Real estate brokers who regularly work with clients to execute 1031 like-kind exchanges need to consider how they and their clients would benefit from DSTs.  Income Property Advisors (IPA) is the industry leader in offering real estate replacement properties, typically through a Delaware Statutory Trust (DST), for Section 1031 exchange transactions in California and all across the nation.

 

1. Avoid Financing Obstacles

In a 1031 Exchange, any debt on sold property needs to be replaced with equal or greater debt on the replacement property. This requirement creates potential roadblocks for Brokers if the property owner is either unable to obtain financing or unwilling to go through the rigorous process to do so required by lenders today. Many property owners may simply decide not to sell if financing the replacement property is an issue, resulting in a lost sale for the broker. Other owners may sell but find themselves unable to complete an Exchange because they can’t get the required financing for their replacement property, resulting in a large tax hit for the owner.  

DSTs solve both problems. In a DST, the trust is the borrower for the loan on the property, not the individual investors.  Yet, even though the investor is not a party to the loan, the debt on a DST satisfies the investor’s 1031 Exchange debt requirements. There are no loan documents for the investors to sign and no prequalification requirements for investors to pass. Presented with this option, many property owners on the fence may decide to sell their properties. And property owners already in a 1031 exchange but unable to finance their replacement properties can still complete their Exchange by investing in DSTs with the right amount of debt.

 

2. DSTs Make Great Back Up Properties

A common strategy to identify replacement properties is the “3 Property Rule,” where an exchanger may identify up to three properties, without regard to their fair market value, within 45 days. Identifying only one property may be dangerous because a property can fall out of escrow for many reasons: financing, inspections, etc. To secure an opportunity to execute a successful 1031 exchange, the exchanger could identify the first property as defined by the investor/commercial real estate broker. The exchanger can then identify two additional properties owned by DSTs. It costs the exchanger no extra money to identify additional properties. Taking this precaution ensures that the exchanger has adequate choices.

 

Property #1: Property identified by investor/broker

Property #2: Property owned by DST

Property #3: Property owned by DST

 

3. Avoid Taxable Gains on Boot

The exact dollar amount of the replacement property is a common challenge in 1031 transactions. In one example, the relinquished property sells for $2.0 million and the exchanger identifies a replacement property for $1.8 million. The difference in the price of the relinquished property and the price of the replacement property results in a taxable amount on the remaining $200,000. Under the “3 Property Rule,” DSTs provide a solution:

Sale Price of Relinquished Property:   $2.0 million

Replacement Property #1: $1.8 million property identified by investor/broker

Replacement Property #2: $100,000 investment in property owned by DST

Replacement Property #3: $100,000 investment in property owned by DST

Result: All $2.0 million is exchanged with no taxable income

 

4. No Property Management Headaches

The property is professionally managed by a third party in a DST-structured 1031 exchange. Professional managers handle the Terrible T’s: Tenants, Toilets, Trash, Turmoil, Termites. The investor enjoys the Terrific T’s: Travel, Time, Tennis. DST programs offer additional advantages, including the direct deposit of distributions and reporting through Substitute 1098/1099s.

 

5. Diversification Benefits

Investing in a DST can provide portfolio diversification. For instance, an investment could be made in a single DST that owns multiple properties in several states. It would be almost impossible for a broker to identify three replacement properties in three different states within the allowed 45-day timeframe. So DSTs are an optimal way to achieve diversification.

 

6. Don’t Get Sidelined

Many realtors have clients that will not sell until they find the “right” property. Having the option to invest in institutional-grade properties owned by professionally managed DSTs may get investors off the sidelines, and the realtor receives their commission.

 

7. Swap Till You Drop

A DST is different than a 721 Exchange (UPREIT) transaction where the investor’s exchange journey ends with the sale of the UPREIT. The DST structure allows the investor to continue to exchange properties over and over again until the investor’s death. Upon the death of the investor, under current tax laws, the heirs would get a “step up” in basis, thereby avoiding capital gains taxes on the original and subsequent properties.

 

8. Estate Planning Tool

Everyone wants the best possible scenario for their heirs before they pass. Investing in a DST eliminates the opportunity for children or heirs to argue over what to do with an investment property when the owner passes away. The heirs continue to receive any distributions from the investment, and upon the sale of the property owned by the DST, each of the heirs can choose what to do with their inherited portion. One heir can continue to exchange the investment, while another can sell and receive cash proceeds.

 

9. Quality Properties and Leverage Options

IPA provides a diversified portfolio of properties across the United States and a wide variety of property types and leverage options. This wide range of opportunities enables investors to select a high-quality, institutional-grade private placement program that best suits their needs.

 

10. Low Minimums

An investor can exchange as little as $100,000 into a DST. This can include the remaining assets leftover from a property exchange.  It also allows the investor to diversify their equity into multiple properties.

 

Whether you are a broker, investor, or simply want more information, contact us today to speak with one of our partners.