SEC Defines Accredited Investor

The Securities and Exchange Commission Wednesday amended its “accredited investor” definition to allow investors to qualify based on defined measures of professional knowledge, experience or certifications — including holding certain Financial Industry Regulatory Authority licenses — in addition to the existing tests for income or net worth.

The 166-page amendments adopted Wednesday also expand the list of entities that may qualify, including by allowing any entity that meets an “investments test.”

“For the first time, individuals will be permitted to participate in our private capital markets not only based on their income or net worth, but also based on established, clear measures of financial sophistication,” said SEC Chairman Jay Clayton, in a statement. “I am also pleased that we have expanded and updated the list of entities, including tribal governments and other organizations that may qualify to participate in certain private offerings.”

The commission stated that the amendments to the final rule are part of its “ongoing effort to simplify, harmonize, and improve the exempt offering framework, thereby expanding investment opportunities while maintaining appropriate investor protections and promoting capital formation.”

SEC Commissioner Hester Peirce tweeted Wednesday “Americans shouldn’t have to ask the SEC for permission to invest, but today’s accredited investor rule at least offers people a path to ask permission based on their education, rather than simply telling them ‘no, unless you’re rich.’”

In the case of individuals, “the previous rule used wealth — in the form of a certain level of income or net worth — as a proxy for financial sophistication,” the SEC states. However, “we do not believe wealth should be the sole means of establishing financial sophistication of an individual for purposes of the accredited investor definition. Rather, the characteristics of an investor contemplated by the definition can be demonstrated in a variety of ways.”

The thresholds stand at a net worth of at least $1 million excluding the value of primary residence, or income at least $200,000 each year for the last two years (or $300,000 combined income if married).

According to the SEC, the amendments to the accredited investor definition in Rule 501(a):

  • add a new category to the definition that permits natural persons to qualify as accredited investors based on certain professional certifications, designations or credentials, including the Series 7, Series 65, and Series 82 licenses as qualifying natural persons. (The Commission will reevaluate or add certifications, designations or credentials in the future);
  • include as accredited investors, with respect to investments in a private fund, natural persons who are “knowledgeable employees” of the fund;
  • clarify that limited liability companies with $5 million in assets may be accredited investors and add SEC- and state-registered investment advisers, exempt reporting advisers and rural business investment companies (RBICs);
  • add a new category for any entity, including Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries;
  • add “family offices” with at least $5 million in assets under management and their “family clients,” as each term is defined under the Investment Advisers Act; and
  • add the term “spousal equivalent” to the accredited investor definition, so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors.

The amendments also expand the definition of “qualified institutional buyer” in Rule 144A to include LLCs and RIBC programs if they meet the $100 million in securities owned and invested threshold in the definition.

The amendments also add to the list any institutional investors included in the accredited investor definition that are not otherwise enumerated in the definition of “qualified institutional buyer,” the SEC said, provided they satisfy the $100 million threshold.

DST Provides Direction and Course of Action for Family Legacy

By Al DiNicola

DST.Investments, LLC- Registered Investment Advisor

July 15, 2020

Financial advisers, CPAs and Attorneys interface with investors and provide valuable insight into planning for generational wealth transfer, occasionally referenced as a family legacy. This trust bond may have taken years to develop or may develop quickly with sound financial advice.  Professionals deal with situations which may have recurring themes. However, the professional must understand each and every situation prior to suggesting the alternatives.

Recently, we had the pleasure of working with a family and we were able to suggest alternatives for their specific needs.  The patriarch of the family had recently passed away in his late 80’s. The matriarch was in an assisted living facility, in her mid-80’s and in failing health.  Over the years, the patriarch and matriarch had assembled a real estate holding portfolio in a coastal Florida town.  The commercial and residential rental properties served the family well for over twenty years. Some of the properties were free and clear of any debt but there were a few with mortgages on the properties. One of the three siblings (now all in their 60’s) was charged with the responsibility of managing the real estate. After 10 years of active management of the assets, the managing sibling was searching for an alternative.   The first alternative was to simply sell all the real estate (on an accelerated plan) and pay the capital gains tax as well as recapturing all the depreciation and paying the tax at a rate of 25%. The second was to attempt to do a 1031 Exchange and defer the taxes.  The 1031 posed a few obstacles with the replacement of debt. The main obstacle was the matriarch signing on the loan for the debt replacement.

The family was looking for a source of monthly income, without the stress of management or even dealing with a management company in the case of an individual commercial building with a Triple New Lease (NNN).  The family also understood that outright selling the real estate while the mother was still living may forfeit the step up in basis to current value.  For those not familiar with this provision this is the readjustment of the value of an appreciated asset for tax purposes upon inheritance. This would mean the property owner would pass ownership upon their death. This minimizes the capital gain taxes that may be due.  In the case of this family, the taxes that would have been due were just under $1.6MM if the property was sold outright and not pass to the heirs.

There still is a need for the mother to receive some sort of monthly income. The other fact would be the three siblings will eventually inherit the asset (property). The solution was to execute a 1031 tax deferred exchange and purchase a variety of DST assets which all included removing management concern as well as the debt replacement. We analyzed the proposed closing statement from the sale of the investment properties. There were four total investment properties that were to be exchanged.  We analyzed the payoff of the loans on the properties since one of the requirements of a 1031 is the debt needs to be replaced.  The DST also provide non-recourse debt. This means there is no requirement to sign for the loan that is in place for the DST. We also evaluated the amount of equity that would be available for acquisition of the DSTs. We counseled the siblings on the selection of a Qualified Intermediary (QI) to hold the funds. All transactions must be through a QI.

The result was a diversified portfolio of multiple DSTs in a variety of assets and geographic locations. While the DST are operating the mother receives monthly income directly into her account. Since there are multiple DST and more than likely different periods of eventual sales of the DST the family can evaluate what the next steps would be at that time. If the mother is still living the family can do successive 1031 exchanges into other DST or even out of the DST back into regular real estate. These additional alternatives provide additional flexibility. The family can now enjoy the best of both worlds the disclosures of a security and the tax advantages of real estate.

When the mother passes away, the assets transfer to the siblings with a step up in basis for tax purposes.  Each sibling can be assigned a different DST for their own accounts. The siblings would receive the monthly income from the DST during the life of the DST. Once the DST reaches full term and is sold the siblings would be in line to receive the proceeds from the DST. The siblings would have a variety of options on the disposition of the asset once the DST would be sold.  The individual sibling would receive the proceeds from the DST. The individual siblings would be free to take the proceeds with the added factor of a step up in basis.

As always consult your CPA or financial adviser.  We specialize in DST structure and function.

For more information on how to properly set up an IRC 1031 Tax Deferred Exchange or if you are an accredited investor and would like additional information on a DST contact Al DiNicola at 239-691-8098.

Happy 4th of July Holiday!

We know the past couple of months have been challenging for us all, but hopefully this independence day weekend will help bring some joy into the lives of you and your loved ones. Stay safe and have a great weekend!

As always, we’re here to answer any portfolio questions or discuss your planning needs. Click here to contact us or simply call us at (800) 378-0515 to set up an appointment with one of our investment advisor representatives or financial planners.

Happy Fourth Of July from the DST Investments Team!

COVID and Real Estate

COVID-19 quickly grew into a global pandemic affecting the health of mankind, economies, capital markets and individual businesses.

Prior to the COVID-19 outbreak, the S&P 500 Index had produced an average annual return of 9.8 percent over the last five years ending January 31, 2020, and the Dow Jones Industrial Average (the DOW) set its highest closing record on February 12, 2020.[1] Commercial real estate had a very favorable outlook going into 2020, with CBRE projecting “slowing but sufficient growth that will generally support strong property market fundamentals”.[2] While the first cases of COVID-19 were reported in the U.S. in late January 2020, the number of confirmed cases significantly increased by mid-March. As the number of confirmed cases grew, U.S. capital markets experienced dramatic changes, including record-setting point drops and the start of the first bear market in nearly 11 years.

The commercial real estate (CRE) industry has been highly affected by COVID-19, primarily due to the unprecedented and necessary response including the temporary closure of non-essential businesses. As of April 7, 2020, forty-two states had ordered businesses to temporarily close and residents to stay home, resulting in more than 316 million people working and eating at home.[3] This has had a substantial impact on the American job market, with first-time claims for unemployment benefits surging more than 3,000 percent since March 21, 2020. The Department of Labor reported 10 million U.S. workers filed for unemployment benefits in the last two weeks of March.[4] The previous record high of unemployment filings in a week was 695,000 in 1982. The Congressional Budget Office expects an unemployment rate above 10 percent for the second quarter.[5]

Unemployment

This is neither an offer to sell nor a solicitation of an offer to buy any security, which can be made only by an offering memorandum or prospectus that has been filed or registered with appropriate state and federal regulatory agencies and sold only by broker dealers and registered investment advisors authorized to do so. An offering is made only by means of the offering memorandum or prospectus in order to understand fully all of the implications and risks of the offering of securities to which it relates. A copy of the applicable offering memorandum or prospectus must be made available to you in connection with any offering. Please see below for important disclosures.

On March 27, 2020, Congress passed a COVID-19 stimulus bill, known as the CARES Act. This stimulus was put in place to add $2.2 trillion directly into the U.S. economy, including providing aid to all CRE sectors, mostly in the form of liquidity support for tenants. While the stimulus package may provide relief to CRE tenants and owners, it does not extend, at this point, to CRE lenders, directly affecting CRE capital markets.

The effects of COVID-19 are being felt across the globe in one way or another. The fundaments of commercial real estate going into 2020 were strong and positioned well for the short- to mid-term disruption we are facing today. While temporary, the length and ultimate magnitude of COVID-19’s effects are unfortunately uncertain and multiple aspects of the economy, including commercial real estate, are expected to be negatively affected by the pandemic.

COVID-19 Pandemic’s Impact on Commercial Real Estate Sectors

Hospitality

  • Travel advisories and state-to-state quarantine requirements for travelers have significantly limited travel and have had a considerable impact on hospitality
  • Some hotels are opening rooms to first responders and nurses, and repurposing space for COVID-19 testing and preparation
  • Prior to the COVID-19 outbreak, U.S. hotels were forecasted to have a 0.1 percent decline in RevPAR (revenue per available room) 2020. Since that forecast, leisure and business travel has virtually stopped, and the revised outlook has been updated to a full year RevPAR decline of 37 percent and a Q2 decline to more than 60 percent[7]

Industrial

  • Industrial is seeing strong overall demand and rent is likely to remain stable
  • People are staying home, resulting in increased demand for e-commerce and industrial space
  • Industries with international exposure may have increased disruption due to travel and trade restrictions
  • U.S. warehouse operators hired more than 8,000 workers in March[8] in an effort to fulfill online orders and keep people supplied through the pandemic

Multifamily

  • Demand remains favorable for multifamily, however the sector is expected to be impacted as tenants struggle to pay rents due to rising unemployment
  • Bottom lines for apartment owners and operators are expected to be affected as planned rent increases and value-add projects may be postponed
  • Second quarter GDP is projected to fall between 10 percent and 20 percent, leading governments at the federal, state and local levels to roll out moratoriums on eviction and requiring rent flexibility and forbearance[9]
  • Once we return to a more stable environment, multifamily is expected to retain its position as a preferred CRE asset class, as an estimated 35 percent of U.S. households rent

Retail

  • Retail is struggling in expected areas – enclosed malls, bars, restaurants, fitness centers and others deemed non-essential have been asked to temporarily close
  • Business is booming for essential businesses such as grocery and pharmaceutical retailers
  • While essential retailers are open, they have made several adjustments to help lower the spread of the virus and support social distancing, including special hours for seniors and limiting how many shoppers can enter stores

Office

  • Offices with exposure to short-term leases are expected to be the most vulnerable
  • 88 percent of organizations have encouraged or required employees to work from home, regardless of whether or not they showed coronavirus-related symptoms, which will reduce utilization rates of office space[10]
  • 74 percent of organizations intend to move at least 5 percent of their previously on-site workforce to permanently remote positions post-COVID-19, which, over the longer term, may speed up the adoption of remote working and investment into collaborative technologies[11]

CRE Capital Markets

  • Given the uncertainty surrounding COVID-19, there is a lack of liquidity currently in the real estate capital markets, resulting in debt funds that rely on repo lines or credit facilities to likely pause originations until markets stabilize
  • CRE lenders are being pressured as borrowers are unable to make mortgage payments and banks are demanding more cash collateral for credit facilities

 

Sources:
[1] Barrons. The Dow Just Hit a Record High. It’s About Time. February 12, 2020.
[2] CBRE Research Real Estate Market Outlook 2020 U.S.
[3] New York Times. See Which States and Cities Have Told Residents to Stay at Home. April 7, 2020.
[4] CNN Business. A 3000% jump in jobless claims has devastated the US job market. April 2, 2020.
[5] The New York Times. White House Debates How Far to Go on Face Mask Guidelines. April 7, 2020.
[6] The Wall Street Journal. The March Jobs Report in Charts. April 3, 2020.
[7] CBRE Flash Call: COVID-19 Impact on Commercial Real Estate. March 18, 2020.
[8] Wall Street Journal. Warehouse Hiring Surge Defies Crashing U.S. Jobs Market. April 3, 2020.
[9] Yardi National Multifamily Report. March 2020.
[10] March 17, 2020 Gartner Survey. Gartner HR Survey Reveals 88% of Organizations Have Encouraged or Required Employees to Work From Home Due to Coronavirus.
[11] March 30, 2020 Gartner Survey. Gartner CFO Survey Reveals 74% Intend to Shift Some Employees to Remote Work Permanently.


Disclosure
The views expressed herein are subject to change based upon economic, real estate and other market conditions. These views should not be relied upon for investment advice. Any forward-looking statements are based on information currently available to us and are subject to a number of known and unknown risks, uncertainties and factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements.

Important Risk Factors to Consider

Investments in real estate assets are subject to varying degrees of risk and are relatively illiquid. Several factors may adversely affect the financial condition, operating results and value of real estate assets. These factors include, but are not limited to:

  • changes in national, regional and local economic conditions, such as inflation and interest rate fluctuations;
  • local property supply and demand conditions;
  • ability to collect rent from tenants;
  • vacancies or ability to lease on favorable terms;
  • increases in operating costs, including insurance premiums, utilities and real estate taxes;
  • federal, state or local laws and regulations;
  • changing market demographics;
  • economic risks associated with a fluctuating U.S. and world economy;
  • changes in availability and costs of financing; and
  • acts of nature, such as hurricanes, earthquakes, tornadoes or floods

Leave the cash, take the cannoli!

By leaving the “Cash”, we mean, to always use a Qualified Intermediary, (“QI” ).   A Qualified Intermediary (QI), sometimes known as an accommodator or facilitator, is a critical part of a 1031 exchange. Choosing the right provider is key to executing a successful transaction.  By “take the Cannoli” we mean, keep your tax benefits intact!

In order to complete a 1031 exchange, an investor must not take “constructive receipt” of the proceeds from the sale of the relinquished property. Constructive receipt is a tax concept in which a taxpayer is liable for income, which may not have been physically received, but has been credited to the taxpayer’s account or otherwise becomes available for him or her to draw upon in the future. The QI is an entity (person or company) who, for a fee, acts to facilitate the 1031 exchange by entering into a contractual agreement for the exchange of properties, avoiding constructive receipt.

It’s important to know that neither the taxpayer nor a “disqualified person” may serve as a QI. A “disqualified person” is the agent of the exchanger at the time of the exchange. A person who has acted as the taxpayer’s employee, attorney, accountant, investment banker or broker, or real estate agent or broker, within the two-year period preceding the date of the transfer of the first relinquished property, is treated as an agent of the exchanger, and thereby a disqualified person. If an attorney has provided tax or legal services to the exchanger within the prescribed two-year period, the attorney is a disqualified person.

The 1031 exchange QI is responsible for:

  • preparing the 1031 exchange legal agreements and related transaction documents in order to properly structure the transaction;
  • receiving, holding and safeguarding the 1031 exchange funds throughout the transaction; and
  • advising, coordinating or consulting on the implementation of the 1031 exchange transaction to ensure compliance with the Internal Revenue Code, Treasury Regulations and related Revenue Rulings and Procedures.

A significant amount of care should be taken to select a QI because of the crucial role this entity plays in the administration of the 1031 exchange transaction. The industry under which QIs operate is not as heavily regulated as the securities industry and  that’s why it’s important to consider several of the following factors during the selection process:

Established and Experienced

The 1031 exchange process is involved, and it takes a competent, well-established QI to provide services for an investor that comply with the requirements. Investors are advised to ensure the QI has many years of experience and understands the 1031 exchange requirements so they can easily guide clients through a transaction.

Policies, Procedures and Internal Audit Controls

Detailed policies, procedures and internal audit controls are critical in minimizing the risk of loss to 1031 exchange funds and assets while being held by the QI. Established providers will have sophisticated processes that typically include multiple checks and balances to ensure the QI is taking into consideration the needs and interests of clients first.

Separate, Segregated Qualified Trust Accounts

It is typical for an active QI to facilitate multiple 1031 exchanges simultaneously. It is important that the QI segregates the funds for each exchange into separate accounts that are held distinctly for the benefit of each individual exchanger. Segregated accounts guard the funds of the QI’s clients if a QI runs into financial difficulty or declares bankruptcy.

Safety of 1031 Exchange Funds

Another important element is the protection of the 1031 exchange funds while being held and managed by the QI. Fidelity bonding safeguards against intentional wrongful acts, such as fraud, theft and forgery. A selected QI ought to maintain fidelity bonding from a reputable provider to transfer the risks associated with deliberate wrongful acts to another party.

Errors and Omissions

QIs should maintain an errors and omissions (E&O) insurance policy from a reputable insurance provider. E&O insurance protects the 1031 investor and the QI from risks associated with actual or perceived errors and omissions performed by the QI during the exchange period. Although sophisticated internal controls and processes can minimize the risk of loss, mistakes are always possible.

It is always acceptable – and encouraged – for a potential client to request a copy of the QI’s insurance policies, both E&O insurance and fidelity bonding, in order to verify the insurance underwriter, the policy limit, and policy term/expiration date, to ascertain whether the policies are sufficient. It is also important in regard to the fidelity bonding to note whether the policy limit is “per occurrence” (applies to each individual incidence) or “in aggregate” (the total or maximum coverage available to investors for the 12-month policy period regardless of the number of losses).

While QIs are essential to the 1031 exchange process, there are several considerations an investor must be aware of when selecting a QI for an exchange. In addition to complying with the IRS guidelines for completing a successful exchange, it benefits the investor to know what to look for in a QI to protect their capital and their tax-deferred status during the exchange process. Referring to the key components discussed here can help investors pick a QI that will not put their investment at undue risk.

Conclusion

Hopefully this post provides insight on why the QI is essential to the 1031 exchange process. By understanding not only the key functions a QI performs in an exchange, but also by recognizing several of the key qualities to consider when evaluating a QI, investors will be better equipped to make the right selection for their unique 1031 exchange needs.

For more information, visit www.dst.investments

Comparing Real Estate and Energy Section 1031 Exchanges

A new article by Bradford Updike, LLM, JD and David Sengstock, JD of Mick Law P.C. that discusses the contrasting segments of the real estate DST and energy-based §1031 product sectors.

Conventional asset-based products continue to present DST 1031 opportunities for stable cash flows, long-term capital preservation, and in some cases, growth, the energy §1031 product area presents a niche avenue for investors with a steeper risk tolerance, as well as an opportunity to achieve an out sized return driven through oil and gas mineral rights ownership and commodity market exposure.

This article is intended for Accredited Investors, broker dealers, investment advisors, and family offices to better understand the contrasting features of §1031 product offerings in conventional real estate and in oil and gas assets. Despite structuring these offerings as §1031 eligible products, understanding the economics as well as the tax consequences of these products is a critical key to investment success.

Vacation Homes and IRC Section 1031 Exchanges

“Second homes” or Vacation Homes” offer another opportunity for the 1031 Exchange. Often a taxpayer’s best investment has been his vacation home and yet many tax and legal experts have argued against section 1031 when it came time to sell.

Back in February of 2008, the IRS established guidelines for determining whether a vacation home qualifies for a 1031 Exchange. Although exchanges of second homes have been done for years, we now have the definitive ability to confirm, yes they can qualify.

Revenue Procedure 2008-16 sets forth the safe harbor guidelines as follows:

RELINQUISHED PROPERTY

  • The holding period for the vacation home is at least 24 months immediately before the exchange;
  • For each of the two 12-month periods, the vacation home is rented to another person at a fair rental for 14 days or more; and
  • The homeowner limits his use of the vacation home to not more than 14 days or 10% of the number of days during the 12-month period that the vacation home is rented at a fair rental value.

REPLACEMENT PROPERTY

  • The holding period following the exchange is at least 24 months;
  • For each of the two 12-month periods, the vacation home is rented to another person at a fair rental for 14 days or more; and
  • The homeowner limits his use of the vacation home to not more than 14 days or 10% of the number of days during the 12-month period that the vacation home is rented at a fair rental value.

When contemplating an exchange, one of the most common questions real estate investors ask is: Will my mixed-use vacation property be eligible for an exchange? Thankfully, the answer to this question is “yes.”

Instead, like other revenue procedures issued by the IRS, is a guideline intended to supplement the agency’s interpretation of Section 1031. If taxpayers follow this procedure, the IRS will not challenge the vacation home’s eligibility as relinquished property. Abiding by this document will mean avoiding a legal challenge, but this doesn’t mean going outside the bounds of 2008-16 will necessarily result in a failed transaction.

What Rev. Proc. 2008-16 is saying is that the IRS will not challenge the “holding requirement” of Section 1031 if taxpayers follow its guidelines. The potential issue that could be presented by vacation homes is the holding requirement. That is, there could be a dispute over whether such property satisfies the requirement that relinquished property must be “held for” investment.

If taxpayers disobey Rev. Proc. 2008-16, the holding requirement may still be met, but the issue can only be resolved on a case-by-case basis. It is not a quantitative requirement, as we know, but a qualitative one, and it demands an individualized analysis by the court. The language and appearance of the procedure may seem authoritative, but accountants should be aware that it is not a set of strict rules.

Despite the confusion the above may seem to cause, the guidelines are straightforward: For vacation homes used as relinquished property, taxpayers should own the property for at least 24 months prior to the exchange. For replacement property to be used as a vacation home, it should also be held for a minimum of 24 months.

These ownership periods are referred to as “qualifying use” periods, which operate just before the exchange (for relinquished property) or just after it (for replacement property). In other words, if a taxpayer owns a relinquished property vacation home for five years, only the 24 months immediately preceding the exchange constitute the qualifying use period.

Taxpayers must rent the home at a fair market value for at least 14 days in each of the two 12-month time segments which make up the 24-month qualifying use period. Also, their personal use of the home cannot exceed the greater of 14 days or 10 percent of the total days the home is used as a rental during each 12-month segment. These guidelines apply to both relinquished and replacement property. Thus, the IRS is making it clear that the holding requirement will not be contested should these guidelines be observed.

DST Investments is a registered investment advisor that specializes in DST 1031 Consulting services. For a complimentary consultation, please visit us at www.DST.investments or email us at support@dst.investments.

DST Provides Direction and Course of Action for Family Legacy

By Al DiNicola

DST.Investments, LLC- Registered Investment Advisor

June 15, 2020

Financial advisers, CPAs and Attorneys interface with investors and provide valuable insight into planning for generational wealth transfer, occasionally referenced as a family legacy. This trust bond may have taken years to develop or may develop quickly with sound financial advice.  Professionals deal with situations which may have recurring themes. However, the professional must understand each and every situation prior to suggesting the alternatives. 

Recently, we had the pleasure of working with a family and we were able to suggest alternatives for their specific needs.  The patriarch of the family had recently passed away in his late 80’s. The matriarch was in an assisted living facility, in her mid-80’s and in failing health.  Over the years, the patriarch and matriarch had assembled a real estate holding portfolio in a coastal Florida town.  The commercial and residential rental properties served the family well for over twenty years. Some of the properties were free and clear of any debt but there were a few with mortgages on the properties. One of the three siblings (now all in their 60’s) was charged with the responsibility of managing the real estate. After 10 years of active management of the assets, the managing sibling was searching for an alternative.   The first alternative was to simply sell all the real estate (on an accelerated plan) and pay the capital gains tax as well as recapturing all the depreciation and paying the tax at a rate of 25%. The second was to attempt to do a 1031 Exchange and defer the taxes.  The 1031 posed a few obstacles with the replacement of debt. The main obstacle was the matriarch signing on the loan for the debt replacement.

The family was looking for a source of monthly income, without the stress of management or even dealing with a management company in the case of an individual commercial building with a Triple New Lease (NNN).  The family also understood that outright selling the real estate while the mother was still living may forfeit the step up in basis to current value.  For those not familiar with this provision this is the readjustment of the value of an appreciated asset for tax purposes upon inheritance. This would mean the property owner would pass ownership upon their death. This minimizes the capital gain taxes that may be due.  In the case of this family, the taxes that would have been due were just under $1.6MM if the property was sold outright and not pass to the heirs.

There still is a need for the mother to receive some sort of monthly income. The other fact would be the three siblings will eventually inherit the asset (property). The solution was to execute a 1031 tax deferred exchange and purchase a variety of DST assets which all included removing management concern as well as the debt replacement. We analyzed the proposed closing statement from the sale of the investment properties. There were four total investment properties that were to be exchanged.  We analyzed the payoff of the loans on the properties since one of the requirements of a 1031 is the debt needs to be replaced.  The DST also provide non-recourse debt. This means there is no requirement to sign for the loan that is in place for the DST. We also evaluated the amount of equity that would be available for acquisition of the DSTs. We counseled the siblings on the selection of a Qualified Intermediary (QI) to hold the funds. All transactions must be through a QI.

The result was a diversified portfolio of multiple DSTs in a variety of assets and geographic locations. While the DST are operating the mother receives monthly income directly into her account. Since there are multiple DST and more than likely different periods of eventual sales of the DST the family can evaluate what the next steps would be at that time. If the mother is still living the family can do successive 1031 exchanges into other DST or even out of the DST back into regular real estate. These additional alternatives provide additional flexibility. The family can now enjoy the best of both worlds the disclosures of a security and the tax advantages of real estate.

When the mother passes away, the assets transfer to the siblings with a step up in basis for tax purposes.  Each sibling can be assigned a different DST for their own accounts. The siblings would receive the monthly income from the DST during the life of the DST. Once the DST reaches full term and is sold the siblings would be in line to receive the proceeds from the DST. The siblings would have a variety of options on the disposition of the asset once the DST would be sold.  The individual sibling would receive the proceeds from the DST. The individual siblings would be free to take the proceeds with the added factor of a step up in basis.

As always consult your CPA or financial adviser.  We specialize in DST structure and function.

For more information on how to properly set up an IRC 1031 Tax Deferred Exchange or if you are an accredited investor and would like additional information on a DST contact Al DiNicola at 239-691-8098.