Exit Strategy & 1031 Exchange
Accruit is the leading, independent Qualified Intermediary (QI) for the 1031 Exchange. Since inception in 2000, Accruit has worked with Fortune 500 companies, individual property owners/operators, and everyone in-between. With over 200 years of collective experience amongst their team of 1031 exchange experts, they provide a proven solution to tax deferral for commercial real estate owners (including marina owners). Their patented technology allows them to complete exchanges in much less time compared to a paper-based system. Through autogenerated documents and electronic signatures, their seamless customer experience surpasses expectations. Accruit prides themself on Safe, Secure and Simple 1031 exchanges.
Accruit is a trusted steward of capital, partnering exclusively with 4- and 5-Star Bauer-rated banks that are monitored quarterly for safety and stability, with all funds held in segregated bank accounts. Additionally, Accruit has experience managing up to $9 Billion annually in exchange transactions for clients large and small. They are proud to do business nationwide and they meet all best practices and state requirements for fidelity bonds, as well as errors and omission coverage.
Accruit’s patented technology, Exchange Manager ProSM, is a cloud-based, automated service that provides users 24/7 access. Hosted on Microsoft Azure, the data is encrypted, continuously backed up and secured behind a robust web application firewall. Their wire process includes required written direction from the client, then a dual authority internal approval with a verbal confirmation call from Accruit to the title company.
Accruit’s technology allows them to provide a better customer experience with specialized service for each client. Their team includes five staff attorneys and several Certified Exchange Specialists© that simplify the most complex of 1031 exchange situations for clients. Additionally, Accruit has a deep bench of experienced members on their Client Service Team, who process the transactions from beginning to end and ensure compliance with exchange rules. Through electronic signatures their process is fully paperless, and documents can be signed from anywhere. Automated, critical deadline reminders ensure adherence to all 1031 exchange deadlines. Accruit is designed for scale and service, they are proud to handle high volumes while maintaining time with their clients.
1031 Exchanges for Marina Investments
The 1031 exchange is a tax deferment strategy that allows you to defer such taxes as capital gains, depreciation recapture, state and possibly the NIIT taxes on business use or investment properties when they are sold. The profits are then reinvested into another business or investment use property, which advances many owner exit strategies for staying invested in commercial real estate and reaping the rewards of passive ownership, cash flow, and wealth preservation.
Types of 1031 Exchanges
Forward Exchange: The most common type of exchange, in which your relinquished property is sold and a replacement property is purchased within the 180-day exchange period.
Reverse Exchange: Increasingly popular due to the hot real estate market, a reverse exchange is where you find your replacement property PRIOR to selling your relinquished property. In these exchanges, the QI will acquire your replacement property and hold it in title until you sell your relinquished property.
Build-to-Suit/Improvement Exchange: These exchanges allow the taxpayer to put exchange funds toward the cost of improvements to the replacement property.
Example of Tax Implications from a Sale
The hypothetical scenario assumes you purchased your marina for $1M, which has since grown in value for a $2.5M sale price. As you can see, if you sold your marina outright, you would owe $482,000 in the various taxes outlined above. On the other, utilizing a 1031 exchange, you could put that $482,000 into a new investment and defer all taxes, in some instances indefinitely. For taxpayers that pass away still holding a property received as part of an exchange, they will be able to pass it to their heirs with a stepped up basis – your heirs could then sell this property with no taxable gain.
1031 Exchange Timeline & Process
From the day you close on the sale of your marina (relinquished property), you have 180 days to close on your replacement property. The 180 days is broken up into 1) 45 days to identify your replacement property (Identification Period) and 2) 135 days to complete the transaction. In the event there is high competition on a particular property you are interested in, you are allowed to identify two additional properties (three properties all together) for your transaction(s).
At the closing of your Relinquished Property, the funds from the sale will be transferred to the Qualified Intermediary (QI) for holding until the time of closing on your replacement property. Within the 45-day identification period you will work closely with your real estate team and the Client Service Coordinator on your QI team to properly identify your replacement property(ies). If you are unable to identify replacement property within the 45 days, your exchange will be closed and your funds will be released to you, becoming taxable. (More info. on this below with the DST)
What Property Qualifies for a 1031 Exchange?
Any real estate property that was held for investment or business use qualifies as relinquished property (property to sell) in a 1031 exchange. There are also many options for replacement property (property to purchase), creating flexibility based on your investment goals and needs Below are common types of replacement property for reinvestment:
- Single or multi-family rental properties
- Office buildings, shopping centers, and warehouses
- Apartment buildings
- Hotels and motels
- Farm or ranch land
- Vacant land held for investment
- Billboards, cell tower sites, and easements
- Mineral, oil, gas, water, and timber rights
- Delaware Statutory Trusts (DSTs)
Passive, Low Maintenance Investments
One increasingly popular option for reinvestment is a Delaware Statutory Trust (DST). A DST is a real estate investment vehicle that provides investors with access to investment-grade real estate that is generally larger than that which could have been acquired on their own. The reference to “DST” does little to explain the nature of the investment, but rather identifies the legal structure of the property you would be acquiring. This equates to a fractional interest in the subject property of the DST, equal to the amount of your equity investment.
DSTs allow for diversification of a real estate investment portfolio. Additionally, DSTs eliminate the headaches involved in traditional real estate ownership, the so-called “Three-Ts: Toilets, Tenants and Trash”. DSTs have grown in popularity with seasoned real estate investors that are looking to change their active real estate investment into passive real estate investments, allowing them to retire from property management responsibilities. DSTs also provide a solution to challenges many are facing in the hot real estate market we have seen in recent years. Namely, many sellers have trouble finding and identifying replacement property(ies) within the 45-day identification period. Oftentimes DSTs are utilized when a seller is coming up on their 45-day mark and have been unable to find other real estate to reinvest in that would satisfy the requirements of the 1031 exchange. In these situations, the DST can be a “safety net”, offering the seller an investment that is intended to provide reliable income with no property management. Later, when the property as a whole is sold (typically 5-7 years from purchase) the investor will share in the profits on a pro rata basis (equivalent to fractional interest).
Benefits of the 1031 Exchange for Sellers
If you are considering selling your marina, one of your exit options the LIPG will discuss with you is the 1031 exchange as a tax deferral and reinvestment strategy towards future goals. There are many benefits of the 1031 exchange when it is right for your long-term goals, including: defer taxes; reinvestment in passive investment(s) (versus actively running the day-to-day management); reliable cash flow (quarterly or monthly); low maintenance; portfolio diversification; step-up in basis (estate planning implications).
If we look back to the example tax liability if you were to sell your marina with a $1.5M gain, you would have netted $2,018,000. Investing this amount for a year in a money market account at one half of a percent (50 basis points) would generate income of $10,090. Doing a 1031 exchange, however, would allow the full $2,500,000 to be invested in a DST, triple net-leased property (for example), at 5% – this would generate $125k in the same one-year time period compared to $10,090.