when navigating the tax deferral opportunities. As a savvy real estate investor, you’re well aware of the tax benefits that §1031 exchanges offer. These powerful tools allow you to defer capital gains taxes when selling one investment property and acquiring another like-kind property. However, the intricacies of dealing with partnerships and LLCs can be as complex as navigating a multi-story commercial building. In this comprehensive article, we’ll delve into two specific strategies: the “swap and drop” and the “drop and swap.” Understanding the distinctions and applications of these strategies is crucial for making informed decisions that align with your investment goals. It may be somewhat confusing because the terminology seems similar.

1. §1031 Exchanges (Cliff Notes)

If you can remember Cliff Notes you may be in the right demographics to sell active real estate and move into a passive ownership. Here are the notes or the fundamental principles of §1031 exchanges. These transactions allow investors to sell a property and reinvest the proceeds into another property of equal or greater value, all while deferring capital gains taxes. The key requirement is that the replacement property must be of like kind (e.g., commercial real estate for commercial real estate). It’s important to note that ‘like-kind’ refers to the nature and character of the property, rather than its grade or quality, allowing for a broad range of investment opportunities.

2. The Challenge with Partnership LLCs

Limited liability companies (LLCs) are a popular choice for real estate investments due to their pass-through taxation and flexibility. However, when it comes to §1031 exchanges, partnership LLCs pose unique challenges. Partnership interests mean that each partner holds an ownership interest. But what happens when some partners want to cash out while others prefer to continue deferring taxes through a §1031 exchange? It’s akin to trying to negotiate lease terms with a diverse group of tenants—everyone has different priorities. Navigating these challenges requires strategic planning, often leading investors to consider ‘swap and drop’ or ‘drop and swap’ strategies.

3. The “Drop and Swap” Strategy

What Is It?

In a “drop and swap,” partners first perform a financial ballet by converting their ownership structure from an “entity level” (the LLC) to a co-ownership arrangement (tenants in common or TIC). Next, the property is sold, and the proceeds are divided proportionally among the co-owners. Co-owners can choose to cash out and pay taxes or reinvest in another property through a qualified intermediary (QI) while still deferring taxes. Simply put, this strategy involves restructuring ownership from a collective LLC to individual ownership before proceeding with the exchange.

Is It Legal?

Yes, the “drop and swap” strategy is legal. It allows partners to maintain the benefits of a §1031 exchange while adjusting their ownership structure. Taking the steps to accomplish this will potentially save taxes for some investors. We would also suggest to have the right documentation completed ahead of the sale.

4. The “Swap and Drop” Strategy

What Is It?

There is another option. Partners start with the existing LLC ownership structure. The property is sold, and the entire LLC sells the relinquished property in one grand swoop. Partners then purchase the replacement property together, continuing to defer taxes as long as the LLC remains intact. In more straightforward terms, the “swap and drop” keeps the LLC structure intact throughout the exchange process, enabling partners to act together.

Is It Legal?

Absolutely. Section §1031 requires that exchanges of partnership property be handled by the same taxpayer. As long as the LLC composition remains unchanged, the “swap and drop” approach is compliant. It’s like executing a flawless aerial maneuver without missing a beat.

5. Which Strategy Should You Choose?

The decision between “swap and drop” and “drop and swap” depends on your specific circumstances. “Drop and Swap” is ideal when partners want to change their ownership structure and maintain §1031 exchange benefits. “Swap and Drop” is suitable when partners prefer to keep the existing LLC intact and defer taxes collectively. While choosing a strategy, consider potential risks and consult with professionals to understand the implications fully.

Conclusion

Both strategies offer solutions for navigating the complexities of partnership LLCs during §1031 exchanges. The nuances of each approach require careful consideration and a deep understanding of the partnership’s goals and individual circumstances. While these strategies offer innovative solutions, the complexities of §1031 exchanges and partnership dynamics necessitate personalized advice from tax and legal professionals to navigate successfully. Consult with your tax advisor and legal counsel to determine the best approach for your investment goals.

If the investors wish to go in different directions meaning some investors utilizing a traditional 1031 exchange and others seeking a more passive investments such as DST, the former strategy is preferable. That would be to get the legal work completed in the Drop and Swap. DST (or TICs) by design have longer investment time periods. This would prevent any quick actions. In addition, some investors who are required to replace debt enjoy the non-recourse debt assignment in the DST structure.

DSTs are not for all investors. The acquisition of a DST is for accredited investors only. Contact your investment adviser for additional details on how a DST may be a solution to your §§1031 Exchange and suited for your investment future. For more information on how to properly set up an IRC §§1031 Tax Deferred Exchange or if you are an accredited investor and would like additional information on a DST contact Al DiNicola at 239-691-8098 or email adinicola@namcoa.com.

This is not an offer to purchase or solicitation to purchase any security, as such be made only through an offering memorandum or prospectus. Investing in securities, real estate, or any investment, whether public or private, involves risk, including but not limited to the potential of losing some or all of your investment dollars when you invest in securities. You should review any planned financial transactions that may have tax or legal implications with your personal tax or legal advisor. NAMCOA, LLC is a Registered Investment Advisor, regulated by SEC (Securities and Exchange Commission). Our corporate office is located at 999 Vanderbilt Beach Road, Suite 200, Naples Florida 34108. Securities Offered through MSC-BD, LLC, Member of FINRA/SIPC. 5 Centerpointe Drive, Ste. 400 Lake Oswego, OR, 97035. MSC-BD, LLC and NAMCOA are independently owned and are not affiliated.

Thank you.

Understanding Ground Lease Interests and Their Role in §1031 Exchanges

March 14, 2025

By Al DiNicola, AIF®
1031 Tax Deferred Exchange Specialist & DST Advisor/Specialist
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC, Member of FINRA/SIPC

In the world of real estate investment, leveraging the benefits of a §1031 exchange can provide investors with a powerful tool to defer taxes and reinvest in properties. One unique opportunity within this strategy involves the use of ground lease interests. While ground leases are typically considered long-term rental agreements, they can also play a significant role in tax-deferred exchanges under specific conditions. But how exactly do ground leases fit into the framework of a §1031 exchange, and what are the benefits, challenges, and considerations investors should be aware of when using this strategy?

What is a Ground Lease?

A ground lease is a long-term lease arrangement where the tenant holds exclusive rights to the land for a specified period, typically 30 years or more. In these leases, the tenant is responsible for developing and maintaining the property, but the ownership of the land remains with the landlord. Ground leases are often used in commercial real estate, allowing tenants to build and operate properties without the upfront costs associated with owning the land.

Can a Ground Lease Be Used in a §1031 Exchange?

Yes, a ground lease can qualify for a §1031 exchange under the right conditions. The Internal Revenue Service (IRS) treats long-term leasehold interests (those lasting at least 30 years) as similar to fee simple ownership, which makes them eligible for §1031 exchange tax deferral. For investors looking to defer capital gains taxes on the sale of a relinquished property, the leasehold interest in a ground lease presents an effective and flexible option.

How Does a Ground Lease §1031 Exchange Work?

In a typical §1031 exchange, an investor sells a property and reinvests the proceeds into another like-kind property, thus deferring capital gains taxes. A ground lease §1031 exchange follows a similar process but involves acquiring a long-term leasehold interest in a property along with the right to develop or improve the land.

In this case, an investor sells a property and uses the proceeds to acquire a leasehold interest in a ground lease. The investor can then develop or improve the land according to their specifications, allowing for significant customization of the property. This type of exchange is particularly advantageous for investors seeking strategic locations for development or those who wish to avoid the high costs of purchasing land outright.

Benefits of a Ground Lease §1031 Exchange

A ground lease §1031 exchange offers several compelling advantages for real estate investors:

Tax Deferral: As with traditional §1031 exchanges, the most significant benefit is the ability to defer capital gains taxes on the sale of the relinquished property. This allows investors to preserve more capital for reinvestment and grow their portfolios without the immediate tax burden.

Cost Efficiency: Ground leases can often be more affordable than purchasing land, allowing investors to focus their capital on property development rather than land acquisition. This strategy allows for greater financial flexibility and efficiency.

Flexibility in Development: A ground lease provides the flexibility to develop or enhance the property. Investors can create customized improvements, which are particularly useful for those seeking to tailor properties to specific market needs or operational goals.

Prime Location Opportunities: Ground leases often involve securing prime real estate locations that may be unavailable for direct purchase. Investors can gain access to valuable properties in key areas without the substantial upfront costs associated with land acquisition.

Risk Mitigation: Since ground leases are long-term contracts, they offer stability for investors who benefit from fixed lease terms and reliable landowners. This can reduce the uncertainty and risk associated with shorter-term investments.

Practical Considerations and Challenges

While ground lease §1031 exchanges present significant opportunities, they also come with specific considerations that investors must navigate.

Eligibility and Lease Term Requirements: The IRS requires the lease term to be at least 30 years for the exchange to qualify. If the lease term is shorter than this, it will not be considered “like-kind” and will not qualify for tax deferral.

Improvement Requirements: In some cases, investors may choose to improve or develop the property as part of the exchange. The IRS requires that the improvements meet or exceed the value of the relinquished property to qualify for tax deferral benefits. These improvements must also be completed within 180 days of the sale of the relinquished property, adding a layer of complexity to the process.

Delaware Statutory Trust (DST) offerings. There have been and potentially, may continue to be a select number of offerings of structures built on a ground lease. These ground leases are very long in the number of years. One of the potential benefits, maybe the depreciation schedules on the asset may be on the building only. In addition, there may also be accelerated depreciation schedules and cost segregation providing additional pass-through benefits to the investors.

Involvement of a Qualified Intermediary (QI): As with any §1031 exchange, the use of a Qualified Intermediary (QI) is required to facilitate the transaction. The QI helps ensure that the taxpayer does not have direct control over the proceeds of the relinquished property sale, which is crucial for maintaining the tax-deferred status of the exchange.

Legal and Documentation Requirements: The IRS requires detailed documentation of the intended improvements and their legal description, as well as strict timelines. It is essential to have clear planning and the necessary legal and financial resources to ensure the exchange is executed correctly.

State-Specific Regulations: State laws may vary on what constitutes real property, so it’s crucial to be aware of the specific regulations in the state where the property is located. Working with an experienced legal team can help mitigate potential risks associated with state-specific rules.

Key Steps in a Ground Lease §1031 Exchange

Sale of the Relinquished Property: The process starts with the sale of the relinquished property. The proceeds are then transferred to a Qualified Intermediary.

Identification of the Replacement Property: Within 45 days of the sale, the investor must identify the replacement property (in this case, a leasehold interest in a ground lease) and any intended improvements.

Involvement of the Accommodation Titleholder (AT): During the construction period, a special purpose entity (SPE) or Accommodation Titleholder holds the leasehold interest while the investor manages the development process.

Completion of Improvements: The investor must ensure that the improvements are completed within the IRS’s 180-day window. If any issues arise during construction, contingency plans should be in place to avoid jeopardizing the exchange.

Transfer of Leasehold Interest: Upon completion, the leasehold interest, along with the improvements, is transferred to the investor, finalizing the exchange.

DSTs are not for all investors. The acquisition of a DST is for accredited investors only. Contact your investment adviser for additional details on how a DST may be a solution to your §1031 Exchange and suited for your investment future. For more information on how to properly set up an IRC §1031 Tax Deferred Exchange or if you are an accredited investor and would like additional information on a DST contact Al DiNicola at 239-691-8098 or email adinicola@namcoa.com.

This is not an offer to purchase or solicitation to purchase any security, as such be made only through an offering memorandum or prospectus. Investing in securities, real estate, or any investment, whether public or private, involves risk, including but not limited to the potential of losing some or all of your investment dollars when you invest in securities. You should review any planned financial transactions that may have tax or legal implications with your personal tax or legal advisor. NAMCOA, LLC is a Registered Investment Advisor, regulated by SEC (Securities and Exchange Commission). Our corporate office is located at 999 Vanderbilt Beach Road, Suite 200, Naples Florida 34108. Securities Offered through MSC-BD, LLC, Member of FINRA/SIPC. 5 Centerpointe Drive, Ste. 400 Lake Oswego, OR, 97035. MSC-BD, LLC and NAMCOA are independently owned and are not affiliated.

Thank you.

Related Party Rules in §1031 Exchanges: Navigating Complexity for Compliance

The rules surrounding related parties in §1031 exchanges often lead to confusion and misconceptions. While many believe that transactions involving related parties are prohibited under the Internal Revenue Code (IRC) Section 1031, exceptions exist that allow such exchanges under specific conditions.

March 9, 2025

By Al DiNicola, AIF®
DST §1031 Specialist
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC, Member of FINRA/SIPC

We receive calls from investors selling their business and the associated real estate to a family member. The investor may be seeking to do a §1031 exchange into a Delaware Statutory Trust (DST) by selling the real estate property to a related party taking over their business. The seller wants to move on to a more passive investment for the real estate and potentially utilize a gain on the business sale via an Opportunity Zone investment. This article explores the related party rules, clarifies who qualifies as a related party, and outlines the exceptions and considerations investors need to know to navigate these transactions successfully.

What Is a Related Party in a §1031 Exchange?

Under Sections 267(b) and 707(b)(1) of the IRC, a related party in a §1031 exchange includes:

Immediate Family Members: Siblings, spouses, ancestors (parents, grandparents), and descendants (children, grandchildren).
Business Entities with Significant Ownership or Control: Entities where the exchanger holds more than 50% ownership, such as corporations, partnerships, or trusts; two corporations that are members of the same controlled group; and corporations and partnerships with more than 50% direct or indirect common ownership.
Certain Fiduciary Relationships: For example, an exchanger and the fiduciary of a trust.
Affiliated Businesses: Entities directly or indirectly controlled by the exchanger or their immediate family.

This broad definition ensures that any transaction involving individuals or entities with close personal or financial ties is subject to heightened IRS scrutiny to prevent abuse.

Why Related Party Rules Exist

Before 1984, related party transactions in §1031 exchanges were prone to manipulation. For example, related parties could shift tax liabilities or inflate property values, undermining the integrity of the tax system. To address this, the Tax Reform Act of 1984 introduced safeguards, including the two-year holding period, to ensure that these transactions are legitimate and not structured to avoid taxes.

Key Rules and Exceptions for Related Party Exchanges

Direct Exchanges Between Related Parties

When two related parties directly exchange properties, both parties must hold the exchanged properties for at least two years following the transaction. If either party disposes of their property within this period, the IRS retroactively revokes the tax deferral, and the original capital gain becomes taxable in the year of disposal.

However, exceptions to the two-year holding rule exist, including:

Death of a Party: If one party dies within the two-year period, the rule is waived.
Involuntary Dispositions: Events like eminent domain or natural disasters that force the sale of a property.
IRS Approval: If the IRS determines the transaction was not structured to avoid taxes.

Selling to a Related Party

Selling relinquished property to a related party in a §1031 exchange is generally straightforward, as long as the transaction complies with IRC Section §1031 guidelines, including the requirement that the property is held for investment or business purposes. No specific holding period applies to the related party acquiring the relinquished property.

Buying from a Related Party

Purchasing replacement property from a related party comes with stricter requirements. The related party selling the property must also be conducting a §§1031 exchange for the transaction to qualify. If the related party is not engaging in their own exchange, the transaction will likely be disqualified.

Documentation and IRS Compliance

Related party exchanges are subject to heightened scrutiny, making thorough documentation critical. Investors should maintain detailed records, including:

Property appraisals
Contracts and exchange agreements
Correspondence with the related party
IRS Form 8824, which discloses the nature of the relationship and the transaction details

Planning for Success in Related Party Exchanges

To navigate the complexities of related party rules in §1031 exchanges, consider the following:

Understand the Two-Year Holding Requirement: Ensure compliance with the holding period for direct exchanges to avoid retroactive tax consequences.
Consult Professionals: Work with tax advisors, legal professionals, and a qualified intermediary to ensure the exchange complies with all regulations.
Maintain Transparency: Keep detailed records and file all required forms to demonstrate the legitimacy of the transaction.

Related party rules in §1031 exchanges are designed to protect the integrity of the tax system while still allowing legitimate transactions to occur. By understanding these rules, planning carefully, and seeking professional guidance, investors can leverage §1031 exchanges involving related parties to achieve their investment goals while staying compliant with IRS regulations.

DSTs are not for all investors. The acquisition of a DST is for accredited investors only. Contact your investment adviser for additional details on how a DST may be a solution to your §1031 exchange and suited for your investment future. For more information on how to properly set up an IRC §1031 Tax Deferred Exchange or if you are an accredited investor and would like additional information on a DST contact Al DiNicola at 239-691-8098 or email adinicola@namcoa.com.

This is not an offer to purchase or solicitation to purchase any security, as such be made only through an offering memorandum or prospectus. Investing in securities, real estate, or any investment, whether public or private, involves risk, including but not limited to the potential of losing some or all of your investment dollars when you invest in securities. You should review any planned financial transactions that may have tax or legal implications with your personal tax or legal advisor. NAMCOA, LLC is a Registered Investment Advisor, regulated by SEC (Securities and Exchange Commission). Our corporate office is located at 999 Vanderbilt Beach Road, Suite 200, Naples Florida 34108. Securities Offered through MSC-BD, LLC, Member of FINRA/SIPC. 5 Centerpointe Drive, Ste. 400 Lake Oswego, OR, 97035. MSC-BD, LLC and NAMCOA are independently owned and are not affiliated.

Thank you.

1031 Exchange Education- What is Boot?

The market is starting to loosen up for investors seeking to sell their properties via §1031 tax deferred exchange. Once under contract investors need to understand a few specific items that may cause either a unintended tax issue or an issue with an expense taken at closing that is not permitted in a §1031 exchange.

March 4, 2025

By Al DiNicola, AIF®
DST 1031 Specialist
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC, Member of FINRA/SIPC

Recently we have received calls from investors seeking information on what cash they can retain, what happens when the loan is paid off, and how rental and security deposits are handle at closing. We do not provide tax advice.

Let’s handle one item at a time. There is an item referenced as boot in an exchange. “Boot” refers to any portion of a §1031 exchange that does not meet the like-kind replacement property criteria. Most commonly this is in the form of “cash boot” and “mortgage/debt boot.”

Cash boot occurs when an investor has uninvested proceeds from the sale of a replacement property. If they intend to do a §1031 exchange but do not replace all of the cash received from the sale, they will owe tax on the uninvested portion.

Example:

If an investor sells an investment property for $2,000,000 and they purchase a replacement property for $1,500,000, they will have a $500,000 cash boot that will be subject to tax. The investor would be subject to federal and state taxes depending on where they live.

It has been brought to our attention in a few investment seminars that certain investors will over paid for their replacement property. This occurs when calculating the potential taxes that may be due on not using all the cash, when compared to simply paying more for the property (aka the asking price or even higher). If you are paying capital gains taxes, have a high income that may subject you to NIIT (net investment income tax), and live in a high income tax state you may face up to 40% taxes on the boot. Other investors (accredited) may determine they would rather negotiate a better price on the replacement property (meaning not using all the cash proceeds in the exchange) and then utilize a Delaware Statutory Trust (DST) for any remaining cash boot. DSTs are scalable and can handle left over cash from the exchange.

Mortgage/debt boot occurs when the mortgage value on the replacement property is less than the mortgage on the relinquished property. It is important to consider this when doing a §1031 exchange as both the cash received AND the debt need to be replaced in the acquired property.

Example:

An investor sells an investment property with a $500,000 mortgage and purchases a replacement property utilizing a $400,000 mortgage. This investor will be subject to tax on a mortgage boot in the amount of $100,000. It is important to note that this boot can be offset by adding $100,000 of cash to the exchange.

The easiest way to avoid a “boot” issue is to remember that you are replacing the total real estate value in a §1031 exchange. Both the equity and debt from the relinquished property need to be equal or greater in the replacement property.

There are reasons why an investor may have troubles with the replacement loan. In the short 45-day identification window the investor may need to qualify for a loan. Granted, there is a total of 180 days to close but most investors may wish to guarantee there is loan approval prior to identifying the replacement property. Accredited investors may seek to utilize Delaware Statutory Trust (DSTs) as a replacement property. DSTs provide non-recourse debt pre package for investors without application or effects on individual credit reports.

When we work with an accredited investor we take into consideration suitability of replacement assets as well as balancing the utilization of cash and the inclusion of replacement debt if necessary.

This is not an offer to purchase or solicitation to purchase any security, as such be made only through an offering memorandum or prospectus. Investing in securities, real estate, or any investment, whether public or private, involves risk, including but not limited to the potential of losing some or all of your investment dollars when you invest in securities. You should review any planned financial transactions that may have tax or legal implications with your personal tax or legal advisor. NAMCOA, LLC is a Registered Investment Advisor, regulated by SEC (Securities and Exchange Commission). Our corporate office is located at 999 Vanderbilt Beach Road, Suite 200, Naples Florida 34108. Securities Offered through MSC-BD, LLC, Member of FINRA/SIPC. 5 Centerpointe Drive, Ste. 400 Lake Oswego, OR, 97035 MSC-BD, LLC and NAMCOA are independently owned and are not affiliated.

Thank you.

February 2025 Landscape Review DST Equity Raise Records Impressive Start

Is the first month equity raised for Delaware Statutory Trust (DST) a trend or a blip in 2025? 2024 achieve a 12 percent increase when compared to 2023 and with over $600 Million in January this is a positive sign.

By Al DiNicola, AIF®
January 16, 2024
DST 1031 Specialist
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC, Member of FINRA/SIPC

According to Mountain Dell Consulting, who engages and tracks activities from sponsors of Delaware Statutory Trust (DST) and TIC Market Equity investment, the January 2025 equity raised was $630,816,989. Using simple math and multiplying by 12 that would be over $7.5 Billion in equity for the entire year. It is too early to project the 2025 results.

2025 Early Indication.

As stated, it is too early to predict what the final equity number will be at the end of 2025. What we may be able to use are demographic and economic drivers that may increase demand for certain product offerings. The above monthly average of equity raised in January of 2025 (when compared to 2024) may have been as a result of an end of the year sale of investment properties. If investors sold their investment property utilizing a 1031 tax deferred exchange the move into a DST is relatively easy. Easy from the standpoint of the DST offerings being prepackages with non-recourse debt to facilitate the exchange. Life events may become more important than economic drivers. Certain life events such as moving from one location to another downsizing going off the college or utilizing self-storage facilities may happen more than economic situations.

Market Metrics.

When comparing available equity at the end of 2024 and the available equity overall at the end of 2025 there are just some small variations. There is approximately $75 million more in equity that is now available at the end of January 2025. There are also 5 fewer programs offering currently and you can see the other metrics in the chart below.

	End of 2024	End of Jan 2025
Available Equity	$2,342,198,682	$2,415,974,183
Number of Programs	93	88
Days on Market	317	323
Number of active Sponsors	50	50
Average 1^st Yr. Return	4.94%	4.93%

One item that was not included in the overall summary of the Mountain Dell Report is the number of all cash DST. 38 of the 88 current offerings are all cash. That is almost 40%.

Current Asset Class Metrics

Sponsors have entered a more conservative underwriting, reduced the LTV and increased the equity needed for each DST.

Asset Class	#’s of Programs	Available Equity	LTV	Dollar as % of offerings	#’s as % of offerings
Energy	2	$5,850,000	0.00%	0.24%	2.27%
Hospitality	2	$37,072,659	0.00%	1.53%	2.27%
Industrial	14	$464,825,271	28.28%	19.24%	15.91%
Multi-Family	29	$1,025,305,365	38.83%	42.44%	32.95%
Student Housing	4	$75,813,369	38.32%	3.14%	4.55%
Office	4	$159,083,980	36%	6.58%	4.55%
Office/medical	4	$172,722,200	25.65%	7.15%	4.55%
Retail	18	$144,456,558	16.73%	5.98%	20.45%
Self-Storage	6	$117,209,197	8%	4.85%	6.82%
Senior Housing	3	$126,305,584	16%	5.23%	3.41%
Manufactured Housing	0			0.00%	0.00%
Other	2	$87,330,000	0%	3.61%	2.27%
Total	88	$2,415,974,183		100.00%	100.00%

Noted in the chart above is the average LTV for each asset class. There are no asset classes with an average LTV of over 40%. Understanding that when displaying an average there may be (depending on the asset class) an LTV over 40%. Thus, for investors with a higher LTV need we have a few alternatives. When we assist an investor with a larger §1031 exchange ($1M and above) especially when debt needs to be replaced, we typically blend multiple DSTs with leverage to diversify the replacement portfolio for the investor. Please consult with us about that strategy

There are a few interesting takeaways from this chart as displayed. In looking at the number of programs offered by a single asset class multifamily with 29 surely is outpacing the rest of the offerings. Over the period last year there were almost as many industrial offerings as there were multifamily. Actually, while there was almost the same number of industrial multifamily offerings, and the volume of multifamily offerings was actually less than industrial offerings. There has been an increased absorption of industrial assets over the past few months. A note for retail which needs to be explained is that many of the offerings may be considered ‘necessary retail” such as f grocery stores and needed facilities as compared to your department store retail offerings. Noticeably absent from this is manufactured housing. Very few offerings came on the market last year based on the void of acquisition of manufactured housing. An item which we don’t report on too frequently is the inclusion of a §721 UPREIT at some point in time after the Delaware statutory trust is acquired. Some of the offerings will have optional §721 UPREITS, others will have mandatory upgrades. We will create an article on the advantages and disadvantages of the §721 UPREIT program.

Final DST Market Overview Comments

If we reflect on the past seven (7) years, the average annual equity raise was $5.37 Billion. Some analysts will use a rolling 5-year average, and that number would be $6.658 with the potential outlier year of 2022 with over $9.2 Billion raised. Drilling down even further, eliminating the high and low over the past 7 years, the average year would be $5.1 Billion. The underlying demographics for investors wanting to sell actively managed real estate and move into passive ownership could be at an all-time high. We will see if the other market dynamics provide momentum for investors to see their existing properties.

We continue to research, review, and monitor all the major DST sponsors. We speak weekly with our sponsor contacts and conduct due diligence on DST offerings. Our continued research enables us to provide a quick response to investor questions regarding their cash investing needs as well as their §1031 tax deferred exchange. We are especially skilled at balancing the exchange debt equity requirements. We also specialize in the §1033 exchange in the case of natural disaster or eminent domain cases. The timeline for investors to decide on their utilization of a §1033 may extend beyond the benchmark 2 years as identified in the §1033 Code and potentially extend to 4 years. With the 2023 hurricanes in Florida and North Carolina as well as the 2024 fires in California, it may be too early to make any prediction on how many investors will take advantage of the §1033 tax advantages. Over the years we have assisted investors in dealing with their emotions as well as their replacement strategy. We are so fortunate in our specific location in Florida dealing with three hurricanes in 2024. Even though the eye of hurricane Milton came over us we were spared damage to our property. Our thoughts and prayers are with the people in southern California at this time.

What to Look for in 2025 and 2026

DSTs have been gaining broader institutional exposure and acceptance. The inclusion of the 721 UPREIT (after a safe harbor period). Large institutional investors have been stepping into the space. Not only on the sponsor level but also the large institutional player and advisors prospective. Schwab and Fidelity have entered the participation via platforming DSTs. Large wire houses are stepping into the 1031 space on the wealth management side of the business. On a different topic, but potentially of vast interest may be the extension of the tax cuts with the new administration as well as a potential modification and extension to the Opportunity Zone (OZ) investment opportunity.

This is not an offer to purchase or solicitation to purchase any security, as such be made only through an offering memorandum or prospectus. Investing in securities, real estate, or any investment, whether public or private, involves risk, including but not limited to the potential of losing some or all of your investment dollars when you invest in securities. You should review any planned financial transactions that may have tax or legal implications with your personal tax or legal advisor. NAMCOA, LLC is a Registered Investment Advisor, regulated by SEC (Securities and Exchange Commission). Our corporate office is located at 999 Vanderbilt Beach Road, Suite 200, Naples Florida 34108. Securities Offered through MSC-BD, LLC, Member of FINRA/SIPC. 8215 SW Tualatin- Sherwood Rd, Suite 200, Tualatin, OR 97062. MSC-BD, LLC and NAMCOA are independently owned and are not affiliated.

Thank you.