Origin Exchange

A 1031 exchange is a tax-deferral strategy that allows real estate investors to sell an investment property and reinvest the proceeds into a “like-kind” property without immediately incurring capital gains taxes. It is named after Section 1031 of the Internal Revenue Code (IRC).  

For a comprehensive explanation, read our article: What Is a 1031 Exchange? Understanding This Powerful Tax-Deferral Strategy. 

A 1031 exchange allows investors to defer capital gains taxes and reinvest 100% of their proceeds. Selling an investment property outright may make sense in cases where liquidity is needed, but it results in immediate tax consequences and less capital for reinvestment. 

Key benefits of a 1031 exchange include:

• Tax deferral: Avoid paying capital gains taxes upfront, keeping more money invested. 
• More capital for growth: Reinvest the full sale amount instead of losing 20% to 30% to taxes. 
• Portfolio flexibility: Upgrade, diversify or consolidate properties to fit investment goals. 
• Estate planning: Heirs can inherit property with a stepped-up basis, potentially eliminating capital gains taxes. 

The like-kind requirement means that the relinquished property, or property being sold, and the replacement property, the property being acquired, must both be real property held for investment or business purposes. However, like-kind is defined broadly—the properties do not need to be identical. 

Examples of like-kind exchanges:

• Selling a rental property and buying a multifamily apartment 
• Exchanging raw land for a retail shopping center 
• Swapping an office building for an industrial warehouse 
• Selling business property and investing in a Delaware Statutory Trust (DST) 
   

Properties that don’t qualify as like-kind:  

• Primary residence  
• Foreign real estate 
• Stocks, bonds or other securities 
• Real estate partnership interests 
• Personal property 

As long as both properties are investment or business real estate, they typically qualify for a 1031 exchange.

• Multifamily
• Office
• Hotels
• Farmland
• Raw land
• Mineral rights
• Industrial
• Retail
• Triple-net-lease asset
• Interest in a Delaware Statutory Trust (DST)
• Tenants in common (TIC) interests

A qualified intermediary (QI) is a required third party in a 1031 exchange that holds the proceeds from the sale of a relinquished property to ensure the investor does not take constructive receipt of the funds, which would disqualify the exchange. 

Origin is not a QI, but we can recommend experienced QIs who specialize in facilitating 1031 transactions. It is essential to work with a reputable QI to ensure compliance with IRS regulations and a smooth exchange process.

The 1031 exchange timeline begins as soon as the relinquished property is sold. Investors must adhere to strict deadlines to qualify for tax deferral: 

• 45 days: The investor must identify potential replacement properties within 45 days of the sale. 
• 180 days: The investor must close on a replacement property within 180 days of selling the relinquished property. 

Both deadlines run simultaneously from the closing date of the relinquished property. Missing either deadline can result in disqualification from 1031 tax benefits. 

In a 1031 exchange, you must identify replacement properties with your qualified intermediary within 45 days of selling your relinquished property. After this 45-day window, you can only purchase properties you have previously identified. 

Most investors identify one to three properties, but if you want to identify more than three, you must follow one of these two IRS rules: 

• The 200% rule: You can identify any number of properties if their total fair market value does not exceed 200% of the value of your relinquished property. For example, if you sell a property for $500,000, you can identify multiple properties worth up to $1 million total. 
• The 95% rule: You can identify an unlimited number of properties, but you must acquire at least 95% of the total value of all properties identified. For example, if you identify five properties worth $2 million total, you must purchase properties worth at least $1.9 million (95% of $2 million).

Failing to comply with these rules may result in a failed exchange, meaning your sale would be taxable.

Yes, a 1031 exchange can be used to consolidate multiple properties into a single replacement asset. One common strategy is exchanging multiple properties into a Delaware Statutory Trust (DST), which provides passive ownership and eliminates direct management responsibilities. 

A qualified intermediary (QI) can help facilitate this process and ensure compliance with IRS regulations. 

A 1031 exchange and a QOZ investment both offer tax benefits but differ in eligibility, investment flexibility and long-term tax treatment. 

For a comprehensive explanation, read our article: Qualified Opportunity Zones vs. 1031 Exchanges 

Yes, there are several options for investors who own a partnership interest and want to complete a 1031 exchange: 

• Drop and swap: The partnership can dissolve and convert into tenants in common (TIC) ownership before the sale. Each TIC owner then can choose to either complete a 1031 exchange with their share or to pay taxes on the sale. 
• Partial exchange: The partnership can sell the property and do a partial exchange with the proceeds. Partners who do not wish to exchange can be bought out with after-tax proceeds, while those who want to defer taxes can retain ownership. 
• Origin Exchange: If all partners agree to stay together for at least two years, the partnership can complete a 1031 exchange into a Delaware Statutory Trust (DST). If and when the DST is acquired by Origin Investments’ IncomePlus Fund and transitions into an UPREIT 721 exchange, partners can retitle their interest into individual ownership tax-free under a 721 exchange. Each option depends on the partnership structure and investment goals, so it’s important to consult with a qualified intermediary (QI) or tax advisor. 

A Delaware Statutory Trust (DST) is a legally recognized trust structure that allows multiple investors to co-own fractional interests in institutional-grade real estate. DSTs are commonly used in 1031 exchanges as a passive investment alternative to direct property ownership. 

For a comprehensive explanation, read our article: What is a DST? The Benefits of Delaware Statutory Trusts  

A Delaware Statutory Trust (DST) allows investors to defer taxes, eliminate management responsibilities, and access institutional-quality real estate through a 1031 exchange. Key benefits include: 

Tax Deferral

DST investors receive the same tax benefits as a direct 1031 exchange, deferring capital gains, state income taxes and depreciation recapture. The cost basis from the relinquished property also carries over. 

Passive Ownership

A DST removes landlord responsibilities, eliminating the hassle of managing tenants, maintenance and operations. The property is managed by experienced professionals, ensuring investors receive the benefits of ownership without day-to-day involvement.

Access to institutional-quality assets

Investors acquire a fractional interest in larger, professionally managed properties, allowing them to exchange into high-quality assets rather than simply replacing one property with another.

The potential for consistent passive income

DST investors receive monthly passive income without the burdens of active management, making it an attractive option for those seeking steady cash flow. 

Estate planning

DST interests are easier to transfer to heirs than physical property, simplifying estate planning and minimizing tax consequences upon inheritance.

Debt and equity flexibility

DSTs can match debt and equity requirements for a 1031 exchange, solving the challenge of finding a property with the right financing structure. Investors can assume pre-arranged non-recourse debt, making it easier to satisfy exchange rules.

While Delaware Statutory Trusts (DSTs) offer tax benefits and passive ownership, they also come with certain limitations that investors should consider before investing.

Lack of liquidity: DST interests are highly illiquid and cannot be easily sold or converted into cash. Investors should be prepared for a long-term hold and must qualify as accredited investors, typically requiring a net worth of $1 million or more.

No management control: DSTs are fully passive investments, meaning all decisions are made by the sponsor. Investors have no direct control over property management, leasing or the timing of a sale. 

Delaware Statutory Trusts (DSTs) must adhere to strict IRS regulations to qualify for 1031 exchange tax deferral benefits. These rules, often called the “seven deadly sins” of DST investing, are designed to maintain the DST’s passive structure and preserve its like-kind exchange eligibility. While investors receive an ownership interest in the trust, they relinquish voting rights and management control. Here are the seven deadly sins of DST investing: 

1. No additional equity contributions: Investors make a single equity contribution upon formation. DSTs cannot issue capital calls, so all future expenses must be planned and funded upfront. 
2. No refinancing of debt: Any mortgage placed on the property at the time of acquisition cannot be refinanced during the DST’s ownership. 
3. No reinvestment of sale proceeds: When a DST property is sold, proceeds must be distributed to investors and cannot be reinvested into another asset. 
4. Limits on capital expenditures: Only normal repairs and maintenance are permitted. To prevent speculative investing, any major improvements, upgrades or development projects are prohibited. 
5. Limits on cash investments: Any excess cash held by the DST must be invested conservatively in short-term debt or similar low-risk vehicles—no speculative investments are allowed. 
6. Mandatory cash distributions: The DST must distribute earnings and proceeds to investors on a predetermined schedule, ensuring passive income but limiting reinvestment flexibility. 
7. No new leases or lease renegotiations: The DST itself cannot negotiate new leases or modify existing ones. Instead, a master lease structure is typically used, allowing a third-party master tenant to handle lease agreements. 

By following these rules, DSTs maintain 1031 exchange eligibility, ensuring investors can continue deferring taxes while enjoying a passive real estate investment. 

Yes, but continuity of title is required for 1031 exchange compliance. This means that the same entity that sells the relinquished property must acquire the DST interest to maintain tax-deferred status. For example, if ABC partnership owns the property being exchanged, ABC partnership itself must invest in the DST. Changing ownership structure immediately before or after the exchange could trigger a taxable event.   

A 721 exchange, also known as an UPREIT (umbrella partnership real estate investment trust) exchange, allows investors to exchange real estate for partnership interest instead of another property. It is often used as an exit strategy for 1031 exchange investors who want to transition from direct property ownership into a diversified, professionally managed real estate portfolio. 

For a comprehensive explanation, read our article: What is a 721 Exchange? How an UPREIT Works   

While a 721 exchange offers significant benefits, investors should be aware of key considerations before making the transition: 

• No direct control: Once the property is exchanged for operating partnership (OP) units in an UPREIT, the investor no longer has direct ownership or decision-making power, similar to a Delaware Statutory Trust (DST). 
• No future 1031 exchanges: Unlike real estate held in a 1031 exchange, OP units cannot be exchanged into another property through a 1031 exchange. 
• Market and investment risk: UPREITs are subject to market fluctuations, economic downturns and external risks such as interest rate changes, recessions and global events. Past performance does not guarantee future results. 

A 721 exchange allows investors to contribute property to a partnership in exchange for operating partnership (OP) units, providing ownership interest and access to distributions and appreciation. 

Single-step exchange: 

• Used by institutional investors (e.g., REITs, large real estate firms) 
• The partnership directly acquires the investor’s property in exchange for OP units 

Two-step 721 exchange

• Common for individual investors who don’t own institutional-grade assets. 
• Step 1: The investor 1031 exchanges their property into a Delaware Statutory Trust (DST) 
• Step 2: A REIT’s operating partnership acquires the DST, converting DST interests into OP units 

The two-step method allows individual investors to transition from a single asset into a diversified portfolio while fully deferring taxes. 

Through Origin Exchange, investors can exchange their properties for professionally managed, institutional-quality DST assets, earning monthly distributions and potential capital appreciation.

KEY BENEFITS

• Defer taxes indefinitely: Federal capital gains, state income taxes and depreciation recapture are deferred, while the original property’s basis rolls over. 
• Simplify estate planning: Beneficiaries may inherit DST interests as securities rather than physical property, reducing complexity and minimizing tax implications upon liquidation. 
• Generate passive income: Investors trade active property management for a steady, monthly income stream without the burdens of ownership. 
• Access institutional-quality real estate: Exchange privately held properties for fractional ownership in Class A multifamily assets sourced and managed by Origin’s team. 
• Lower fees: Unlike many DSTs that charge sales commissions and fees up to 15%, Origin Exchange eliminates brokerage sales commissions. This means more of your investment goes directly into real estate acquisition, leading to greater potential returns. 

Origin charges an acquisition fee of 1.0% to 1.5% of the purchase price of the asset. There are no ongoing management fees. However, Origin is entitled to be reimbursed for the DST organizational and offering expenses, up to 50 bps. 

1. Engage a QI: Work with a qualified intermediary (QI) to open an account to receive your sale proceeds. 
2. Sell your property: Go through the normal process of selling your asset. At closing, the proceeds will be placed with your QI to maintain 1031 exchange eligibility. 
3. Identify the Origin DST property: Work with your QI to designate the Origin DST as your replacement property. 
4. Subscribe and transfer funds: Complete the subscription process, and your QI will wire the funds to the DST. 
5. Begin receiving distributions: Once your investment closes, you will start receiving monthly distributions immediately. 
6. DST phase: During the DST phase, you will receive monthly distributions, and any property appreciation earned during your hold period. Income can be offset with depreciation pass-through and filed as usual on Schedule E. 
7. DST phase tax reporting: You will receive a grantor letter, which you will use to complete Schedule E on your tax return.  
8. IncomePlus Fund option: After two years, Origin’s IncomePlus Fund has the right to acquire your DST interest. 
9. 721 exchange into the IncomePlus Fund: If the IncomePlus Fund acquires your DST interest, you will receive operating partnership (OP) units, which are tax-deferred under Section 721. 
10. IncomePlus Fund phase tax reporting: The IncomePlus Fund OP units will generate a K-1. 
11. Continued investment returns: Investors in the IPF operating partnership will receive the same returns as the fund, which targets 9% to 11% annual returns. 

Origin Exchange’s Delaware Statutory Trust (DST) real estate assets are consistent with Origin’s stringent investment criteria: multifamily properties in the path of growth, geographically diversified in Origin markets across the U.S. 

Our goal is to have one 1031 exchange opportunity every quarter. 

Investors in Origin Exchange must be accredited investors.

The minimum investment is $250,000. There is no cap on how much you can invest. 

Cash flow during the DST period is a function of many variables, including cap rate, financing costs and property-level expenses. While cash flow can vary depending on market and property attributes, we anticipate the DST will generate an average of 4.25% to 5% cash flow during the holding period.

Distributions are paid monthly. After closing, you will receive a prorated distribution for the remainder of that month, which will be paid the following month. For example, if you close on Sept. 5, your distribution for Sept. 5–30 will be paid in October. Moving forward, you will receive regular monthly distributions. 

No, there is nothing within the DST structure to reinvest distributions into during this phase. However, you can set up monthly distributions to be deposited directly into your brokerage account, where they can be automatically reinvested in other investments of your choice.  

If the IncomePlus Fund does not execute its fair market value option to acquire the DST, the expectation is that the asset will continue to be held by DST investors until it is sold. At that time, the investor could elect to complete another 1031 exchange or take cash and pay taxes on the investment.

The operating partnership units will be pari passu (substantially equivalent) to IncomePlus Fund units. 

There is no fee payable in connection with the IncomePlus Fund’s exercise of the fair market value option. 

The two-year period does not start when the DST is created. Instead, it begins after the final investor has entered the DST. 

DST investors will receive a “substitute 1099” from the DST trustee, which will provide the investor with taxable income details. If the DST interests are exchanged for units in the operating partnership, the investor will receive a K-1, which reports the investor’s income share and provides comprehensive information about the investor’s deductions and other tax-related items about the partnership.

Boot refers to any non-like-kind property received in a 1031 exchange, such as cash, debt relief or personal property. While receiving boot does not disqualify the exchange, it can create a taxable gain, resulting in a partially deferred exchange rather than a fully tax-deferred transaction.

How to avoid boot: 

• Trade equal or up in value: The replacement property must be equal to or greater in value than the relinquished property. 
• Fully reinvest net equity: All proceeds from the sale must be used to acquire the replacement property—any leftover cash becomes taxable boot. 
• Match or exceed existing debt: The loan amount on the replacement property must be equal to or greater than the debt on the relinquished property. If the loan amount on the replacement property is lower, you can add cash to offset the difference to avoid boot. 

No. The investor is required to remain in the DST until the asset is either acquired by the IncomePlus Fund or sold to a third party.  

If the IncomePlus Fund chooses to acquire the DST, the redemption program is the same as the IncomePlus Fund’s.

No. However, if the IncomePlus Fund elects not to acquire the DST interest, you can opt to do a subsequent 1031 exchange.