Category: Accredited Investor

Case Study: The Zero DST

A 1031 exchange is essentially a swap of one investment property for another. The advantage of using a 1031 exchange is that it allows you to defer capital gains on appreciated investment property.

There are a number of factors to consider when doing a 1031 exchange, including potential tax implications for any debt on the exchanged property. 

Enter the 1031 exchange Zero Income DST (Delaware Statutory Trust).

A Zero DST is a form of 1031 exchange that provides a debt option to help avoid the unwanted tax implications of reduced debt that can result from a 1031 exchange.

Let’s take a look at a case study from a client who we recently helped through this process.

Morgan’s situation 

Morgan was doing a $1.7 million 1031 exchange with about $933,000 in debt. That left $767,000 in cash at the Qualified Intermediary (QI).

I received a call from Morgan and after a brief introduction and back-and-forth, he paused and asked, “Did I screw up my exchange?”  Note this is the PG-13 version of what he actually asked.

This was the beginning of the educational process. I started Morgan’s education by explaining to him that he needed to get a loan for $933,000 and is required to replace the debt that was paid off as part of the 1031 exchange. In a 1031 Exchange you have to replace the equity and the debt.  So if you closed a sale at $1.7 million that had $$933,000 in debt, you have to purchase $1.7 million of like-kind replacement real estate which includes $933,000 of debt.

You see… Morgan had outlined his “plan” which sounded great, but I asked him, “what about the debt?”  Where’s the $933,000 in debt – he interrupted, “I paid that off!”  No laughing allowed.  That’s when I had to explain to him the requirement of having to replace the debt/loan in his new purchase(s).  You can probably hear, the “OOOOOH… really?” yourself while reading this.

Morgan already purchased one property for $420,000 all cash. He was in contract for a second property for $207,000 which was to close very soon. For both properties he was planning to use all-cash to make the purchases.

What was missing in those two transactions was that there was no debt.

Using a Zero coupon DST

What a Zero coupon DST does is provide the debt needed without having to go and get a new loan.  The Zero although it provides no income, it gives you all of the debt and depreciation as if you actually had a $933,000 loan.

Morgan purchased $204,000 of a Zero Coupon DST program which was the equivalent of $934,000 of debt; which covered all of the debt from his old property. Problem solved, this eliminated virtually all of the taxes he would have faced on the elimination of the $933,000 in debt.

Morgan was like many real estate investors who are unaware of the potential tax hit from not replacing the debt eliminated from the property that is being exchanged. This can cause a 1031 exchange to literally “blow up” in an investor’s face.

If you’re considering slowing down and spending more time with your spouse/partner, the grandkids, traveling or just not dealing with the tenants, toilets, and trash, and the other headaches that can come with owning income property, let’s set up a time to talk about what that looks like.

It’s easy to schedule a meeting.  My calendar is as close as the “Calendly” link below.  Copy the link into a browser and schedule a meeting today.

?   ???? ????:  https://calendly.com/herbalston/30min

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.

The case study is for illustrative purpose only. Individual results will vary.

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.

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.

 

 

How to Qualify for a 1031 Exchange: A Simple Guide for Investors

Are you thinking about selling your investment property? If so, a 1031 exchange might be an excellent option! This effective tool, also known as a “like-kind exchange,” allows investment property owners to defer a variety of taxes by reinvesting their funds into another piece of property.

Qualifying for this incredible wealth-building opportunity isn’t as difficult as you might think. Here’s what you need to know. 

What is a 1031 Exchange?

Section 1031 of the Internal Revenue Code provides the ability to exchange a business, income, or investment property for “like-kind” property. Doing so allows the property holder to defer federal and state capital gains taxes and the 3.8% Medicare tax. A 1031 exchange also defers the recapture of depreciation.

The primary benefit of a 1031 exchange is the ability to hold onto your buying power. Without it, a property sale would result in you paying a significant portion of your profits to the government. This would leave you with less money to purchase a new investment. By taking advantage of a 1031 exchange, you’re able to keep all of your money working for you.

Eligibility Requirements

If you currently own business property or a piece of real estate held for income or investment, you likely qualify for a 1031 exchange. This opportunity is open to individuals, S-corporations, C-corporations, LLCs, trusts, general partners, limited partners, and any other tax-paying entity.

The primary requirements for qualifying are that (1) you have a qualifying property, and (2) you meet the time restrictions.

When you sell your property, you’ll have 45 calendar days from the closing date to identify your replacement property. You also only have 180 calendar days from the date of your first property closing to close on the replacement property. In addition, you must use a “qualified intermediary” to oversee the transaction and ensure all 1031 exchange requirements are met.

Like-Kind Property

Finding a “like-kind” property may seem intimidating. However, it’s not as complicated as you might think. As long as the new property is located in the United States and it’s used in business or held as an investment or income-producing property, it’s considered a “like-kind” property.

No matter what kind of investment, income, or business property you currently hold, you’re able to exchange it for a variety of different properties. This may include a vacant lot, apartment building, commercial building, or even a single-family residence (as long as it’s not your primary residence or second home).

In some cases, a vacation home may qualify for a 1031 exchange. However, you must show that you have “limited personal use” of the property. This means that the property owner or the owner’s family must not personally use the property for more than 15 days per year or 10% of the number of days during the year that the property is rented at the fair market value.

Personal property, like gold coins, aircraft, computers, and equipment, may also qualify for a 1031 exchange. However, the rules regarding these exchanges are much more specific. If you’re considering engaging in any kind of a 1031 exchange, it’s a good idea to consult with a tax professional before you get started.

Delaware Statutory Trust

While finding a “like-kind” property isn’t necessarily difficult, many property holders are selling their real estate holdings because they no longer want to deal with the hassles of managing physical property. The good news is, you can qualify for a 1031 exchange without the ongoing effort of managing a replacement property.

A Delaware Statutory Trust (DST) is an investment vehicle that serves as a like-kind investment property. It allows accredited investors to continue owning real estate property and enjoy the benefits of a 1031 exchange, without the headaches that come with property management.

To learn more about how to qualify for a 1031 exchange and explore whether a DST is appropriate for you, send us a message or give us a call at 415-991-1031. Remember, you only have 45 days from the sale of your property to find a replacement property, so don’t delay! 

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) Halston Pacific is independent of CIS and CIA.

 

Do You Need to Be an Accredited Investor to Complete a 1031 Exchange?

It’s no secret that some investment options are confusing. While doing your research, you may come across terms you’re not familiar with. For example, many real estate investments are open to “accredited investors” only. What does this mean, and how does it apply to 1031 exchanges? The following guide will tell you everything you need to know.

What is an Accredited Investor?

The term “accredited investor” was created by the Securities and Exchange Commission (SEC) to describe a certain type of sophisticated investor. It’s defined under Rule 501 of Regulation D in the Securities Act of 1933.

To qualify as an accredited investor, you must meet the following requirements:

1. Earn an annual income of at least $200,000 (individual) or $300,000 (joint) in the past two years. 

2. Have a net worth of more than $1 million (excluding the value of your primary residence), either individually or with your spouse.

You must also reasonably expect to maintain the same levels of income in the future. Due to their financial success and presumed experience, accredited investors are considered sophisticated. It’s assumed that they have enough experience to understand complex investment vehicles.  

Rule 501 also defines accredited investor status for organizations. This includes trusts, companies, and other entities.

Why Are Some Investments Restricted to Accredited Investors? 

Under normal circumstances, investment securities must go through a registration process before they’re offered to the public. This is intended to protect investors from getting involved in securities that are fraudulent, overly-complex, or illiquid. However, the registration process can create a financial burden for investment companies. For this reason, there are many exceptions that allow issuers to avoid registration.

If a company wants to avoid having to register its offerings, they often must agree to limit their sales to accredited investors only. The SEC assumes that individuals who have reached accredited investor status are capable of thoroughly evaluating an investment offer. This includes determining the merits of the investment and evaluating its potential risks. Only after this evaluation is done can someone truly determine whether an investment is an appropriate choice for their needs. In the event that an accredited investor makes a poor decision, it’s also assumed that they have the means to overcome the negative financial impact.

Unregistered private investments are often complex, have the potential for significant losses, and may not be fully liquid. By limiting the sales of these securities to accredited investors, the SEC is attempting to prevent inexperienced investors from getting in over their heads.

Do You Need to Be an Accredited Investor to Do a 1031 Exchange?

A 1031 exchange is a transaction that allows investors to defer capital gains on the sale of investment property. To qualify for this tax benefit, you must exchange your current property for a “like-kind” property (or properties) of equal or greater value. 

While investors must follow IRS rules to qualify for this favorable tax treatment, they are not required to be an “accredited investor.”

However, if investors use the  Delaware Statutory Trust (DST)  structure for1031 exchange using a Delaware Statutory Trust (DST), that is a different story. 

Because DSTs are considered “securitized investments” by by the SEC, the accredited investor requirement kicks in. DSTs allow multiple investors to own fractional interest in a single property or a portfolio of properties. Like other unregistered investments, DSTs can be complex and are considered illiquid investments.. So, while you don’t have to be an accredited investor to engage in a 1031 exchange, you do if you plan to do it using a DST.

Learn More About 1031 Exchanges

A 1031 exchange offers many advantages for both accredited and non-accredited investors. This includes investment diversification, tax deferral, and the potential for increased cash flow. However, while the concept isn’t complex, the execution can be.

If you’re interested in taking advantage of a 1031 exchange, we can help. Contact us today to discuss your goals and learn how to get started.

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) Halston Pacific is independent of CIS and CIA.