1031 Exchange Delaware Statutory Trust (DST) Replacement Property Interests
Smart 1031 Exchange Investments Table of Contents
DST Replacement Property 3 InterestsTM (RPIs)
1031 Exchange Review 5
Advantages of DST RPIs 10
More About DSTs 17
Tenants-in-Common (TIC) 23 1031 Ownership Structure
Disadvantages of RPIs 27
How to Invest 33 Replacement Property InterestsTM
Terms to Know What are Replacement Property Interests TM (RPI)? REPLACEMENT PROPERTY INTERESTSTM
Equity ownership interests in large properties by TM Replacement Property Interests (RPI) are equity multiple 1031 exchange investors through Delaware Statutory Trust (DST) and Tenants-In- ownership interests in large properties through Common (TIC) co-ownership structures. Delaware Statutory Trust (DST) and Tenants-In- Sometimes also referred to as co-ownership or Common (TIC) entities by multiple 1031 exchange fractional interest ownership. investors. RPIs: 1031 EXCHANGE Method of deferring capital gains taxes on the ü Offers the potential for stable long-term income, sale of an asset by exchanging the proceeds for without landlord duties, plus potential property a similar asset. appreciation;
REPLACEMENT PROPERTY ü Will fit almost any size exchange, as investors own The property being purchased in a 1031 exchange. a proportionate share of the property; and
ü Offer the option to invest in one or multiple investment-grade properties, that may otherwise be out of reach.
3 What is a DST?
0.8%
ü Operationally similar to a limited partnership,
2.2% but with a different legal structure in order to 1.3% be eligible for 1031 exchange investments;
ü A Sponsor “packages” the DST investment by finding the property, performing due diligence, 100% DST securing financing, acquiring the asset and retaining management prior to interests being offered to individual 1031 investors;
ü Each investor owns their proportionate share of 1.2% equity in the DST;
0.8%
ü Each investor is entitled to their proportionate
1.1% share of income produced by the DST.
4 1031 Exchange Review
If you are already comfortable with the concept of 1031 exchanges, you can skip ahead to page 10.
For a more in-depth description of 1031 exchanges, please refer to the REALIZED eBook titled What Is A 1031 Exchange?
The 1031 Exchange Dilemma
1031 Exchange Overview
Wealth Building
Rules of Thumb
5 The 1031 Exchange Dilemma
PAYING MAKING A POOR TAXES INVESTMENT
Pay 20 to 30% In Taxes On OR Hastily Reinvest In A Your Hard-Earned Profits Replacement Property You From Selling A Property May Regret Owning
It’s difficult to find a high-quality replacement property for a 1031 exchange in the IRS imposed 45-day identification period, which creates anxiety, and often results in poor investment decisions.
Replacement Property InterestsTM offer a potential solution to the 1031 Exchange Dilemma. These investments meet all the tax and legal conditions of a 1031 exchange, are equity ownership in pre-vetted assets without any landlord duties, and are “packaged” to simplify 1031 exchange sizing and timing requirements.
6 Terms to Know
1031 “LIKE-KIND” EXCHANGE: 1031 Exchange Overview* Method of deferring capital gains taxes on the sale of Profits from selling investment properties are taxed. Depending on your tax bracket and property by using or where you live, Federal and State Capital Gains Tax, Affordable Care Act Surtax and “exchanging” the sale proceeds to buy another Depreciation Recapture Taxes combined range between 15% and 30%, but can surpass investment property. 35% in some cases.
REPLACEMENT PROPERTY: A 1031 exchange offers real estate investors the opportunity to defer paying these taxes by The property(s) purchased in a 1031 exchange. reinvesting their equity in one or more investment properties. The advantage is that money which would have been paid in taxes, instead remains invested, generating more CAPITAL GAINS TAX: income and wealth. Tax payable on the taxable profits from the sale of a capital asset; Assessed by the federal Many real estate investors have accumulated fortunes over their lifetimes by completing government as well as by most exchanges each time they sell, keeping more of their money at work. With proper estate states. planning, the taxes deferred through 1031 exchanges can be eliminated when properties are passed to an investor’s heirs. DEPRECIATION RECAPTURE : Income tax due upon sale of an asset that had previously provided an offset to ordinary income via depreciation deductions. * For a more in-depth description of 1031 exchanges, please refer to the REALIZED eBook titled What Is A 1031 Exchange?
7 1031 Exchange: Wealth Building Every dollar paid to the IRS could be gone forever. Investors who continually perform 1031 exchanges may generate ever increasing cash flow and net worth compared to real estate investors who choose to pay taxes each time they sell a property. Cumulative Cash Flow and Equity Accumulation
$3,500,000 1031 Exchanges vs. No Exchanges
$3,000,000 1031 Exchanges No Exchanges Property Sale $2,500,000 Property Sale $2,000,000 Property Sale $1,500,000
$1,000,000 Equity + Cumulative Cash Flow
$500,000 0 5 10 15 20 Year
Assumptions: initial equity of $500,000 with year 1 cash-on-cash of 6.0%; 5 years between each property sale and 1031 exchange; 3.5% annual appreciation and growth in net operating income (NOI); 30 year mortgage of 50% loan-to-value at 5.0%; depreciable building improvements = 80% (land = 20%) using 27.5-year straight line depreciation: closing and transaction costs equal 1.0% of purchase price for each subsequent property; 20.0% federal capital gains rate, 12.3% state capital gains rate (CA), 3.8% Medicare surtax, 25.0% depreciation recapture rate; cash flow is assumed retained by the investor and not reinvested in real estate.
8 1031 Exchange: Rules of Thumb
In order to defer taxes, there are a few Rules of Thumb that must be followed: QUALIFIED INTERMEDIARY 1. 45-Day Identification Period: Identify the replacement property(s) within 45 days An independent person, of the date of sale. company, or entity that enters into a written 2. 180-Day Closing Period: Complete purchase of replacement property(s) within agreement with the 180 days from the date of sale. exchanger to facilitate the transfer of proceeds from the exchanger to the 3. Purchase Price: All funds from sale must be reinvested in a replacement buyer of the relinquished property(s), or will be subject to tax. property and from the exchanger to the seller of 4. Debt Matters: The mortgage amount on the replacement property must equal or the replacement exceed the mortgage paid off at sale of the relinquished property. property to effect a tax deferred exchange under IRC Section 1031. 5. Don’t Touch the Cash: A Qualified Intermediary must hold the proceeds during an exchange. Investor control of funds may disqualify the exchange.
6. Same Taxpayer: The buyer of the replacement property must be the same legal entity as the seller of the relinquished property.
9 Advantages of DST Replacement Property Interests TM
ü Tax Advantaged Recurring Income
ü No Landlord Duties
ü Simplified Investment Process
ü Can Fit Any Size Exchange
ü Institutional Quality Properties
ü Diversify Real Estate Holdings
10 Advantages of DST Replacement Property Interests TM
Tax Advantaged Recurring Income § DST Replacement Property InterestsTM offer recurring, long-term recurring income deposited directly into the investor’s designated account, typically each month or quarter.
§ Income from a DST is tax advantaged to the extent an investor is able to deduct their proportionate share of mortgage interest and depreciation.
11 Advantages of DST Replacement Property Interests TM
No Landlord Duties SPONSOR The firm that has created the DST investment for § DST investments are “packaged” by a Sponsor consideration finding, acquiring, financing and who is responsible for all property management, managing the DST property on behalf of its investors. asset management and property operations.
LIMITED PERSONAL LIABILITY § The Sponsor typically has extensive background The DST is the borrower, not the individual in managing and maintaining the types of investors. Like a corporation or LLC, investors are not personally liable for any debts of the DST properties in their respective DSTs. beyond the value of their investment.
§ Sponsors typically provide periodic investor reports on the performance of the underlying DST properties.
§ Investors are generally shielded from personal liability beyond their investment.
12 Advantages of DST Replacement Property Interests TM
Simplified Investment Process 45-DAY IDENTIFICATION PERIOD Replacement property(s) must be identified within § DST investments are “pre-packaged”, meaning 45 days of the date of sale of the relinquished the mortgage is already in-place and property property. due diligence such as title, survey and environmental assessment has been completed. 180-DAY CLOSING PERIOD Replacement property(s) must be purchased within 180 days of the sale of the relinquished property. § Investment in DST Replacement Property InterestsTM, and your 1031 exchange, can be completed quickly with limited paperwork.
§ Reduced risk of missing 45-day or 180-day 1031 exchange deadlines.
§ Eliminates need to frantically try to find potential replacement properties.
13 Advantages of DST Replacement Property Interests TM
Can Fit Any Size Exchange*
§ Because DST Replacement Property InterestsTM are “pre-packaged”, they can be purchased in $1,000 increments*.
§ Can be perfectly sized to the amount of proceeds you have to exchange.
§ Investors are allocated their proportionate share of the mortgage on the DST property.
§ Perfect for investors with “leftover” 1031 funds from purchasing other properties.
* Subject to minimum investment size established by the Sponsor.
14 Advantages of DST Replacement Property Interests TM
INSTITUTIONAL QUALITY Properties of sufficient size and Institutional Quality Properties stature to merit attention by large national or international investors. § Replacement Property Interests provide access to properties that may otherwise be out of reach for individual investors based on their 1031 exchange funds.
§ By pooling their equity with other co-owners, an investor is able to own a portion of an “institutional quality” property that may otherwise be an unattainable investment.
For example, an investor could exchange $500,000 of equity into a $20,000,000 property. Assuming the deal was capitalized with 50% debt and 50% equity, the investor would own 5.0%* of the Replacement Property Interests.
* Ownership based on percentage of equity invested in example.
15 Advantages of DST Replacement Property Interests TM
Diversify Real Estate Holdings
§ Because DSTs are “pre-packaged”, it is possible to evaluate a variety of potential investment options across the US.
§ Because of the flexibility in equity requirements, many investors choose to diversify their 1031 investment into multiple DSTs.
For example, an investor with $500,000 in 1031 exchange funds may invest $100,000 in a DST owning a 300-unit apartment complex in Tampa, $200,000 in a DST downtown office building in Denver and $200,000 in DST retail properties in Portland.
16 More about Delaware Statutory Trusts (DST) BENEFICIARY Any person who is eligible to receive distributions from a trust, will, or life insurance 0.8% The DST Explained policy. A DST is a legal entity constructed under