1031 Exchange
A tax-deferral strategy under Section 1031 of the Internal Revenue Code that allows an investor to sell a commercial property and reinvest the proceeds into a like-kind replacement property while deferring capital gains taxes. The exchange must follow strict timelines: the replacement property must be identified within 45 days and the transaction must close within 180 days of the original sale. A qualified intermediary must hold the proceeds between transactions. 1031 exchanges are one of the most powerful wealth-building tools in commercial real estate, allowing investors to compound returns by deferring taxes across successive transactions.
Related Terms
Delaware Statutory Trust (DST)
A legal entity used in commercial real estate to hold investment property, commonly used as a replacement property vehicle in 1031 exchanges. DSTs allow individual investors to acquire fractional interests in institutional-quality properties while qualifying for tax-deferred exchange treatment. The trust structure provides passive ownership with no management responsibilities. DST investors receive their pro-rata share of income, appreciation, and depreciation benefits. Sponsors typically structure DSTs with non-recourse financing and long-term holds.
Cap Rate (Capitalization Rate)
A rate used to estimate the value of income-producing properties, calculated by dividing NOI by the property's market value or purchase price. A property with $500,000 NOI and a 5% cap rate would be valued at $10 million. Lower cap rates indicate higher values and are typical in primary markets; higher cap rates suggest higher risk or secondary/tertiary markets.
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