“Beyond the Classroom: Why Investors Are Studying DSTs This Fall”

Recently we published a three-part educational series called “Sharpening Your Portfolio IQ: The New Semester of Alternative Investment Strategies”.  At a recent real estate and CPA conference there were continued concerns and interest about the sequence of events to properly position assets for a Section 1031 tax deferred exchange.

September 27, 2025

By Al DiNicola, AIF®
1031 Tax Deferred Exchange Specialists & DST Advisor
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC, Member of FINRA/SIPC

Investors are also taking a deeper dive into Delaware Statutory Trust (DSTs). There was a transition from confusion, concern, caution and then confidence in utilizing a §1031 tax deferred exchange with a DST.

It is appropriate to re-engage and review as we enter an energized time of the year. As we enter the fourth quarter of 2025, investors may be repositioning their real estate and investment holdings to make a move prior to year end or getting ready for 2026 (already).

The confusion was shared as to how Delaware Statutory Trusts (DSTs) qualify as replacement property for §1031 tax-deferred exchanges. As a refresher, this is permitted due to IRS Revenue Ruling 2004-86. The ruling in 2004 established permitting fractional ownership in a DST being considered direct ownership of real estate. Partnership interest would not qualify.

Why DSTs Qualify

  1. IRS Guidance
    • Revenue Ruling 2004-86 confirms that a beneficial interest in a properly structured DST represents direct ownership of real estate.
    • Unlike partnerships or LLCs, DST investors are treated as owning an undivided interest in the underlying real property.
  2. Like-Kind Property Requirement
    • §1031 exchanges require the relinquished property and replacement property to be of “like-kind.”
    • DST interests meet this definition since they are tied to actual real estate assets.
  3. Compliance with IRS Restrictions (noncompliance is referenced as the Seven Deadly Sins)
    DST trustees and sponsors must adhere to strict limitations to maintain compliance:
    • No new capital contributions after the offering is closed.
    • No refinancing after the initial loan is placed.
    • No reinvestment of sale proceeds from disposed property.
    • Limited ability to make structural changes, renegotiate leases, or enter new business ventures.
    • Only normal repair, maintenance, and minor non-structural improvements are permitted.

§1031 Exchange Process Using a DST

  1. Sell the relinquished property – proceeds are held by a Qualified Intermediary (QI) to avoid constructive receipt.
  2. Identify replacement property (DSTs) – within 45 days of the sale of the relinquished property.
  3. Close on the DST investment – within a total of 180 days of the sale of the relinquished property.
  4. Ownership via beneficial interest – investor receives pro-rata share of income and appreciation, but no active management responsibilities.

Advantages of Using DSTs in §1031 Exchanges

  • Fast closing, useful for meeting tight IRS deadlines. DSTs are prepackaged and ready to close in a short period of time.
  • Access to institutional-quality real estate (multifamily, industrial, retail, medical office, self-storage, student housing, life science, and even land).
  • Passive income with professional management.
  • Ability to diversify by investing in multiple DSTs with smaller minimums. A $500,000 exchange may be reallocated into several DSTs. There would be added due diligence as well as additional paperwork. This may provide a level of diversification. Diversification does not eliminate risk but seeks to minimize risk.

What to Look for in a Good DST Professor (AKA Advisor)

When searching for an advisor you may approach the selection process by selecting an educational partner. Investors will go through an educational process and should seek an advisor who has specific DST / §1031 exchange experience. They should know the lifecycle, risks, and legal paperwork, sponsor reputations, fees, etc. Advisors who have interfaced with CPAs may also be able to assist since many CPAs may not deal with §1031 exchanges and DSTs on a regular basis.

A real estate broker typically is not licensed appropriately. Look for Registered Investment Advisors (RIAs), broker‐dealers, or financial professionals who can legally sell DST offerings. DST sponsors typically distribute their offerings through these channels.

An advisor should be selected who has a track record for a number of transactions completed or deals done, who is engaged in the selection process and who understands DSTs needed to balance debt requirements as well as potential diversification. Just as important is being transparent regarding fees and risks.  Advisors who operate in a Fiduciary capacity or with aligned incentives is an advantage. Make sure there are no conflicts of interest (e.g. the advisor is also sponsoring the DST or gets paid extra for promoting certain ones).

Communication actually is a two-way situation. The advisor needs to be responsive, communicative, and educational.  Advisors should take time to understand your goals, walk you through the pros/cons, help with due diligence. The investor needs to understand time constraints, especially with the 45-day identification period and returning documentation. This is especially important when investors contact us well within their 45-day identification period.

Advisors who adopt an educational attitude first and foremost may provide the most effective and efficient solution for the investor. Investors who begin their educational process with the right advisors will be in the best financial position as well as meeting timing constraints if utilizing a 1031 exchange.

As always contact us for more information and a complimentary consultation.

NAMCOA® is a SEC registered investment advisory firm that provides comprehensive portfolio management, financial planning, and fiduciary decision-making services on behalf of retirement plan sponsors. Our Difference is summarized by our fiduciary approach which enables us to better meet portfolio and retirement plan objectives, resulting in stronger risk adjusted returns for investors and peace of mind for Clients. We also focus on alternative real estate investment. Many real estate investors are seeking tax deferred solutions utilizing §1031 exchanges or Opportunity Zones.

Alternative investments and DSTs are not for all investors.  The acquisition of a certain alternative investments including DSTs is for accredited investors only.  Contact your investment adviser for additional details on how a DST may be a solution to your §1031 Exchange and suited for your investment future. For more information on how to properly set up an IRC §1031Tax Deferred Exchange or if you are an accredited investor and would like additional information on a DST contact Al DiNicola at 239-691-8098 or email adinicola@namcoa.com.

This is not an offer to purchase or solicitation to purchase any security, as such be made only through an offering memorandum or prospectus.  Investing in securities, real estate, or any investment, whether public or private, involves risk, including but not limited to the potential of losing some or all of your investment dollars when you invest in securities. You should review any planned financial transactions that may have tax or legal implications with your personal tax or legal advisor.   NAMCOA, LLC is a Registered Investment Advisor, regulated by SEC (Securities and Exchange Commission). Our corporate office is located at 999 Vanderbilt Beach Road, Suite 200, Naples Florida 34108. Securities Offered through MSC-BD, LLC, Member of FINRA/SIPC. 5 Centerpointe Drive, Ste. 400 Lake Oswego, OR, 97035MSC-BD, LLC and NAMCOA are independently owned and are not affiliated.

Thank you.

1031 Exchange Education- What is Boot?

The market is starting to loosen up for investors seeking to sell their properties via §1031 tax deferred exchange. Once under contract investors need to understand a few specific items that may cause either a unintended tax issue or an issue with an expense taken at closing that is not permitted in a §1031 exchange.  

March 4, 2025

By Al DiNicola, AIF®
DST 1031 Specialist
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC, Member of FINRA/SIPC

Recently we have received calls from investors seeking information on what cash they can retain, what happens when the loan is paid off, and how rental and security deposits are handle at closing. We do not provide tax advice.

Let’s handle one item at a time. There is an item referenced as boot in an exchange. “Boot” refers to any portion of a §1031 exchange that does not meet the like-kind replacement property criteria. Most commonly this is in the form of “cash boot” and “mortgage/debt boot.”

Cash boot occurs when an investor has uninvested proceeds from the sale of a replacement property. If they intend to do a §1031 exchange but do not replace all of the cash received from the sale, they will owe tax on the uninvested portion.

Example:

If an investor sells an investment property for $2,000,000 and they purchase a replacement property for $1,500,000, they will have a $500,000 cash boot that will be subject to tax. The investor would be subject to federal and state taxes depending on where they live.

It has been brought to our attention in a few investment seminars that certain investors will over paid for their replacement property. This occurs when calculating the potential taxes that may be due on not using all the cash, when compared to simply paying more for the property (aka the asking price or even higher). If you are paying capital gains taxes, have a high income that may subject you to NIIT (net investment income tax), and live in a high income tax state you may face up to 40% taxes on the boot. Other investors (accredited) may determine they would rather negotiate a better price on the replacement property (meaning not using all the cash proceeds in the exchange) and then utilize a Delaware Statutory Trust (DST) for any remaining cash boot.  DSTs are scalable and can  handle left over cash from the exchange.

Mortgage/debt boot occurs when the mortgage value on the replacement property is less than the mortgage on the relinquished property. It is important to consider this when doing a §1031 exchange as both the cash received AND the debt need to be replaced in the acquired property.

Example:

An investor sells an investment property with a $500,000 mortgage and purchases a replacement property utilizing a $400,000 mortgage. This investor will be subject to tax on a mortgage boot in the amount of $100,000. It is important to note that this boot can be offset by adding $100,000 of cash to the exchange.

The easiest way to avoid a “boot” issue is to remember that you are replacing the total real estate value in a §1031 exchange. Both the equity and debt from the relinquished property need to be equal or greater in the replacement property.

There are reasons why an investor may have troubles with the replacement loan.  In the short 45-day identification window the investor may need to qualify for a loan.  Granted, there is a total of 180 days to close but most investors may wish to guarantee there is loan approval prior to identifying the replacement property. Accredited investors may seek to utilize Delaware Statutory Trust (DSTs) as a replacement property.  DSTs provide non-recourse debt pre package for investors without application or effects on individual credit reports.

When we work with an accredited investor we take into consideration suitability of replacement assets as well as balancing the utilization of cash and the inclusion of replacement debt if necessary.

NAMCOA® is a SEC registered investment advisory firm that provides comprehensive portfolio management, financial planning, and fiduciary decision-making services on behalf of retirement plan sponsors. Our Difference is summarized by our fiduciary approach which enables us to better meet portfolio and retirement plan objectives, resulting in stronger risk adjusted returns for investors and peace of mind for Clients. We also focus on alternative real estate investment. Many real estate investors are seeking tax deferred solutions utilizing §1031 exchanges or Opportunity Zones.

DSTs are not for all investors.  The acquisition of a DST is for accredited investors only.  Contact your investment adviser for additional details on how a DST may be a solution to your 1031 Exchange and suited for your investment future. For more information on how to properly set up an IRC 1031Tax Deferred Exchange or if you are an accredited investor and would like additional information on a DST contact Al DiNicola at 239-691-8098 or email adinicola@namcoa.com.

This is not an offer to purchase or solicitation to purchase any security, as such be made only through an offering memorandum or prospectus.  Investing in securities, real estate, or any investment, whether public or private, involves risk, including but not limited to the potential of losing some or all of your investment dollars when you invest in securities. You should review any planned financial transactions that may have tax or legal implications with your personal tax or legal advisor.   NAMCOA, LLC is a Registered Investment Advisor, regulated by SEC (Securities and Exchange Commission). Our corporate office is located at 999 Vanderbilt Beach Road, Suite 200, Naples Florida 34108. Securities Offered through MSC-BD, LLC, Member of FINRA/SIPC. 5 Centerpointe Drive, Ste. 400 Lake Oswego, OR, 97035  MSC-BD, LLC and NAMCOA are independently owned and are not affiliated.

Thank you.

CRE Market Update 2025 and 1031 Exchange Trends ~ Part 2

There was much anticipation, during the previous administration, that the long-standing Section 1031 tax deferred exchange provision would see changes. There were several proposals, from elimination (of what some referenced §1031 a loophole), to limiting the exchange dollar limits, to other strategies, none of which came to fruition. 

January 27, 2024

By Al DiNicola, AIF®
DST 1031 Specialist
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC, Member of FINRA/SIPC

We have previously written about the reasons why. Advisors, CPAs, real estate professionals and most importantly the individual investors feel comfortable the program will stay intact, at least we are hopeful.

In Part 1 we commented on real estate prediction, interest rate changes, financing, inventory supply, asset classes and short-term rental in certain areas. (See   Part 1 – 2025 CRE Trends). We will address a few other areas and amplify. 

Can you Refinance? There continues to be concerns regarding the ability of investors (especially large investors) to refinance maturing lower rate loans to higher interest rates. We have heard of the projected number of loans maturing over the next two years. The estimates range from $700M to $2 Trillion depending on the source and interpretation of the data. No matter what the dollar amount will be, the individual investor will be focused on how to reposition their asset either through refinancing or reselling.

A lot of that will be determined by the banks that are holding the loans. Some analysts have often used the phrase “extend and pretend” but some banks may potentially use some of the same strategies. In banking, the term “extend and pretend” refers to a practice where banks or lenders extend the terms of a loan (i.e., by lengthening the repayment period or restructuring it) instead of addressing underlying issues, such as the borrower’s inability to repay. This is often done to avoid recognizing a loan as non-performing or impaired on the bank’s balance sheet, which could require the bank to set aside additional reserves or take a loss. 

There may be an increase in the volume of activity simply based on the fact that there are maturing loans, and some investors want to get out from under the loans. The challenge many investors will face when doing a §1031 exchange is that the loans that are being paid off need to be replaced in order to have a valid §1031 exchange unless the investor can provide fresh cash in place of a mortgage. Delaware Statutory Trusts (DSTs) may assist certain investors with debt being replaced with non-recourse loans.

Interest Rates and Transaction Volume

A reduction in a few basis points in interest rates is expected to boost 1031 transaction volume. This may push an upward trend in residential and commercial exchanges. Investors evaluating making moves may focus on tax deferral as well as NOI or distributions being paid.

Seller Financing

Traditional financing challenges will lead to more seller-financed transactions. This may become problematic with sellers leveraging §1031 Exchanges. We will follow up with another article on the benefits and drawbacks of seller financing.

Shifts in Asset Classes

Multifamily, industrial, self-storage, and certain necessary retail properties are expected to see robust activity as investors use §1031 Exchanges to defer taxes. Certain investors may move from one asset class to another.  Investors utilizing DST may have an advantage in selecting several asset types and geographic locations as replacement properties.  This diversification spreads the risk of real estate over a greater number of properties.  For example, an investor selling a residential rental property for $500,000 may acquire 3-5 different DSTs (typically $100,000 minimum in a DST) and assemble a portfolio of real estate rather than one property. If the relinquished $500,000 property has debt, the DSTs provide non-recourse debt which may be viewed by investors as favorable.

Shift to Passive Investments

Investor demographics continue to suggest a move away from active management. An increase in management-intensive properties being exchanged for passive investment types like NNN (Triple Net Lease) and DSTs is expected.

Geographical Shifts

Local regulations may restrict the rental of certain real estate.  New policies and zoning regulation may change the number of rentals per year or per month (as in the case of Airbnb investors) that will prompt investors to move their investments to more landlord-friendly areas.

The need for more housing

In many locations there is a movement for permitting Additional Dwelling Units (ADU). The need for residential units in many locations has prompted municipalities to seek alternatives such as permitting ADU to be added to existing properties.  A single-family home may have enough room to build a smaller home or garage/carriage home on the same property. Hence the name additional dwelling unit (on the same property).  The increase in unit counts may prompt investors to look at §1031 opportunities. There may also be a combination of mixing commercial with residential offerings known as Mixed-use.  This diversification may appeal to a variety of investors, especially those seeking §1031 Exchanges.

Location, Location

The migration of people and to certain extent investment dollars are moving to the southern smile states (as they are known). These are known as retirement-friendly areas. Rumors of warmer weather (although maybe not in the southeast in January 2025), lower cost of living, favorable tax conditions, and areas friendly to retirees, continue to be in demand for investors.

2025 may be a fluid year with opportunities for investors. Potential legislative changes, market dynamics, interest rates, net operating income and other strategies are trends we will continue to monitor. The DST strategy as well as Opportunity Zones should continue to be of interest to advisors as well as investors. Another trend to watch is the IRA to ROTH conversion strategy.

NAMCOA® is a SEC registered investment advisory firm that provides comprehensive portfolio management, financial planning, and fiduciary decision-making services on behalf of retirement plan sponsors. Our Difference is summarized by our fiduciary approach which enables us to better meet portfolio and retirement plan objectives, resulting in stronger risk adjusted returns for investors and peace of mind for Clients. We also focus on alternative real estate investment. Many real estate investors are seeking tax deferred solutions utilizing §1031 exchanges or Opportunity Zones.

DSTs are not for all investors.  The acquisition of a DST is for accredited investors only.  Contact your investment adviser for additional details on how a DST may be a solution to your 1031 Exchange and suited for your investment future. For more information on how to properly set up an IRC 1031Tax Deferred Exchange or if you are an accredited investor and would like additional information on a DST contact Al DiNicola at 239-691-8098 or email adinicola@namcoa.com.

This is not an offer to purchase or solicitation to purchase any security, as such be made only through an offering memorandum or prospectus.  Investing in securities, real estate, or any investment, whether public or private, involves risk, including but not limited to the potential of losing some or all of your investment dollars when you invest in securities. You should review any planned financial transactions that may have tax or legal implications with your personal tax or legal advisor.   NAMCOA, LLC is a Registered Investment Advisor, regulated by SEC (Securities and Exchange Commission). Our corporate office is located at 999 Vanderbilt Beach Road, Suite 200, Naples Florida 34108. Securities Offered through MSC-BD, LLC, Member of FINRA/SIPC. 8215 SW Tualatin- Sherwood Rd, Suite 200, Tualatin, OR 97062.  MSC-BD, LLC and NAMCOA are independently owned and are not affiliated.

Thank you.

CRE Market Update 2025 and 1031 Exchange Trends ~ Part 1

The beginning of 2025 has quickly moved into and almost out of January.  The commercial real estate market, or CRE as it is known, appears to be set for another dynamic year.

January 24, 2024

By Al DiNicola, AIF®
DST 1031 Specialist
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC, Member of FINRA/SIPC

First Days of New Administration. The initial days of the new administration have been filled with executive orders, anticipation, and speculation of clarity in policy for the investing world. For a number of years, we have written articles on the advantages of Delaware Statutory Trust (DST) being used in conjunction with 1031 exchange replacement properties. We have also opined on the different strategies for investors using alternative real estate positions to enhance non-correlated returns and potentially defer capital gains taxes. This included investments into opportunity zones which may be under review for potential extension this year.

Real Estate Predictions. There are many predictions for what we can expect for the commercial real estate market this coming year and beyond. There will be evolving market conditions as well as fluctuations in many financial and political arenas that may affect the commercial real estate market. This will require property owners and investors contemplating selling their property to take positive action. This will require advisors, real estate brokers, CPA’s, and other professionals to work as a team to help guide the investor to stay informed about the latest opportunities and trends in 2025.

The past few years CRE as well as 1031 exchange transactions have faced many hurdles to produce the volume of transactions that has happened. These hurdles included rising interest rates, reduced inventory, uncertain political situations, natural disasters, and a host of other localized issues.

Interest Rates Up & Down & Up Over the past 40 years interest rates have risen and fallen. Creativity in the marketplace seems to have adapted to the interest rate changes. Buyers and sellers will come to grips with the reality of the interest rates and each will adapt to affect the sale (disposition) or acquisition of real estate. This may be good news for transaction volume that is expected in the tax deferred IRS code known as section 1031.

Financing (new investments or refinancing current investments) faces challenges especially in light of the strict underwriting guidelines or as some would put it more conservative guidelines. These guidelines are being used when approving loans for new buyers as well as for investors attempting to refinance their current ownership. Sellers who are motivated may decide to seek more creative solutions by offering seller financing. This all hinges on how motivated the sellers are to move from their current investment property either selling outright or utilizing a §1031 exchange.  A §1031 exchange may optimize their potential replacement property or repositioned asset.

Inventory Supply. In certain locations the amount of available inventory may have restricted sellers from even listing their properties because of the limited supply that would qualify as a replacement property. Sellers who utilize DSTs typically do not face many inventory limitations. However, sellers looking at a traditional 1031 replacement property may move and adopt the reverse exchange as an option. Reverse exchange enables an investor to acquire a property prior to selling their current investment property. In a competitive market this flexibility may provide for a viable strategy. Other investors may seek to buy properties that are considered value add and that would be perfect for improvement exchange. Both of these strategies may become complicated if properties are not sold when in a reverse exchange is entered into, as well as an improvement exchange where all the improvements cannot be completed by the 180th day of the exchange.

Multi-Family & Industrial in demand. Traditional real estate markets as well as the DST markets expect to see large multifamily properties and industrial spaces still to be sought after. Even with the online shopping known as the Amazon effect, there are necessary retail centers that have become popular and will remain in time demand in traditional acquisitions as well as DST acquisitions. Traditional office space has become challenging for investors to sell. Large office spaces have been packaged in DST that include government buildings such as Social Security Administration, and others, with extremely long leases that may be viable for certain investors. Medical office is still popular among investors, and we have seen increased activity of the limited numbers for medical office offerings in the DST marketplace. Investors moving out of traditional office properties may want to reinvest into more resilient asset classes with the potential for growth.

Short Term Rental Challenges.  Many municipalities are currently struggling with property rights with regards to the restrictions on short term rentals. The growth of AirBNB has surely created opportunities, obstacles, an outcry depending on what side of the issue you fall on. Residential investors that face growing restrictions may seek to sell, replace, or in some cases shift their investments to other locations. Certain investors may also seek to change asset classes, so they do not have to deal with the short-term rental situation.

We don’t believe that anyone has a crystal ball as to the velocity of transactions that will happen in 2025. Given the demographics of certain investors and the real estate that they own, many will be seeking to execute a §1031 tax deferred exchange. The demographics also suggest that many investors will seek moving from active involvement or management into passive involvement and seek passive income. There are §1031 strategic insights via DSTs that we may be able to provide to accredited investors.

The higher interest rates we are facing today with limited acceptable replacement properties may be the biggest issue facing investors.

Look for Part Two Soon. We will cover future of §1031, Refinancing and interest rate concerns, shifts in asset classes and geographic shifts, seller financing and a few other topics.

NAMCOA® is a SEC registered investment advisory firm that provides comprehensive portfolio management, financial planning, and fiduciary decision-making services on behalf of retirement plan sponsors. Our Difference is summarized by our fiduciary approach which enables us to better meet portfolio and retirement plan objectives, resulting in stronger risk adjusted returns for investors and peace of mind for Clients. We also focus on alternative real estate investment. Many real estate investors are seeking tax deferred solutions utilizing §1031 exchanges or Opportunity Zones.

DSTs are not for all investors.  The acquisition of a DST is for accredited investors only.  Contact your investment adviser for additional details on how a DST may be a solution to your 1031 Exchange and suited for your investment future. For more information on how to properly set up an IRC 1031Tax Deferred Exchange or if you are an accredited investor and would like additional information on a DST contact Al DiNicola at 239-691-8098 or email adinicola@namcoa.com.

This is not an offer to purchase or solicitation to purchase any security, as such be made only through an offering memorandum or prospectus.  Investing in securities, real estate, or any investment, whether public or private, involves risk, including but not limited to the potential of losing some or all of your investment dollars when you invest in securities. You should review any planned financial transactions that may have tax or legal implications with your personal tax or legal advisor.   NAMCOA, LLC is a Registered Investment Advisor, regulated by SEC (Securities and Exchange Commission). Our corporate office is located at 999 Vanderbilt Beach Road, Suite 200, Naples Florida 34108. Securities Offered through MSC-BD, LLC, Member of FINRA/SIPC. 8215 SW Tualatin- Sherwood Rd, Suite 200, Tualatin, OR 97062.  MSC-BD, LLC and NAMCOA are independently owned and are not affiliated.

Thank you.

2025 Strategies for Consideration

January 10, 2025

Kicking off investment ideas for 2025 may involve traditional and non-traditional strategies.  What is on your list of potential investment moves for 2025? 

By Al DiNicola, AIF®
DST 1031 Specialist
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC Member of FINRA/SIPC

Typically, at this time of year we may be identifying resolutions in all aspects of our lives. Many investors are standing by and anticipate changes with a new administration about to be installed. Normally with all the hustle and bustle of the end of the year, the holiday season and negotiating last minute tax positioning for certain investments 2025 investment planning typically rolls over into the new year. Over the years we have seen many investors investigate or at least think about making moves with their portfolios. Some may consider non-correlated positions. Investors who own real estate and other appreciated assets should consider their alternatives. Understanding the potential options is always worth a discussion.

Primary Residences

Investment moves may include the selling of your primary residence and moving into a smaller residence typically known as downsizing. This may be in your local area or potentially miles away. Warmer climates may prompt moves as some areas of the country are experiencing the first artic blasts. We’ve seen a migration from the northeast and Midwest to what’s known as the smile states which stretch from Texas across the southeast and into the Carolinas. We have specifically assisted homeowners who have a potential large capital gain in their primary residence. This is especially important when looking at how to defer taxes on capital gains above the $500,000 limit per couple exemption. There are current and potentially future advantages of combining the sale of a private residence or personal residence (via Section 121) with a tax deferral strategy in Opportunity Zones (OZs).

Investment and rental Properties.

Investors who own rental properties, especially those involved with active management, may be seeking to move into a more passive involvement with their rental properties. We are especially skilled at assisting these investors who may benefit through selling their current investment property utilizing a section 1031 tax deferred exchange and moving into a Delaware statutory trust (DST) offering. The DST as it is known, provides for potential diversification via change of asset class, multiple acquisitions or replacement properties, as well as geographic location when selling a single property that they’ve held for investment. DSTs that have leverage by design provide non-recourse debt to §1031 investors who are required to replace debt in a 1031 exchange.  We also have investors who have sold real estate that has a high enough basis enabling moving the capital gains into an Opportunity Zone aka OZ (rather than using the §1031 exchange) and retaining the basis tax free.

Selling the Business.

Investors who own a business may be looking at selling the business utilizing a combined tax deferral strategy that may include a §1031 exchange for the real estate the business may own as well as an opportunity zone for the business capital gains. DST qualified as a 1031 replacement and may provide a passive investment.

The sale of the business may start with the business owner selling his business either to a potential second generation owner (aka family member) or offering his business for sale to an unrelated party. Recent studies have revealed that selling or transferring the business from the first generation to the second generation is successful about 35% of the time. Second generation the third generation drops down to 12%. If you are a business owner and have the ability to continue your legacy of business ownership by offering to sell or transferring the ownership to your offsprings or children, congratulations. There are steps to review in order to ensure the biggest potential return to the investor as possible and at the same time providing a springboard for your offering for your offsprings.

Asset repositioning

They are also investors looking at selling appreciable assets whether it would be collectibles, antiques, watches, stocks, artwork, etc. where are they would experience a sizeable gain the sizable gain may benefit through investing that gain into an opportunity zone. This enables the investor to retain to whatever basis they own in the asset and only invest the capital gains into an opportunity zone. We have many articles and insights in how to best utilize the opportunity zone strategy. Investors with stock market gains may shift to another strategy and take advantage of the Opportunity Zone strategy.

IRA to ROTH Conversion (maybe a new idea)

Investors seeking to move from a traditional RIA may seek to execute a ROTH conversion strategy. This strategy needs thorough planning and typically takes place over a period of time.  

Here is a hypothetical situation. An investor has money in regular IRA, or 401(k) accounts and they will pay regular income tax when they take money out of their accounts after they retire. They don’t pay taxes when taking money out of a Roth IRA account because the money in a Roth IRA consists of after-tax dollars.

There are a number of private investments, particularly in commercial and multi-family real estate, that offer an IRS-approved discounted value when converting from a regular into a Roth IRA. Say, towards the end of one year, a client invests $100,000 from a regular IRA in an investment property in the developmental stage. At the end of the year, an independent appraisal will be done on the current value of the investment.

Then, early the following year, the custodian of that client’s regular IRA is required to tell them the fair market value of their IRA on the last day of the previous year. The development they invested in, however, is now just raw land, sticks and bricks. The building or buildings haven’t been built and there are no tenants.

As a result, the current fair-market value of their investment may be as low as 50 percent of the original investment. In plain English: the client’s $100,000 investment is now worth$50,000. They can convert the investment from a regular IRA to a Roth IRA and now pay taxes on a valuation of $50,000 rather than $100,000.

Fast forward four or five years. The property has now been developed and the building has been sold off. Your client’s original $100,000 investment could now potentially be worth $150,000 to $200,000 – all of which, being in a Roth IRA, is now tax free. We will provide future articles on this strategy.

If you would like to review these and other alterative real estate investments including 1031, 1033, DSTs, OZs, and IRA to Roth conversion please contact us.

Investor Disclosure:

DST’s (Delaware Statutory Trusts) are for accredited investors only.  Please us for additional details on how a DST may be a solution to your §1031 and §1033 Exchange and compliment your financial objectives. For more information on how to properly set up an IRC 1031Tax Deferred Exchange or if you are an accredited investor and would like additional information on a DST contact Al DiNicola at 239-691-8098 or email adinicola@namcoa.com.

DST News would like to acknowledge the contribution of content by Four Springs Capital, Madison Capital Group and Capital Square to the article.  These companies are Delaware Statutory Trust (DSTs) sponsors that provide replacement solutions for financial advisors to consider for §1031 and §1033 exchanges.

This is not an offer to purchase or solicitation to purchase any security, as such be made only through an offering memorandum or prospectus.  Investing in securities, real estate, or any investment, in any form, involves risk, including but not limited to the potential of losing some or all of your investment dollars when you invest in securities. You should review any planned financial transactions that may have tax or legal implications with your personal tax or legal advisor.   NAMCOA, LLC is a Registered Investment Advisor, regulated by SEC (Securities and Exchange Commission). Our corporate office is located at 999 Vanderbilt Beach Road, Suite 200, Naples Florida 34108. Securities Offered through MSC-BD, LLC, Member of FINRA/SIPC. 8215 SW Tualatin -Sherwood Rd, Suite 200 Tualatin, OR 97062. MSC-BD, LLC and NAMCOA are independently owned and are not affiliated. 

What are the Basics for Calculating Your Basis

When an investor sells an investment property there is the ability to defer paying capital gains taxes (taxed at 0%, 15%, or 20%) as well as the recapture of depreciation (taxed at 25%) for payment at another time. The IRC §1031 enables you to exchange the property you are selling for another property.

By Al DiNicola, AIF®, CEPA™
April 20, 2023
Adinicola@namcoa.com
DST 1031 Specialist
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD

This may be referred to as a like kind exchange. For the purposes of this writing, we will address investment property and not primary residential property. We are not providing tax advice and investors are encouraged to consult their own CPA.

Understanding  basis in a 1031 exchange.

 There are several types of basis, including:

  • Original Cost basis;
  • Adjusted Cost Basis;
  • Depreciated Basis;
  • Tax Basis;
  • Carried Forward Basis; and
  • Step up in Basis.

The confusion may begin with an investor wondering what happens to their basis when the property is sold. When the topic of depreciation arises there are a variety of questions. What happens to depreciation while I own the property? How long does it take to use up all the depreciation? How can I start depreciation over again with a new property? If I use up all the depreciation and I still want tax advantaged real estate, what do I do? Does the entire property get depreciated?  All of these questions and more may be traced back to the original property to establish your basis. There may be a long paper trail needed if you do multiple exchanges.

Hypothetical example

Jack & Diane are selling a rental house in New Jersey. They paid $175,000 for the property in January 2002. They also paid 15,000 in closing costs.  They invested another  $25,000 to add a garage. They accept an offer for $400,000 on the property (December closing 2022). They have owned the property for ten years. They have located a property in Daytona Beach for $400,000.

Original Cost Basis

The original cost basis is the original purchase price, associated closing cost at the time of acquisition of the relinquished property. The original cost basis in the home would be $190,000 ($175,000 original purchase price, $15,000 in closing cost).

Adjusted Basis

The adjusted basis would be the original cost basis plus the $25,000 for the garage. If there were any other major renovation or cost that adds to the value of the home those cost or investment would be added.   For this example, the total adjusted cost basis would be $215,000. 

Depreciated Basis

Depreciation is an interesting situation. The IRS assumes you have taken the depreciation whether you utilized that depreciation or not. The property was depreciated each year. The depreciation schedule is 27.5 years for residential property (commercial property is 39 years). However, the entire purchase price of $175,000 is not depreciated. Only the structure can be depreciated and not the land. For this example, we will assign a land value of $25,000 to the property and $150,000 for the structure plus the closing cost of $15,000 and addition of the garage $25,000 for a total of $190,000. The depreciation taken was $6,900 each year for a total of $138,000. In this case  the property has a depreciated basis  of $77,000.  In some cases, the depreciated  basis may be zero if the property was held for the entire depreciation period. 

Original Purchase$175,000
Closing Cost$15,000
Original Cost Basis$190,000
Garage Addition$25,000
Adjusted Cost Basis$215,000
  
Depreciation taken (rounded)$138,000
Depreciated Basis  (rounded)$77,000

Tax Basis

One of the first  items an investor may want to know is  the tax basis in order to determine if the investor wishes to enter into a 1031 tax deferred exchange. The tax basis would be used to establish the capital gains on the property as well as the recapture of the depreciation over the years. The New Jersey home has an adjusted cost basis of $215,000 and sold for $400,000. The cost of selling the New Jersey home was $20,000 and that is subtracted from the selling price to arrive at the net selling price used to determine the capital gains. This would be $380,000. The net selling price on the property would be $380,000 minus the $77,000 depreciated basis taken for a Tax Basis of $303,000. For federal tax purposes this amount is divided into recapture and capital gains. There will be recapture of the $138,000 depreciation taken is taxed at a rate of 25%. The remaining $165,000 would be taxed at the capital gains rate. This would depend on the individual tax payer (0%, 15%, 20%). Individual states such as New Jersey have taxes that are also due upon the sale and would use the entire $303,000 for calculations. There may also be (depending on tax payer income level) a 3.8% NIC tax on gain. These taxes would be deferred if utilizing a 1031 tax deferred exchange.

Carry Forward Basis

The  $77,000 depreciated basis is the  carried forward basis.  The property in Daytona Beach is the same price as the New Jersey home being sold. This is a very important fact because the price of the new property is a big factor that affects many items. Actually, they are buying equal. Because they bought equal the basis in the new property is the same as the remaining basis in the New Jersey home. The basis rolls forward to the new Daytona Beach property.

The original date (2002) of the New Jersey home is what appears on the future depreciation schedules.  The depreciation schedule carries over as if they were still depreciating the New Jersey home. In this case there is no additional depreciation time other than what is remaining on the $77,000. That would be seven- and one-half years remaining.  

 If you had a mortgage on the relinquished property this will be noted.

The depreciated  basis on an investment property can appear to be allusive to determine. One of the most important factors is the purchase price of the replacement property. This dictates many items that will affect you.

How to increase basis in replacement property.

The question many investors ask is how do you change the dynamics on the exchange and potentially increase tax favored write offs?  One strategy would be to purchase up, meaning  a more expensive replacement property. Rather than buying a $400,000 property in Daytona Beach hypothetically they purchase a $500,000 property. Their basis in the property would be increased by $100,000.  This is a combination of the rollover $77,000 plus the $100,000 for a total of $177,000. There would be 7½ years remaining on the $77,000 and the $100,000 would start on a 27 ½ year depreciation schedule. The updated depreciation schedule shows the continued depreciation of the New Jersey homes (as if they still owned it) and the acquisition of the Daytona Beach property portion as of the date they closed on the Daytona Beach property.

Bring more cash or acquire more debt!

In order to increase the purchase price, the investor would need to bring additional cash or arrange for a mortgage or loan for the $100,000. This may involve applying for a loan.  In most cases the investor would need to sign for and be liable for the loan.  To avoid personal liability for a loan, some investors utilize Delaware Statutory Trust (DST) as a replacement property especially when leverage is present.  DST have non-recourse debt. This eliminates the need for Jack & Diane to apply for or be liable for any of the assigned debt on the new acquisition. We have guided investors who have fully depreciated their investment properties who acquired a DST with 50% Loan to Value. This would increase the basis by an additional the amount of the debt assignment ($400,000 for example). Acquiring additional debt is not for all investors.  If the investor utilized a future 1031 exchange the acquired debt (or balance paid off) needs to be replaced. The other consideration would be the overall goals of the investor when acquiring a property and in this example the Daytona Beach property may have other uses in the future.

Step Up in Basis

The final basis would be referenced as the step-up basis.  This strategy benefits the heirs of the investor.  When the investor passes away there is an adjustment from the original basis to the current market value. If the original property was purchased for $175,000 fully depreciated (over 27.5 years) and now worth $750,000 that is the new basis. The basis has been stepped up to current value.  If the property is sold there would be no capital gains taxes due and there would be no recapture of depreciation taken.  This strategy may be utilized to build generational wealth.

As previously stated, we are not CPA. We have guided many investors with a list of questions for their CPAs and assisted in countless 1031 exchange consultations.  We have also assisted in the acquisition of DST utilizing the 1031 process.  Call with any questions you may have. DSTs are not for all investors. The acquisition of a DST is for accredited investors only. Contact your investment adviser for additional details on how a DST may be a solution to your 1031 Exchange and suited for your investment future. For more information on how to properly set up an IRC 1031Tax Deferred Exchange or if you are an accredited investor and would like additional information on a DST contact Al DiNicola at 239-691-8098 or email adinicola@namcoa.com.

This is not an offer to purchase or solicitation to purchase any security, as such be made only through an offering memorandum or prospectus. Investing in securities, real estate, or any investment, whether public or private, involves risk, including but not limited to the potential of losing some or all of your investment dollars when you invest in securities. You should review any planned financial transactions that may have tax or legal implications with your personal tax or legal advisor. NAMCOA, LLC is a Registered Investment Advisor, regulated by SEC (Securities and Exchange Commission). Our corporate office is located at 999 Vanderbilt Beach Road, Suite 200, Naples Florida 34108. Securities Offered through MSC-BD, LLC, Member of FINRA/SIPC. 8215 SW Tualatin -Sherwood Rd, Suite 200 Tualatin, OR 97062. MSC-BD, LLC and NAMCOA are independently owned and are not affiliated.

SOCIAL MEDIA

Social Media platforms are solely for informational purposes. Advisory services are only offered to clients or prospective clients where the advisory firm and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by NAMCOA unless a client service agreement is in place. Thank you.

NAMCOA® – Naples Asset Management Company®, LLC

Why not a TIC? Are DSTs better?

A frequently asked question is why a Delaware Statutory Trust (DST) potentially better than a Tenants in Common (TIC). This question comes up especially when considering a IRC § 1031 tax deferred exchange.

By Al DiNicola, AIF®, CEPA™
March 30, 2023
Adinicola@namcoa.com
DST 1031 Specialist
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD

Is deferring taxes similar to kicking the can down the road? Many investors will review the sale of their real estate and wonder how taxes may be deferred.  The 1031 tax deferred exchange often is the immediate solution. Many investors who are selling their actively managed real estate are searching for hands free or passive investment so they can avoid any active management.   Over the years we have heard from investors, qualified intermediaries (QIs) as well as CPAs that the best intentions of the investor to execute a 1031 exchange were not always successful.    What solutions are there to defer taxes? One recent solution (which does not need a 1031 exchange) is an investment in an Opportunity Zone.  We will elaborate on OZ & OZ Funds in future articles.  The two other choices involving a 1031 exchange are Tenants in common (TICs) and Delaware Statutory Trust (DSTs).  The success of the DST has nearly replaced the TIC to a large extent.

Opportunity Zone -Short Version

An opportunity zone enables an investor to retain the basis in the property and only invest the capital gains into a qualified Opportunity Zone offering.  The offering may be a single site or a fund with multiple properties.  Taxes are deferred until the end of 2026 (payable April 2027). If the investor retains their interest in the OZ for a period of 10+ years, then any profits from the sale of the asset are tax free to the investor.  You are free to use the basis however you want to use the proceeds.  However, capital gains taxes as well as the  25% tax on the recapture of depreciation  will be due April 2027. We are well versed in the structure, review, comparison to a 1031 exchange, and recommendation of OZs. Contact us for an in-depth conversation if this may be one of your options.

What is a TIC (short version)

This is a type of co-ownership with multiple investors where funds are pooled to invest in a property. Each property owner typically receives a separate deed and title insurance for their percentage of interest in the property. There may be up to 35 individual investors in a TIC.  Depending on how much each investor has contributed there will be an undivided interest but not equal interest and benefit in the property.  Each investor will be responsible for their percentage share of income, appreciation (loss) and any tax shelter (depreciation) from the property.  There is also financial liability for investors.

What is a DST (short version)?

The  Delaware Statutory Trust (DST) has become very popular over the past 19 years.  This structure enables many more investors than a TIC (potentially unlimited but up to 499 investors). Each investor would purchase a beneficiary ownership interest in the property (referenced as the asset)  of a trust.  Limited partnership occasionally gets compared to a DST with regards to the structure. However, there are many differences aside from the ability to utilize a 1031 exchange with a DST. DST Overview – DST Education and Market News (dstnews.org)

TIC and DST Differences & Similarities

There will be a separate deed for each investor under a TIC structure (noting their percentage of ownership based on the financial contribution). In a TIC structure there is also voting right associated for each investor.  TIC owners also may transfer their ownership interest to another party without the consent of the other TIC investors.  In a DST an investor will need to wait for the sponsor to sell the property.

There are several similarities between the TIC structure and the DST structure. For investors when selling, both may qualify for a 1031 as a replacement property. DST have professional management and many TICs will also utilize a professional manager.

If an investor is seeking diversification as a strategy, then both structures may provide an alternative. DSTs have a low barrier to entry with many only requiring $100,000. TIC may also have lower entry levels depending on the overall investment.

Determining which structure is better- decision or conflict.

One of the structural elements some investors find attractive in the TIC structure is the ability to make decisions. That is if there is a unanimous decision among all the investors. There could be as many as 35 investors in a TIC and obtaining a unanimous decision may be problematic.  This may result in conflict. Imagine if there are 20 members of a TIC and eighteen want to sell and there are two who do not.  This would enable the minority to dictate the process. Many TICs were caught in the greet recession (2008-2009) with the inability to take swift action and resulted in many TICs failing.   

Recently the Delaware Statutory Trust investment strategy has been preferred by investors over Tenants in Common. In the DST structure the sponsor has the lead on all aspects of the DST.  This includes when to sell the property. Investors who want to be able to make decisions are not the right fit.  The entire decision process is in the hands of the sponsor. Investors who are seeking passive ownership evaluate this as a benefit.

What is the ante or buy in?

If you are in Vegas visitor (gambler) will search out which tables to sit down based on the posted minimum bet necessary to play. The DST minimum typically is $100,000 for a 1031 exchange investor ($50,000 in some cases for a cash investor). In addition, there are many more potential investors when compared to the 35-investor limit in a TIC.   For example, if there was a $35 M property each TIC investor would need to invest $1M to pay cash for the property.  The same $35 M property could have 350 DST investors each investing $100,000.  This enables investors to diversify their investments in many more additional DST assets.

If the same $35M property was to be leveraged with 50% LTV each TIC investor would need to come up with $500,000 cash portion and be personally responsible for a $500,000 loan. In addition, if any other TIC investor default on their portion of the loan the other TIC investors are responsible for making the payments. In a DST structure each investor would come up with $50,000 and have a non-recourse debt assignment for $50,000. There is only one entity responsible for the debt and that is the DST Trust.

The flexibility in the DST structure with the non-recourse loan and lower capital investment enables smaller accredited investors to invest in a larger institutional property.  When an investor borrows to fund the TIC real estate investment that debt will most likely appear on their credit profile and should be included on a personal balance sheet as a liability. Some TIC investors may utilize their other investment and create a cross collateralization of assets.  This does not happen with the DST investment vehicle, where the debt is all non-recourse debt.

Beat the Clock- Meeting the 1031 requirements.

The two critical time periods of the 1031 exchange are the 45-day identification period and then the 180-day closing time period. The process for the TIC investment structure may be obtaining consensus on the properties to identify especially within the 45-day period.  The other potential issue with the TIC (if structuring a new TIC) is the requirement for each investor to provide funding if any of their funds are being borrowed. Each borrower would need to apply for their own loan and go through the underwriting process.

When an investor starts the acquisition process for a DST the time from start to finish may be 7-10 days. This may include 2-3 days for the initial paperwork (once the asset is identified) interaction with the QI and then 2- 3 days include a weekend and then closing can occur. Contrast this quick period with the challenges in structure and function of the TIC, especially with the 45-day identification timeline places the TIC as not the preferred option.  The other toxic situation that may implode the TIC exchange may be if one of the members does not obtain financing for their respective portion of the acquisition.  That could jeopardize the entire exchange for all parties.  Compare that situation with the non-recourse structure of the DST acquisition where the DST comes with prepackaged financing.

The limiting or qualifying factor for a DST is the status of the investor  DSTs require that all investors are accredited.  A TIC does not have the accredited investor status.

Here is a graphic view of the two structures.

DSTTIC
Number of InvestorsUnlimited, though typically capped at 499Up to 35
Investor OwnershipPercentage of beneficial ownership in a Trust that owns the propertyUndivided interest in the property
Number of Borrowers1 (the DST)Up to 35 (each investor is a borrower
Reporting on Credit Profile Report and Balance SheetNOYES
Major DecisionsNo investor voting rightsEqual voting rights and unanimous consent
Bankruptcy RemoteProvided by DST structureInvestors must form Single Member LLC
Investor GuaranteesNot neededInvestors generally require to provide “carve-outs”
IRS GuidanceRevenue Ruling 2004-86Revenue Procedure 2002-22

If you’d like to learn more about DSTs and 1031 Exchanges schedule your free 30-minute call today.

DSTs are not for all investors.  The acquisition of a DST is for accredited investors only.  Contact your investment adviser for additional details on how a DST may be a solution to your 1031 Exchange and suited for your investment future. For more information on how to properly set up an IRC 1031Tax Deferred Exchange or if you are an accredited investor and would like additional information on a DST contact Al DiNicola at 239-691-8098 or email adinicola@namcoa.com.

This is not an offer to purchase or solicitation to purchase any security, as such be made only through an offering memorandum or prospectus.  Investing in securities, real estate, or any investment, whether public or private, involves risk, including but not limited to the potential of losing some or all of your investment dollars when you invest in securities. You should review any planned financial transactions that may have tax or legal implications with your personal tax or legal advisor.   NAMCOA, LLC is a Registered Investment Advisor, regulated by SEC (Securities and Exchange Commission). Our corporate office is located at 999 Vanderbilt Beach Road, Suite 200, Naples Florida 34108. Securities Offered through MSC-BD, LLC, Member of FINRA/SIPC. 8215 SW Tualatin- Sherwood Rd, Suite 200, Tualatin, OR 97062.  MSC-BD, LLC and NAMCOA are independently owned and are not affiliated.

SOCIAL MEDIA

Social Media platforms are solely for informational purposes. Advisory services are only offered to clients or prospective clients where the advisory firm and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by NAMCOA unless a client service agreement is in place.

Thank you.

Tax Time- Reporting 1031 Exchanges

Congratulations! You have successfully followed all the rules and completed your exchange on time.  You utilized the services of a Qualified Intermediary (QI) so you are in full compliance with IRC §1031.

February 19, 2023
By Al DiNicola, AIF®, CEPA ™
adinicola@namcoa.com
DST 1031 Specialist
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC

You purchased a property equal to or in excess of the property you sold. You used all the cash proceeds and replaced the debt that was paid off on the property you sold. Now it is time to report the details of the exchange as required by the IRS. SO, exactly what does the IRS want to know about the exchange. Maybe not everything but there are key elements of your exchange you need to submit.

CPAs for Complete Answers

We are not CPAs and would suggest consulting your CPA for full compliance.  This may serve as an overview on what to expect.

The Internal Revenue Service provides several forms that need to be completed reflecting your exchange details. Everything starts with form 8824. Real estate investors who have utilized the 1031 exchange are required to fill out this form. This reflects the transactions from the previous tax reporting period. There is a complication that occurs when the sale of the relinquished property and the acquisition of the replacement property does not occur during the same tax reporting year. For example, if you sold your property in August 2022 and completed your exchange in December 2022 the process is straight forward.  However, if you sold your property in August 2022 (identified your replacement properties with the prescribed 45 days) and are waiting to close in February 2023 there is an extra step required.  You would need to fill out form 8824 and attached to your 2022 tax returns. You would complete the reporting when filing your 2023 returns.

Fill in the Blanks- Correctly

  • To avoid any unnecessary penalties or liabilities for taxes the forms need to be filled out correctly. The IRS typically may want answers to Who, What, Where, When, how much, and more questions that will be on Form 8824!
  • What was the property exchanged or a description?
  • Did you make any money (gain) or lose money (loss) on sale of other property you sold or gave up that was not part of the exchange?
  • What was the dates of the replacement properties identified and when the property was closed, or title transferred?
  • What were the proceeds from the sale, was there a mortgage paid off, or any other Cash received or any other relief of liabilities?
  • Were there any related parties to the transaction.
  • What was the adjusted basis on the property that was relinquished. And what was the gain. 
  • What was the fair market value of the property that was acquired.

There are four section to Form 8824.

  • Part I Information on the Like-Kind Exchange
  • Part II- Related Party Exchange Information
  • Part III- Realized Gain or (Loss), Recognized Gain, and Basis of Like-Kind Property Received
  • Part IV- Deferral of Gain from Section 1043 Conflict of Interest Sales

Part I (lines 1-7)  as stated includes information on the exchange. This would include description of the relinquished property which is a full address or other acceptable description (occasionally referenced as the down-leg), the date you transferred title to buyer, when you identified your potential replacement properties (45-day replacement notification) to your Qualified Intermediary (QI), and finally the date you closed on one or more of the identified properties on your list (occasionally referenced as the up-leg).

Part II (lines 8-11) addresses any related party exchange information.  If you had an interest in or stake in a property with a related party translated as any family member, spouse, grandparents, sister, brother, a partnership, etc. would need to be reported.    There a few noted exception including death of related party. As always consult your tax advisor.

Part III (lines 12-25) focuses on the financial numbers related to the exchange. This is how the IRS tracks the financial details of your exchange. Topics and questions include references to fair market value, adjusted basis of relinquished property, gain on property, cash received, adjusted basis of like kind property, realized gain and other financial related questions.

Part IV (lines 26-38). This would be a special situation and used only by officers or employees of the executive branch of the federal government or judicial officers of the federal government (including certain spouses, minor or dependent children, and trustees as described in section 1043) for reporting nonrecognition of gain under section 1043 on the sale of property to comply with the conflict-of-interest requirements. This part can be used only if the cost of the replacement property is more than the basis of the divested property.

Understanding and Execution

Many CPAs and especially tax advisors understand the process especially those who handle 1031 exchanges on an ongoing basis.  The execution of filling out Form 8824 should be very easy for those professionals.  CPAs who are engaging with an investor for the first time may need to ask a lot of question of the investors. A big part of the solution will come back to the individual investor understanding the relinquished property details when acquired (typically found on the closing documents) as well as all cost involved during the ownerships that may add to the basis in the property.

Standing by to assist

We deal with 1031 exchanges all the time and are happy to engage with CPAs on the initial question for your exchange.  We have engage with CPA on clarifying the acquisitions of Delaware Statutory Trusts (DSTs).  DSTs have been utilized by investors for about 20 years.  However, many CPAs do not see as many exchanges involving DSTs as compared with traditional real estate. There are a few more details when a DST is acquired or relinquished.  Typically, those details may be in the description and percentage of ownership. 

Future Discussion.

There are occasions when investors engage in a partial exchange.  This is either by design or by one or more of the properties identified falling out or a failed exchange.  We will address partial exchanges in an upcoming post.

DSTs are not for all investors. The acquisition of a DST is for accredited investors only. Contact your investment adviser for additional details on how a DST may be a solution to your 1031 Exchange and suited for your investment future. For more information on how to properly set up an IRC 1031Tax Deferred Exchange or if you are an accredited investor and would like additional information on a DST contact Al DiNicola at 239-691-8098 or email adinicola@namcoa.com.

This is not an offer to purchase or solicitation to purchase any security, as such be made only through an offering memorandum or prospectus. Investing in securities, real estate, or any investment, whether public or private, involves risk, including but not limited to the potential of losing some or all of your investment dollars when you invest in securities. You should review any planned financial transactions that may have tax or legal implications with your personal tax or legal advisor. NAMCOA, LLC is a Registered Investment Advisor, regulated by SEC (Securities and Exchange Commission). Our corporate office is located at 999 Vanderbilt Beach Road, Suite 200, Naples Florida 34108. Securities Offered through MSC-BD, LLC, Member of FINRA/SIPC. 8215 SW Tualatin- Sherwood Rd, Suite 200, Tualatin, OR 97062.  MSC-BD, LLC and NAMCOA are independently owned and are not affiliated.

SOCIAL MEDIA

Social Media platforms are solely for informational purposes. Advisory services are only offered to clients or prospective clients where the advisory firm and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by NAMCOA unless a client service agreement is in place.

Thank you.

Be aware of potential impact of “Boot” in a 1031 Exchange

When faced with selling an investment property besides the amount of proceeds to pick up at closing the investor may consider the taxes that may be due. Investors may utilize a tax deferred 1031 exchange for all or part of the transaction.

By Al DiNicola, AIF®, CEPA ™
adinicola@namcoa.com
February 17, 2023
DST 1031 Specialist
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC

Tax deferred 1031 Exchanges and Boot

When faced with selling an investment property besides the amount of proceeds to pick up at closing the investor may consider the taxes that may be due.  Investors may utilize a tax deferred 1031 exchange for all or part of the transaction.  If you take proceeds off the table, the proceeds are referenced as boot. In addition, if you are doing an exchange and do not replace the loan that was paid off (either with another loan or fresh cash) you will be liable for mortgage boot. Understanding your overall tax liability should be a starting point.

The Internal Revenue Code does not formally use the term “Boot”. It is used in discussing the tax implications of a 1031 Exchange. In searching for a potential meaning here is a reference.  Boot is an old English term meaning “Something given in addition to.” “Boot received” is the money or fair market value of “Other Property” received by the taxpayer in an exchange.

Many consultants and investors agree that when done properly a 1031 exchange can provide a host of benefits to the investor today and in building an investment portfolio.  The major benefits would be the deferral of capital gains as well as the deferral of recapture of depreciation.

There are situations where an investor believes they are executing a 1031 exchange but may fall short for a few reasons and end up owing money to the IRS.

When do you create Boot.

 Cash boot.

You acquired your relinquished property for $400,000 and sell your relinquished property  for $1,000,000. (For this example we will not attempt to account for any commission or cost of sale). If the replacement property is $800,000 and you collect a check for $200,000 that would be considered boot and taxes would be due. This is income and would be taxed at the taxpayer capital gain rates. It is extremely advisable to contact your CPA.  It may become more involved in determining your exact tax responsibility based on other factors such as recapture of depreciation taken under what maybe referenced as a partial exchange. 

There is also another situation where mortgage boot may be present.

You acquired your relinquished property for $400,000 and sell your relinquished property  for $1,000,000. There is a balance of $200,000 on the relinquished property. (For this example we will not attempt to account for any commission or cost of sale). Once the mortgage is satisfied you have $800,000 in cash. If the replacement property is $800,000 and you pay cash for the property without a loan the $200,000 loan that was paid off would be subjected to what is known as mortgage boot (debt reduction) and taxes would be due. Again, it is extremely advisable to contact your CPA. There is another consideration on this example which we will cover later in this article under Delaware Statutory Trust reference.

Rule Compliance.

IRS rules for 1031 tax deferred exchange compliance are straightforward. Boot would be created in several scenarios. There are basically three main IRS rules or stipulation on being eligible or complying with the 1031 rules. That compliance would enable the exchanger to fully defer capital gains taxes.

The basic rules are:

  • The replacement property needs to meet or exceed the market value of the relinquished property.
  • The investor must use all the proceeds from the relinquished property to purchase the replacement property.
  • If there is a debt satisfied (mortgage) upon closing, then the same amount of debt must be replaced, or the investor can substitute additional cash into the exchange.

Utilizing the rules  from above.

  1. Meet or exceed market value. IF you are selling a property for $1,000,000 you must purchase a property for $1,000,000. There would be an offset for closing cost, commission and a few other items that would reduce the replacement price of the property.
  2. Use all the proceeds. If you receive $1,000,000 in proceeds all the proceeds need to be used.
  3. Replace debt. IF you are selling for $1,000,000 and have a loan paid off of $200,000 you need to have $200,000 in debt on the replacement property and use the additional $800,000 in proceeds towards the replacement purchase.

Exchange Guidance

Exchange guidance may be available from the Qualified Intermediary (QI).  Many Qis assist investors with the required forms and adherence to the dates mandated for identification of the replacement properties.  In addition the QI may also be able to provide some guidance on balancing the exchange if they understand the terms of the purchase.  Technically this may fall outside their scope of services.  When an investors submits the replacement list to the QI the entire market value for the replacement property is stated with out the breakout of cash (equity) invested and the debt component making up the full value. CPAs and Financial advisors who deal with 1031 exchanges on a regular basis may be better suited for balancing the exchange.

There will be Boot can I still exchange?

If you did not satisfy all the requirements for the IRS for a full deferral you can still enter into and execute an exchange. The 1031 tax deferred exchange is not an all or none strategy.  Partial exchanges are possible.

Delaware Statutory Trust (DST) may assist with mortgage boot issues.

There are times in an investors life when they simply don’t want to apply for, sign for, or be financially responsible for another loan on the replacement property.  Recently we assisted an investor with and interesting challenge. The exchange was rather large and started with the sale of an apartment property.  The sale was for $6.1 million but conceptually can be utilized in a lot of situations. Upon the closing of the relinquished property the investor retained $300,000 to pay for personal items.  This would be recognized as boot and taxes due.  Taking boot occasionally serves a purpose especially when there are other financial needs.  There was a loan paid off on the property of over $2M. The investor wanted an additional cash extracted from the exchange in the amount of $400,000.  This created an issue with balancing the remaining cash and satisfying the replacement of debt. The solution was to create a diversified portfolio of DSTs with Non-recourse debt to the investor that balanced the total exchange. The investor was seeking a solution that would avoid signing for any debt responsibility. DST are all structured with non-recourse debt.  The balancing exercise blended DSTs with a variety of loan to value property enabling the investors to avoid any potential taxes on mortgage boot. There would be taxes on the cash taken out of the transaction.  In addition, we also balance the overall replacement market price of the relinquished property. One helpful addition to the solution was the investor’s CPA who we engaged with early on to fully understand the investor situation.

Final word

We welcome calls from investors and CPAs on the 1031 exchange process as well as how DSTs may simply the exchange process. If you are in the midst of selling your property and looking for a few suggestions, please contact us.

DSTs are not for all investors. The acquisition of a DST is for accredited investors only. Contact your investment adviser for additional details on how a DST may be a solution to your 1031 Exchange and suited for your investment future. For more information on how to properly set up an IRC 1031Tax Deferred Exchange or if you are an accredited investor and would like additional information on a DST contact Al DiNicola at 239-691-8098 or email adinicola@namcoa.com.

This is not an offer to purchase or solicitation to purchase any security, as such be made only through an offering memorandum or prospectus. Investing in securities, real estate, or any investment, whether public or private, involves risk, including but not limited to the potential of losing some or all of your investment dollars when you invest in securities. You should review any planned financial transactions that may have tax or legal implications with your personal tax or legal advisor. NAMCOA, LLC is a Registered Investment Advisor, regulated by SEC (Securities and Exchange Commission). Our corporate office is located at 999 Vanderbilt Beach Road, Suite 200, Naples Florida 34108. Securities Offered through MSC-BD, LLC, Member of FINRA/SIPC. 8215 SW Tualatin -Sherwood Rd, Suite 200 Tualatin, OR 97062. MSC-BD, LLC and NAMCOA are independently owned and are not affiliated.

SOCIAL MEDIA

Social Media platforms are solely for informational purposes. Advisory services are only offered to clients or prospective clients where the advisory firm and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by NAMCOA unless a client service agreement is in place.

Thank you.

NAMCOA® – Naples Asset Management Company®, LLC

June 30, 2022, DST.EDU Series B- Part 10 Retail Asset Class

June 30, 2022- DST.EDU (Series B- Part 10) Retail Asset Class
Editor’s note- this is part ten of a ten-part series on DST asset types.
Part 10: Necessary Retail Asset Classification Discussion

By Al DiNicola, AIF®
DST 1031 Specialist
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC, member of FINRA/SIPC

Why Investing in Retail Makes Sense
Delaware Statutory Trusts (DSTs) continue to gain in popularity among cash investors and 1031 tax deferred exchange investors. Investors seeking diversification may refocused on a specific style of retail investment.
Driving around most cities and towns we see many businesses that provide valuable services to the public. Retail has been a major driver of the economy over decades. There is a wide variety of retail space that exist from small strip centers, neighborhood centers, regional centers, power centers and major lifestyle centers. In some areas of the country, we are surrounded by retail. In rural areas you may need to drive miles to purchase groceries and other necessary items for daily life. With the potential of lifestyle centers all retails have one goal in mind and that is to sell services or goods. Over the past 5 years there has been an acceleration of the e-commerce sector (driven by technology) creating competition to the brick & mortar outlets. Many of the brick & mortar stores have opened on-line outlets. There are active sponsor of DSTs structuring offerings with the potential for higher-than-average risk adjusted return especially with rising borrowing rates. However, the investor needs to understand the dynamics of the various retail sector.

Understanding the Retail Asset Class
As with all asset class investors need to understand what can create a successful investment. With retail there may be more variables that may be out of the control of the development company or in the case of a DST the sponsor. The success of a retail investment can be directly linked to the property. The US economy has a direct correlation to the success of many retail properties. Indicators including job creation and increased earning across all employment sectors do add to consumer confidence. The tenant who would be renting the property actually create the value of their business enabling the business to make a profit and afford to make lease payments to the underlying investors. Retail that can build a brand that consumers have confidence in the quality of service or effectiveness of the products prompting the consumer to buy will add to the tenant success. That would equate to tenant renewals for the landlord or investor.
Retail includes an overwhelming list of types of buildings, locations, and designs. We will provide a brief overview prior to a deeper dive into the DST style offering.

Lease Types, Anchors and Duration
We frequently hear the term Triple-Net Leases or if in type NNN. Landlord (investors) may prefer the NNN structure. The main reason is the tenant is responsible for all taxes, maintenance an dinsurance on the property. There may be variations to this structure. The landlord shifts the financial risk to the tenant. One concern for the investor may be how well the tenant maintains the building and potential problems failing to maintain properly.

In prior years stores such as Sears and others no longer in business were considered “Anchor” Properties. Today the anchor tenants many have changed but these anchors continue to drive traffic that smaller retail tenants may benefit from exposure. More traffic may result in increase in potential rents that tenants are able to pay.

Long term leases may benefit both the landlord as well as the tenants. Leases may be as short as a few years up to 20 years. Having a longer lease may assist the tenants to building their name recognition, brand and longevity in a neighborhood or location.

Is E-Commerce a Threat
When we hear E-Commerce, we may have visions of everyone ordering on line for many goods and services. Investor may be nervous of the word e commerce and the potential effect on the retail property success. True there are tenants moving from a traditional storefront and seeking a position online with brand identity seeking to create or in some cases recreate a business. E commerce and internet sales will continue and can be a threat to certain retail. The other dynamic is the increased physical stores for some online seller. For example, Amazon will continue to increase their physical presence. There are also strategic relationships with online sellers offering customers to ability to return unwanted merchandise at a physical location.
The relationship between the E-commerce sector will continue to evolve with the physical retail stores and may not be hurting the retail sector just creating a new relationship. There are consumers who want to be in a retail environment.

Is Any Retail Insulated?
There is another type of retail section that is worth mentioning. We may reference this as “the Insulated Retail Tenant”. The profiles of the retail tenant, (that may be included in a Retail DST), would address those that e-commerce sector that are impossible to replace. Services like a dry cleaner, specialty restaurant, such a juice vendor, ice cream, a clinic, nail salon, and other that involve labor to provide the service to the customer. Overall seeking diversified and desirable Retail tenants that can fill the parking lot with repeat customers, whether its weekly, monthly, or quarterly.

DST Retail Alternative
The DST retail offering seek a somewhat different approach to a typical retail offering. Over the past few years (and especially during the COVID environment) the offerings have focused on necessary retail. Recent portfolio offerings have included Walmart neighborhood stores, Kroger supermarket, Publix Grocery stores, NAPA Auto Parts, CVS, Walgreens, Dollar general, Fresenius Dialysis center, tractor supply and other similar types of stores. These physical locations would also have long term leases. This portfolio would not include a small unbranded retail store in a strip center. The other dynamic of a diversified portfolio of product type would be a geographic diversification. Many of the portfolios would include assets located in a variety of markets or states. A portfolio may have 18 different properties located in 9 states. There have also been single asset retail offerings. For example, there have been BJ Wholesale stores or Cabela’s Bass Pro shops that have appeared in DST offerings over the years.

Conclusion
The importance of spending by consumers cannot be questioned as a critical part of the economy. Many of the same investment criteria for investors in a non-DST investment is used for DST offerings. However, there may be an expanded vision of retail with a DST offering. The main difference may be the ability in a DST to obtain diversification both with markets and number of assets that may assist to mitigate risk for the investor. An investor with $1 MM to invest in a traditional real estate may have one location and with leverage may be forced to sign for a recourse loan on the asset. With a diversified DST portfolio, the same $1 MM may provide the investor with many more assets in their portfolio, non-recourse debt (if leveraged) and potentially geographical diversification. In addition, the passive nature of the DST with no management responsibilities may relieve investors of other concerns.

DSTs are not for all investors. The acquisition of a DST is for accredited investors only. Contact your investment adviser for additional details on how a DST may be a solution to your 1031 Exchange and suited for your investment future. For more information on how to properly set up an IRC 1031Tax Deferred Exchange or if you are an accredited investor and would like additional information on a DST contact Al DiNicola at 239-691-8098 or email adinicola@namcoa.com.

This is not an offer to purchase or solicitation to purchase any security, as such be made only through an offering memorandum or prospectus. Investing in securities, real estate, or any investment, whether public or private, involves risk, including but not limited to the potential of losing some or all of your investment dollars when you invest in securities. You should review any planned financial transactions that may have tax or legal implications with your personal tax or legal advisor. NAMCOA, LLC is a Registered Investment Advisor, regulated by SEC (Securities and Exchange Commission).
NAMCOA’s corporate office is located at 999 Vanderbilt Beach Road, Suite 200, Naples Florida 34108. Securities Offered through MSC-BD, LLC, Member of FINRA/SIPC. 1719 NW Edgar Street, McMinnville, OR 97128 MSC-BD, LLC and NAMCOA are independently owned and are not affiliated.
Thank you.
NAMCOA® – Naples Asset Management Company®, LLC