Origin Exchange

A 1031 exchange is a common way for real estate investors to defer capital gains taxes on the sale of an investment property. But this provision isn’t just for professional investors. It can provide powerful benefits to any owner of appreciated real estate, including potential tax-deferred growth, more straightforward estate planning and the ability to “exchange up” into higher-value properties. With these benefits, however, comes the responsibility of managing assets. One turnkey solution, a Delaware Statutory Trust, can provide those benefits within a passive ownership structure. 

Our philosophy is to create financial solutions that help our investment partners grow and protect their wealth. Launching Origin Exchange was an easy decision. The 1031 exchange industry is notorious for sky-high fees, and investors deserve a better choice. Our goal is to upend this market by cutting out the middleman, offering high-quality investments, and simplifying the lives of investors who no longer want to actively manage real estate.

With Origin Exchange, we are creating access for investors who can come directly to Origin Investments rather than having to add another step or point of contact. Equally as important, Origin’s fee structure is a small fraction of what others typically charge.

Ultimately that translates into a greater financial position that over a number of years can produce a substantial difference.

At some point in their investment journey, these active owners will progress out of the accumulation and growth phase. They may be approaching retirement and are seeking to reap the benefits of their investments without all the work, focusing more on capital preservation and income. Converting from active to passive ownership is possible by exchanging invested property into a 1031 exchange and using a DST, or Delaware Statutory Trust.  

Delaware Statutory Trust, or DST, investments allow owners of real estate investments to pool their capital. Then, they exchange it for institutional assets with professional management. For example, an investor owns a property worth $500,000. By employing a 1031 exchange, they can convert that ownership to another property worth $500,000. But by employing a DST, they can roll their investment into a property or properties worth much more. Even better, the DST provides a passive ownership structure.  

A Delaware Statutory Trust qualifies as “like-kind” for the purposes of a 1031 exchange. According to IRS Revenue Ruling 2004-86, which went into effect in 2004, owners of real property can exchange their assets, called the relinquished property, for part ownership in real property, called the replacement property. 

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.

Participants in a 1031 exchange can receive benefits including the indefinite deferral of federal capital gains and state income taxes, the potential for passive income, and simplified estate planning. In addition, Origin Exchange offers numerous features and benefits, including:

• Potential future capital diversification: The operating partnership of Origin’s IncomePlus Fund has an option to acquire the DST in exchange for units in its operating partnership. This option, if it is exercised, would diversify the investor’s risk.   
• Potential enhanced liquidity: If the IncomePlus Fund acquires the DST, the OP units exchanged for the DST interest will be eligible to participate in a redemption program that mirrors the redemption program provided by Origin’s IncomePlus Fund.  
• Low fees: Typically, DST investments have sales commission and management fees that can be as high as 14%. Origin Exchange charges an acquisition fee and expenses for organizational and operating costs, but it doesn’t pay brokerage sales commissions, which means more of an investor’s capital is going into the purchase of real estate. On a $250,000 investment, and over time, that difference could provide a substantial additional return.
• Expert deal sourcing: Origin leverages local experts in its target markets and uses Multilytics℠, its proprietary suite of machine-learning models, to identify areas with high potential for growth.  
• Direct access: Investors can access DSTs directly and don’t need to work through a broker. Further, a dedicated investor relations team member can answer any questions.

The benefits to a 1031 exchange are myriad. Here are two key ones investors will receive:  

Tax deferral: There are many taxes on the sale of appreciated real estate. Those include federal capital gains, state income tax, depreciation recapture tax and potentially net investment income tax (NIIT). So with a properly structured exchange, all these taxes are deferred, and the basis from the original property is rolled over. There are no limits on how many times an investor may complete a 1031 exchange. This encourages continuous property reinvestment. It also allows the investor to “exchange up” into higher-value properties for the rest of their lifetime.  

This tax-deferred growth can be a powerful wealth-generating tool. Over time, without frictional and tax expenses, investors have the potential to substantially increase the value of their portfolios. To compare possible tax savings on a specific property by employing a 1031 exchange, use our tax calculator.  

Estate planning: There is no limit on the number of 1031 transactions an investor can complete. So investors can exchange up to new properties and “swap until they drop.” When the investor passes away, the property can be passed on to beneficiaries with a fully stepped-up cost basis.  

Delaware Statutory Trusts: Passive Ownership  Every real estate owner has unique circumstances. And most who have accumulated assets during their lifetime want to transition into passive ownership. That means spending their free time on things they truly enjoy instead of the “three Ts” of active real estate management—toilets, tenants and trash, as the saying goes. In these cases, employing a Delaware Statutory Trust (DST) structure allows 1031 exchange investors to exchange their proceeds for an interest in a professionally managed asset and receive passive income.

Qualified Opportunity Zones (QOZs) were implemented as part of the Tax Cuts and Jobs Act of 2017. QOZ funds allow investors to defer and eliminate capital gains taxes from any source, not just real estate. If an investor realizes gains from the sale of a business, stocks or private property, they could invest it in a QOZ fund. If they are selling real estate, their options expand to include a 1031 exchange or QOZ fund. Origin offers both strategies, including our QOZ Fund III, and we can help investors weigh the benefits and characteristics of both options.  

• You can defer the capital gains indefinitely
• 1031s work great for selling a stabilized real estate property and getting into a different stabilized real estate property.
• 1031s can work for development deals but they are very complicated
• Typically you have to invest all of the proceeds from a 1031 deal into the new 1031 deal
• Usually the exit strategy is death whereby the heirs inherit a stepped up basis in the properties

The significant difference between the two options is that the 1031 exchange is a deferral program with unlimited duration. The QOZ program has a limited deferral period, but it affords tax-free profits after a minimum 10-year hold. The determination of which program is better will vary based on each individual investor’s objective. If an investor’s primary goal is to defer taxes indefinitely and never access the investment capital, the 1031 exchange would be the preferable solution; however, if an investor wishes to realize the profits on an investment at some point in their lifetime, a QOZ Fund is the better option.

Because the taxes deferred in a 1031 exchange can roll on indefinitely, the 1031 exchange option can be a valuable estate planning tool. If an investor is willing to hold onto investment property for life, the taxable gains disappear; the investor’s heirs receive a step-up in basis to the property’s fair market value on the date of death, erasing any previous appreciation in the value. Those heirs can sell then the asset immediately without a capital gain.

Under the QOZ program, there’s no escaping the taxman on December 31, 2026, and any person who inherits an interest in a QOZ Fund prior to that date will assume the original tax basis in the investment (no step-up upon death) and be obligated to pay the tax; however, if the heir holds the QOZ Fund interest until a date that is at least 10 years from the original investment, their tax basis will receive a step-up to the investment’s fair market value upon disposition.

You can also watch this video to learn more.

In a 1031 exchange, the investor can defer capital gains taxes by selling investment property and reinvesting the proceeds into a “like-kind” asset. (If you’re interested in selling a property, use our tax calculator to find out how much money you could save through an exchange versus paying taxes.) However, among other requirements, this type of exchange must be completed within a strict 180-day timeframe.  

This approach may not appeal to some investors who no longer wish to “swap till they drop,” or actively exchange properties. Others may prefer to diversify their holdings. For both types of investors, a 721 UPREIT exchange offers a permanent alternative.  

A 721 exchange offers many benefits, including: 

Tax deferral. A 721 exchange allows the investor to defer taxes upon receiving OP units. This can be significant when factoring in federal and state capital gains taxes, depreciation recapture tax and net investment income tax.  

Portfolio, not property. Investors may expand their investment from one property to a portfolio of institutional-quality assets. This eliminates the idiosyncratic risks of owning a single asset. 

Greater flexibility. An UPREIT exchange doesn’t have the stringent deadlines of 1031 exchanges.  

Passive ownership. A 721 exchange allows investors to convert from day-to-day, active real estate management to a passive investment that is professionally managed.  

Potential for passive income. Assets are typically stabilized and cash-flowing, generating monthly distributions to investors that can be shielded from current income with depreciation. 

Simplified estate planning. Investors who have amassed a real estate portfolio often wonder how to divide the assets after they’re gone. A 721 exchange is easily divisible to beneficiaries, who receive a stepped-up cost basis and can typically liquidate holdings with little to no taxes due.  

Section 721 of the Internal Revenue Code allows investors to contribute property in exchange for interest in a partnership. REITs often hold their properties through an operating partnership or umbrella partnership REIT, or UPREIT. By contributing property, a 721 investor receives OP units. Sometimes referred to as an UPREIT transaction or an UPREIT 721 exchange, this strategy has become more prevalent in recent years for investors looking for an estate-planning tool that passes down highly appreciated real estate in a tax-efficient manner.  

In a 721 exchange, an investor contributes property to a partnership in exchange for OP units. These units represent an ownership interest in the partnership. So, OP unit holders receive the same distributions and appreciation as the owners of the partnership interests. There are two ways to participate in a 721 exchange.  

Single-step exchange: 

This approach typically applies to owners of institutional real estate, such as REITs and real estate investment firms. The partnership acquires the investor’s property directly, and the investor receives partnership interest.  

Two-step exchange: 

Many individual real estate investors own properties that do not qualify as institutional assets. In this case, investors use a two-step 721 exchange. First step: The investor sells their property and completes a 1031 exchange into a Delaware Statutory Trust (DST). In the second step, the operating partnership of a REIT may choose to acquire the DST in exchange for OP units. 

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

DST offering: The DST will own real estate consistent with Origin’s stringent investment criteria and quality deals: multifamily properties in the path of growth, geographically diversified in Origin markets across the U.S.  

Capital diversification: The operating partnership of Origin’s IncomePlus Fund has an option to acquire the DST in exchange for units in the operating partnership. This option, if it is exercised, would diversify the investor’s risk.   

Enhanced liquidity. OP units are eligible to participate in a redemption program that mirrors the redemption program provided by Origin’s IncomePlus Fund.  

Low fees: Syndicated DSTs through brokers can have upfront fee structures as high as 14%. We charge an acquisition fee and a fee for organizational and offering expenses. And we don’t pay any brokerage sales commissions.  

Expert deal sourcing: We leverage local experts in our target markets and use Multilytics®, our proprietary suite of machine-learning models, to identify areas with high potential for growth.  

Direct access: Investors don’t have to work through a broker but instead can access DSTs directly. A dedicated team can answer any questions.  

We will pay distributions monthly so whenever you close, you’ll get the prorated remainder of that month paid the next month

Close September 5 you’ll get the fifth through 30th of September paid in October and then from there you’ll get monthly distributions

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.

There is nothing to reinvest the distributions into during this phase. However, you can easily set up the monthly distributions to be paid directly to your brokerage account, where they can be auto-invested elsewhere. After the DST is acquired by the IncomePlus Fund, investors can elect to have their distributions reinvested in the fund through our DRIP (Dividend Reinvestment Program).

As with any tax-based strategy, the requirements are complex, so it is important for investors to complete the 1031 exchange with experienced advisors (learn more about Origin Exchange’s process here). There are a few key rules to understand before selling investment property. 

Qualified intermediary: An investor can never take constructive receipt of proceeds from the sale of a relinquished property. Therefore, an escrow agent, known as a qualified intermediary, or QI, must be set up beforehand to take possession of proceeds at closing. Because the QI is an important part of the process, we strongly recommend working with an experienced QI who has facilitated many 1031 transactions.  

Time frame: Upon closing of the relinquished property, the clock begins ticking for the 1031 investor.  

• 45 days: The investor must identify a replacement property within 45 days of closing. 
• 180 days: The investor must close on the replacement property within 180 days of closing on the relinquished property. 

Matching value: When completing an exchange, the investor must replace the relinquished property with a property of equal or greater value. Is there outstanding debt on the property being sold? That debt must be replaced on thenew property or cash must be added to the exchange to equal the amount of debt.

The term boot refers to non-like-kind property received in an exchange. This does not disqualify the exchange; however, it can introduce a taxable gain into the transaction and the Exchanger can have a “partially” deferred exchange rather than “fully”.

To avoid boot, you should remember three rules:  

1. Your Replacement Property must be like-kind and should be equal or greater in value than the property you’re selling 
2. Ensure that your net equity is “fully spent” when you purchase the Replacement Property 
3. Ensure that your debt on the Replacement Property is of equal or greater value than the property you’re selling 

The IncomePlus provides investors with one federal K1, rather than a K1 for every state we invest in.  While in the DST, tax documents will be a replacement 1099 or Grantor Trust Letter. Essentially, it is a schedule of revenue and expenses of the property and the investors prorated portion. Investors can expect to use this form to fill out schedule E on the tax return. Just like normal investment property. 

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.

We are not; however, we can send you some recommended contacts if needed.

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

• Sell your property and place the proceeds with a qualified intermediary.
• ID the Origin DST with the QI
• Subscribe to the DST and have the QI wire funds
• When your investment is closed, you will start receiving dividends immediately
• During the DST phase you will receive the distributions of the DST and any appreciation during your hold time
• The tax form will be a grantor letter and you will use that to fill out investment property Schedule E on tax return
• 2 years after investment, the Origin Income Plus Fund has the right to acquire your DST interest.
• If the IPF acquires your interest, you will receive operating partnership units which would be tax deferred under section 721.
• From there, you would receive the same returns as the Income Plus Fund, which is targeted at 9-11% annually

Yes. You can contact your QI who can put your properties into a single DST and solve challenge of owning/managing.

The two-year period starts after the last investor is in the DST.

Our goal is to have a 1031 opportunity every quarter.

A DST can invest in any asset class of commercial real estate—multifamily, office, industrial or retail. Origin Investments focuses exclusively on multifamily investing because we believe its market fundamentals are strong. And we have proven expertise as risk managers in diverse economic conditions. By investing in a DST through Origin Exchange, investors receive the following benefits:  

Origin deal sourcing. The DST will own real estate consistent with the IncomePlus Fund’s stringent investment criteria. This Fund is designed to deliver a tax-friendly blend of monthly income and long-term capital appreciation to accredited investors. 

Institutional-quality properties. Investors have access to the same quality deals that Origin Investments includes in its Funds. These are multifamily properties in the path of growth, geographically diversified in Origin markets across the U.S.  

Geographic diversification. DSTs will be in markets that Origin’s deal-sourcing team believes have the highest potential for growth (see below). Our market analysis includes the use of Multilytics®, our proprietary machine-learning model that uses billions of data points to zero in on clusters of high-potential submarkets. A DST gives the investor the opportunity to diversify into one of these growing markets. 

You can also learn more by watching our webinar that highlights what 1031 and 721 exchanges are and how Origin Exchange can simplify the current process to protect and growth wealth by clicking here.

Some key benefits to investors include:   

Tax Deferral

DST investors receive the same tax benefits as if they had completed their own 1031 exchange. That means they can fully defer all taxes due on the sale of the relinquished property. Federal capital gains taxes, state income taxes and depreciation recapture are all deferred. As well, the basis from the original property is rolled over.  

Passive Ownership

Most real estate investors utilize a DST to eliminate active management—the three Ts of toilets, tenants and trash. The DST transfers all management responsibility to the sponsor and gives the client all the benefits of ownership. 

Ability to exchange “up”

Investors acquire a fractional interest in a trust that manages a larger or institutional-quality asset. It’s not simply a “like-kind” exchange of a similar property.  

Professional management

The replacement property is managed through the DST. So, investors no longer need to directly manage a property and can spend more time doing what they love. 

Passive income and simplified estate planning

Landlords exchange day-to-day property management for the benefits of a passive, monthly income stream. And beneficiaries inherit interest in a security, rather than a property, through an estate or trust. If they decide to liquidate the real estate, there are minimal tax implications. 

Matching debt and equity

Investors must replace the full value of relinquished real estate. It can be difficult to find assets that directly match the proceeds and to get financing on the new property. A DST is typically structured with non-recourse debt. So, the investor assumes the leverage and can invest as much equity as they need for the exchange. 

Owning tangible property is more complex than owning a share of stock. DST investments come with certain risks and limitations, and investors should understand these key points before proceeding.  

Lack of liquidity. Owning real estate means owning an illiquid asset. A DST interest is highly illiquid and can’t be converted into cash. For this and other reasons, investors in DST investments must be accredited investors. Typically, this is an individual investor with $1 million or more of net worth.  

Lack of management control. Management is truly passive. DST sponsors professionally manage the asset. That means investors do not have direct decision-making authority.  

The Seven Deadly Sins of DST Investing

DSTs must operate according to seven key criteria in IRS guidelines. These have become known as the “seven deadly sins” among those who employ this strategy to defer capital gains. Investors receive an ownership percentage but relinquish voting and operational management privileges when they invest in a DST. The regulations, described below, were put in place to ensure the DST meets the IRS’ “like-kind” requirements:

• No additional equity contributions: Investors make a single equity contribution upon formation of the DST. Since capital calls are not allowed, all future expenditures must be capitalized upon formation. 
• No refinancing of debt: Mortgages placed on the property cannot be refinanced. 
• No reinvesting of sale proceeds: Any proceeds earned by a DST must be distributed to investors. It can’t be reinvested by the trustee.   
• Limits on capital expenditures: Normal repair and maintenance of the asset, among other things, are allowed. But unnecessary upgrades or other activities that could put investor money at risk are not.  
• Limits on cash investments: DST sponsors can only invest cash in short-term debt or another vehicle—nothing speculative—until it’s time to distribute to investors. 
• Cash distributions: The DST is required to distribute earnings and proceeds to investors within the agreed distribution date. 
• No new leases or renegotiations: Most DSTs use a master lease structure. This means the master tenant negotiates existing leases and enters new ones. This keeps the trustee from renegotiating a lease that could change the terms of the DST investment.  

While there are many advantages in utilizing a 721 exchange, it’s important for investors to understand the rules and regulations. Here’s what to know:  

• No direct control. When exchanging property for UPREIT OP units, investors give up all direct control of their property (like a DST).   
• No more exchanges. An investor may not use OP units in a subsequent 1031 exchange of property. 
• Investment risk. Even the best-managed UPREITs or funds can face circumstances and markets beyond their control—including interest rate hikes, pandemics and recessions. Past performance is never a guarantee of future results. 

There will be no setup fee when an Origin Exchange investor rolls into the IncomePlus Fund.  

Origin only charges an acquisitions fee of 1.5% to 2.5%. There are no ongoing management fees.

However, Origin is entitled to be reimbursed for the DST organizational and offering expenses.

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

Investors in Origin Exchange must be accredited investors.

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

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

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

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.

You can’t engage in a 1031 unless you and your partners agree to dissolve the LLC and restructure into a TIC. This is called a drop and swap and must be performed before the sale. In a TIC, decisions must be unanimous. Another alternative is to do a partial exchange or all partners involved can participate in Origin’s 721 exchange and those that want to liquidate can do so when the property is transferred into the IncomePlus Fund.

The entity that is selling the asset to be exchanged in a 1031 exchange transaction must be the entity that acquires the DST interest. For instance, if a business partnership owns the investment, the partnership must make the DST investment. 

The operating partnership units will be substantially equivalent to IncomePlus Fund units.