I was recently introduced to a wonderful couple by Ron, a Qualified Intermediary colleague who knew I would be able to help them with their 1031 exchange which was valued at approximately $3 million. Ron said, “Herb, you are going to love these folks. Their parent bought investment property years and ago and built up a nice nest egg for retirement. The income from these properties help them put their children through school and get them started on the careers, debt free. They really did it the right way!”

I followed up with them right away and was intrigued by their backgrounds and history. Esteban Ramirez and his wife Monica Yee both came from immigrant families to the US.  Esteban was born in Indiana after his parents immigrated to the US from Mexico and Monica was a naturalized citizen from China.  Her mother and father came to the US to study at Stanford and UC Berkeley, respectively when she was two years old.  Esteban and Monica met in college at UCLA.

Both sets of  parents had invested in real estate and Monica had been managing her father’s real estate since he passed in 2009.  When I spoke to Esteban and Monica, I learned that their children were in college and one had married in 2017 and just had their first child. Esteban and Monica wanted to slow their lives down a bit and spend more quality time with their grandchild. They had been prodding their other children to move-it-along as they told me . . . meaning get married and give us more grandchildren!

The Ramirez’s had recently sold two investment properties around $2.89M, were in escrow to buy one rental at $700K and wanted to place the balance of the proceeds into a variety of Delaware Statutory Trust (DST) investments. DSTs, as you have heard me mention before, are a popular option for 1031 exchangers because they are passive investment which allow investors to rid themselves of the hassles of property management.  Ron, their QI, had told them of the DST option, and after my conversation and several ZOOM calls with several sponsors, they realized that this was the right approach for them.

As I was doing my discovery work with the sponsors, I received a statement from the QI in the amount of $1,418,000. Knowing the value of investment properties they sold, the numbers clearly did not add up.  When I asked Esteban and Monica about the discrepancy, they mentioned there was a small $200,000 loan on one of the properties and at the close of escrow they decided to immediately receive $572,000 to that off along with some other expenses.   Unfortunately, they did not realize the full ramifications of this decision.  I think it was my silence and slightly audible groan.  Receiving $572,000 as cash did not put the full 1031 exchange in jeopardy, but it had now become a partial 1031 exchange and the $572,000 was subject to capital gains taxes.  “Did we screw something up?,” he asked me.

I explained to them the reason why ALL proceeds from a property sale in a 1031 Exchange must be immediately received by the QI at the time of closing the sale. The seller can never take receipt of the funds or the 1031 exchange rules will have been violated.  In the case of Esteban and Monica, their QI did explain this to them, but they did not contact their CPA or Tax Attorney prior to closing the sale which they were advised to do. As it turns out Esteban and Monica were not ignoring their QIs advice. Esteban’s mother had been having some health problems, and among other things, they simply got too busy.

This is why I stress how important it is to to bring all the important players together – your CPA, Tax professional, Financial Advisor and Qualified Intermediary at the very early stage of your 1031 exchange. These are the professionals that will help keep you on track and help ensure your exchange is successful. If Monica and Esteban had put their team together early in the sale process, they possibly could have saved over $150,000 in taxes.

Although, disappointed, they kept a positive attitude.  Esteban assured me emphatically, “We will not take a single step on the sale of our other properties before talking to you and our CPA!”

We trust this discussion has been helpful, and we encourage you to find additional insights in our eBook, Top 11 Misconceptions About 1031 Exchanges, which you can download for free HERE. 

This is for informational purposes only, does not constitute as individual investment advice, and should not be relied upon as tax or legal advice. Please consult the appropriate professional regarding your individual circumstance. Because investors’ situations and objectives vary this information is not intended to indicate suitability for any particular investor. 

 DST 1031 properties are only available to accredited investors (typically have a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last three years) and accredited entities only.  If you are unsure if you are an accredited investor and/or an accredited entity please verify with your CPA and Attorney. 

There are material risks associated with investing in DST properties and real estate securities including liquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal.

Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated. Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.

Securities offered through Concorde Investment Services, Inc. (CIS), member FINRA/SIPC. Insurance offered through Concorde Insurance Agency, Inc. (CIA) Thornwood Financial is independent of CIS, CAM and CIA.