FOR IMMEDIATE RELEASE

IRS GRANTS EXTENSION FOR 1031 EXCHANGES

Just last week I posted and article regarding the absence of any reference within the CARES Act to the 1031 Exchange process. Well, there must have been a lot of other concerns with this absence. I have been involved with real estate and 1031 exchange replacement property since 1980. This is the first time I have seen an extension of the 45-day period on a nationwide basis. I hope this information is valuable to anyone who is doing an exchange now or in the near future.

DST Investments, LLC represents the major institutional DST Sponsors who offer replacement properties that qualify for the IRS 1031 Tax Deferred Exchange

45 and 180 Calendar Day Deadlines Extended to July 15, 2020

April 10, 2020—the U.S. Treasury (Internal Revenue Service) issued Notice 2020-23 late Thursday evening, April 9, 2020, granting relief to investors that are in the middle of a 1031 Exchange transaction.

This Notice is very different from the typical disaster declaration and extensions granted in the past and is somewhat confusing based upon the way it was drafted. Historically, the President would declare a Natural Disaster for a specific geographic area and a date specific event and the U.S. Treasury (Internal Revenue Service) would then issue a Disaster Relief Notice providing a 120-calendar day extension to the 45-day and 180-calendar day deadlines. This approach was not used this time.

Notice 2020-23, which revises Notice 2020-18, 2020-15 IRB 590 (April 6, 2020), and Notice 2020-20, 2020-16 IRB 660 (April 13, 2020), does not specifically address Section 17 contained within Revenue Procedure 2018-58, so it would initially appear that the 120-calendar day extension is not applicable to the current situation.

Affected Taxpayer (Investor)

The Notice provides that any person performing a time-sensitive action listed in either Section 301.7508A-1(c)(1)(iv) – (vi) of the Procedure and Administration Regulations or Revenue Procedure 2018-58, 2018-50 IRB 990 (December 10, 2018), which is due to be performed on or after April 1, 2020, and on or before July 15, 2020 (Specified Time-Sensitive Action), is an Affected Taxpayer.

Deadline Extension

Therefore, the guidance provided within Notice 2020-23 applies to investors that have a 45-calendar day identification deadline or a 180-calendar day exchange deadline that falls on or after April 1st, 2020 and on or before July 15th, 2020. The applicable deadline that falls within those timelines is extended to July 15th, 2020.                 

DST Investments, LLC is not intended to serve as legal, tax or financial advice and make no express or implied warranty respecting the information presented herein and assumes no responsibility or liability for errors or omissions contained herein. You should consult with your own legal, tax and financial advisors regarding your specific real estate transaction or income tax circumstance.

Although current circumstances don’t allow many of us to be with all of our friends and family to celebrate, I would like to wish you and your Family a Happy Easter.  I hope that you are still able to enjoy the time with those that you live with. 

Stay safe and healthy!

CVID-19 and the CARES ACT- 1031 Exchanges and DST Solution

It is a fact the Coronavirus has abruptly change the financial world in many ways. Financial Advisers, CPAs, 1031 Intermediaries, Real Estate Brokers and many other are attempting to adjust on a variety of fronts.  There are many moving parts to real estate transactions under normal condition. Today, we have seen additional attention provided to real estate contracts especially those utilizing a 1031 tax deferred exchange.

I have reviewed the 880 pages of the CARES Act, spending more time on those sections affecting real estate investing.   After this review, I did not find any reference that would impact the 1031 Tax Deferred Exchange process, timing or extension included within that text.  In other words, there are no extensions!

CVID-19 Delays

Currently, we have several “Closings” on the down leg property (that a property owner is selling) that have been delayed for a variety of reasons.  Some of the transaction are focused on financing where the banks now need to reevaluate the acquisition.  Other are simply because the buyers cannot freely inspect the property as in the case in New York.  In other situations, the real estate also has a business included with the sale and there is additional time needed to reopen that business and to evaluate the full contract price.

However, if you have already close on the “Down Leg” and looking for the replacement property you may be in a rather uncomfortable position.  Without a provision for a closing extension, you may not be able to physically inspect the property, finalize the transaction or even conduct basic due diligence.  In addition, certain rental properties may have short term blips or interruptions in the potential income stream.

Practical & Logical

 If you have already closed on your down leg and within the 45-day identification period a DST* may be the practical and logical solution to the situation.  DSTs are carefully prepackaged and can close quickly.   We have heard from investors who have identified specific assets to purchase only to be notified by the lenders that the financing would not be provided.  With a DST there is no need to qualify for debt financing since DSTs are structured with a non-recourse loan.  DSTs usually employ moderate to low leverage to be more conservative, but there is also a selection of “All Cash” DSTs for those looking for something ultra conservative or for a place for other “cash” capital, to enjoy the tax and economic benefits of owning income producing real estate.

DST pay monthly distributions and are approved by the IRS to be used to defer capital gains, retaining the same real estate investment attributes!

HELP IS AVAILABLE

For more details please contact us for the up to date availability of DST in all asset classes, geographic locations and most important that have been through a due diligence process.

If you are considering selling your investment property and looking for a logical alternative for a replacement property, please contact us.  We have over 40 years’ experience in the real estate market and 1031 exchanges.  My name is Al DiNicola, my toll-free number is 800.378.0515 extension 700 and my email address is. adinicola@dst.investments.  Meanwhile, stay safe and healthy!

*DST are Delaware Statutory Trust and are available only to Accredited Investors.

By Al DiNicola

DST Investments, LLC | www.dst.investmens

Securities offered through MSC-BD, LLC

Commercial real estate broker are experts at their craft.  Real estate agents who continue their education and achieve a CCIM (Certified Commercial Investment Member) designation provide added expertise to the analysis, listing, and selling of real estate asset for their customers and investors. Often, the real estate agents are commended for suggesting a solution to a seller which may be at first totally “out of the box”.

Let me share with you one real-life eye-opening example.   Recently, a real estate agent convinced a property owner (in their late 70’s) to sell their commercial asset.  This was an asset the owner had developed and actively operated for a period of over 10 years.  The commercial agent set the stage for the owners to sell the property and execute a 1031 tax deferred exchange to avoid (defer) paying the capital gains tax.  At first the owner was excited to defer paying the capital gains tax. The owner had acquired the raw land for $500,000 and then obtained a construction loan for $2,200,000 to build facility. The property owner, although married, held the property in his own name through an LLC. Total Invested $2,700,000. The commercial agent convinced the owner to sell property for $5,600,000. The property owner (and his wife) were very happy with the sale.

Then the CPA started to calculate the potential gains and taxes that may be due upon the sale without a 1031 exchange. After sales cost the net selling price was $5,300,000. The capital gains would be $2,600,000 (after taking into account the initial $500,000 the seller paid for the land).  The taxes at a total rate of 23.8% would be equal to $618,800. Recapture depreciation on the structure was calculated at $200,000. Total Taxes for this one transaction, of $818,000 would be due if a 1031 was not used.  That would have reduced the profits from $2,6000,000 to $1,782000.  Still a nice sum of money to take as profit.  They wanted to seek an alternative and retain the $818,000.

This CPA took the time to explain to the client, what would happen when the owner transferred ownership (upon his death) to his heirs.  There would be a step up in basis to current value and all of the deferred taxes may be eliminated.  Using a 1031 now would create additional wealth for the surviving spouse (or heirs) as there would have an additional $818,800 in equity preserved. Seeing this is black and white was eye opening to the seller.

The contract for the sale of the property was executed and closing on the property occurred. The proceeds were sent to a Qualified Intermediary (QI) which is one of the requirements for a 1031 exchange. Post-closing the real estate agent attempted to locate replacement properties. The 45-day clock starts ticking. One of the IRC 1031 requirements is to replace the debt component of $2,200,000. The agent located several properties including a Triple Net property (NNN). The agent is excited to present the alternatives to the seller.  However, the seller’s spouse (even though not on the title) does not want her husband at his age to take on any responsibility for another loan (she felt this loan would be “the noose around my neck”), especially in the amount of $2,2000,000.

The real estate agent fails to convince seller to identify replacement property that does includes a “non-recourse” loan.  At this point the relationship between the real estate agent and the seller becomes very tenuous.  The seller was expecting to put $2,6000,000 to work in conservative real estate asset and collect income each month.  No matter how hard the agent looked she could not locate a commercial property that did not require some sort of recourse loan even for part of the deal. There was a delicate balance between the total purchase price, using the cash proceeds of the sale, and balancing the debt replacement. Time was running out for the sellers and the real estate agent. The seller was faced with writing a check to the IRS in the amount of $818,800.

However, that real estate agent had attended a seminar on Delaware Statutory Trusts (DSTs).  She never thought she would need to suggest this exit strategy.  Simply put, since this is a security offering, she is not eligible to participate in earning any commission.  She wanted to find a way her customers could avoid writing the check for capital gains thus utilizing all the proceeds from the sale for acquisition of income producing real estate. Just as important was seeking a solution for the seller since she convinced him to sell the property in the first place.   Instead the client contacted an investment advisor who specialized in DST offerings.

What she and the sellers found was a very clean solution for the seller’s situation. DSTs are “pre-packaged” designed for sellers of real estate who are exiting their properties using a 1031 exchange. The DST sponsors offer a variety of properties in all assets classes that may include some component of debt.  However, the debt that is attached to the assets are non-recourse to the investors. Meaning in the above example the entire proceeds may be invested in a DST and with the right combination of loan to value the debt component can be satisfied.  For the spouse there is “no noose around the neck”.

Rather than the seller writing a check for $818,800 taxes he identifies assets in a DST totaling $5,3000,000 (the net sales price of the property). He acquires the DST assets with the cash of $2,600,000 and satisfies a debt component of $2,200,000. What is even more appealing is the ability to diversify the new properties.  The CPA and QI are aware of the 200% rule in the identification process. The investment adviser created a portfolio of DSTs provided by Sponsors the seller can review.  The most important action was to include the DSTs on the 45-day notification to the QI. Once identified the seller can review all the due diligence materials with the Investment Adviser after the 45-day period and prior to the 180-day mandatory closing requirements. Once the final reviews take place the seller then closes on the specific selection of DST assets.

The seller identified DST assets in the multi family, senior living and self-storage sectors. All the cash proceeds are used, the debt component is satisfied, and the seller has a diversified portfolio of real estate. These assets produce monthly income while the assets are owned and have the potential for appreciation upon sale of the DST by the sponsor.

There are many other aspects of the DST that are worth further research.  Relatively speaking, DST are rather new (20 years) but are gaining popularity for retaining and creating wealth.

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 or visit www.dst.investments

By Al DiNicola

DST.Investments, LLC

Securities offered through MSC-BD

There are many articles centered on utilizing DST alternatives for completing an IRC 1031 tax deferred exchange. Relinquished real estate holdings may be replaced with a Delaware Statutory Trust (DST) asset(s). There are two reason why this works: The Internal Revenue Code, Section 1031 and Delaware’s statutory law. There may be tremendous stress in locating a real estate replacement within the 45 days (and not overpaying) and then ultimately closing with the 180-day period. The DST also provides the incentives of property ownership without taking on any of the management responsibilities.

How do you participate in the DST if you are not doing a 1031 Exchange and simply have cash to invest?  Many sponsors of DSTs have investment options open to cash investors.  For investors just starting out you may add real estate to your portfolio through a DST. You must be an accredited investor.  Many DST sponsors have different minimum investment amount for a 1031 Exchange (typically $100,000) but for a cash investment the amount may start at $25,000.  So, what would you receive for the $25,000?  You would receive a fractional ownership in a large property that is professionally managed.  Typically, a smaller amount would not permit you to purchase into a large portfolio of real estate. This is different than investing in a REIT.

The DST may provide you with a tax advantaged income. Owning real property provides you tax benefits including mortgage interest deduction. This is if there is financing involved with the DST.  Typically, the leverage for DST may be between 50%-65%.  Meaning the loan to value between the loan amount and the purchase price of the DST asset.  However, the DST is the borrower and not you the induvial investor. The loan is non-recourse to you the investor.   Each year you the investor may claim your  share of the mortgage interest deduction. (Please consult your accountant to see how this may affect your personal situation). When you sign up for a DST that has leverage you don’t apply for the loan personally. However, you will receive annual statements for the interest deduction as well as the depreciation on the asset.

There are many stories about individuals (who want to become investors) finding a property, negotiating with the seller, filling out the loan papers, obtain approvals for closing, and even after a due diligence period the deal could still fall apart. Sponsors prepackage DST offering. The sponsor has done all the front work and DSTs are prepackaged.  The sponsor has located the property, negotiated the purchase, completed the due diligence, and has all the management in place as well as any mortgage on the property. This eliminates all the stress. DST offerings are ready to go and can close in a matter of days not months.

What happens once you own a DST?  There is the potential for monthly recurring income. Most DSTs make monthly distributions to investors. The investors are not actively involved in the real estate and this is considered passive income.  This will show up in your mailbox (hence the term mailbox money) or you may prefer direct deposit to your banking account.

So, what is your liability you may ask.  There is a reference to DST being bankruptcy remote.  There are provisions in place to prevent this but in the event the Trust would go into bankruptcy your personal assets are not at risk.  The amount you have invested may be affected but none of your other assets. Unlike other real estate loans where you may have recourse for the loan including potential having your other assets cross collateralize, the DST is the sole borrower.

What happens when it over? Over means the sponsor has decided to sell the real estate asset (DST).  Sponsors have exit strategies ranging in time from 7-10 years. These would be covered in the Private Placement Memorandum (PPM). When this real estate venture is over you have many options. You will be notified by the sponsor of the sale and the pending closing date.  Your plan of action may include taking your cash proceeds (initial investment and profit) and paying your taxes.  You may also do a 1031 Exchange for another real estate property as a sole owner or partner in a deal. This would/may defer any capital gains.  You may also do a 1031 exchange into another DST if the experience has been acceptable to you and your investment goals.

What are the risks?  Any real estate investment should be considered an ill liquid investment. A DST is ownership of real estate and carries the same liquidity drawbacks.  You will/may receive cash flow from the investment, but your initial capital and any profits are tied up until the property is sold.  You may hear the term “cycle” meaning how long the DST is owned before the investment is completed and asset is sold. How long does the cycle take? Typically, sponsors reference this as a long-term hold which is 7-10 years.  Occasionally the cycle maybe shorted. When the cycle is shorter the investors reaction may be one of “I wasn’t ready for this to be over”. Meaning the investor may want to DST to have a longer life especially if the monthly cash flow continues. There is not an MLS for individual ownership of DSTs. Investors cannot call up a broker to list their fractional ownership of the DST.

You don’t get to vote in any of the decision of the DST. Contrasting this to the Tenants in Common (TIC) where you needed unanimous consent to take any action.  (Not to mention in a TIC all 35 potential members may be signing on the loan, but that is another article). You are investing in a deal where there is professional management who handles the leasing, capital improvements and all the other decision, including when to sell the assets. You will be relying on the sponsor and you need to have confidence and trust in the sponsor’s track record. Consult your investment adviser for additional due diligence on the specific real estate asset as well as the sponsor track record.

If you are searching for an easier way to get into the real estate investing market and want to invest your cash, a DST may be just what you are looking for in real estate. It may take all the fun out of locating, negotiating, due diligence, loan application, management and then dealing with tenants, trash and toilets. (The 3 T’s make it into the article). For a great starting point consult an Investment Adviser who specializes in DST investments.

By Al DiNicola

DST.Investments, LLC

Securities offered through MSC-BD

I attend more and more real estate investment meetings and the big question that comes up is “What is a DST”?

DST is the acronym for the Delaware Statutory Trust. As the name implies it was established in Delaware.  However, you don’t need to live in Delaware to invest in a DST.  DST may be located anywhere in the US.  Recently it has become the investment choice of many participants. This is a fractional ownership of real estate permitted by the IRC Section 1031 tax deferred exchanges. DST are rapidly replacing Tenants in Common (TICS) for a number of reasons.

Large national well know sponsors and a few newer sponsors are providing investment opportunities within single properties or portfolios that include multiple properties.  These sponsors typically are national real estate companies and are offered through securities broker/dealer or Registered Investment Advisers.

The replacement properties that are represented within a DST are typically out of the purchasing reach of smaller investors. Today many baby boomers are utilizing this vehicle to invest in institutional quality properties. Many investors seek passive income because real estate is not their primary business.  Many baby boomers who created their portfolios of real estate may have started with one or two rental home and then progressed to large properties.  As one would imaging there is a certain level of management expertise needed to oversee the property.  When boomers were in their prime the challenge of active management was what the boomers were seeking. Something happens when you reach retirement age. Many seek a strategy on cashing in their real estate portfolio, through some sort of tax deferral naturally, but they want to avoid all the management headaches that may still be lingering in their minds. The tenants, toilets and trash are referenced many times! This situation and many other reasons are supporting the strategy to use a DST as a solution.  Future articles will deal with many of the advantages of the DST.  One of the main benefits of the DST is the opportunity to identify DST assets even as a back up to a traditional 1031 Exchange. The 45-day period from closing on the relinquished property slips by so quickly. A good adviser can assist you in the identification efforts.

Let’s take a look in the rear-view mirror.

Less than 20 years ago the US experienced a real estate boom and the real estate securitized industry grew rapidly. Up until 2007-2008 real estate was doing well.  Then came the bust and commercial real estate as well as residential suffered in many areas of the US.  Securitized real estate sponsors before the bust were many.  After the bust the industry contracted.

Tenants in Common (TICs) as mentioned previously were the predominate ownership in a fractional form prior to the crash.  We will address the differences in detail in future articles.  Safe to say TIC created many problems with joint ownership, recourse loans as well us required approval for taking action.  These issues and others were the impetus for the DST structure.

Prior to the recession DST were just getting started. In 2004 the Internal Revenue Code published Revenue Ruling 2004-86. At that time there were only a few major sponsors.  Inland Private Capital was one of the first to provide DST offerings.  After the recession many other sponsors use the DST almost exclusively rather than TICs.

Fast forward to Today.

Mountain Dell Consulting is a market research firm providing a great deal of information on what is currently going on in the 1031 exchange marketplace specifically in the securitized arena.  As of the beginning of September 2019 there was $2.4 Billion raised in equity. The predictions for year end 2019 are $3.3 Billion.  That is a daily raise of $9.125 Million.

DSTs are now front and center as a vehicle of choice.

There were a few changes with the Revenue Ruling 2004-86. One would be a rule that mandates only passive real estate qualifies for IRC Section 1031 treatment in a DST. That is not all bad. Translation may be- headaches are gone with active management. So what properties qualify?  Net-leased properties (referenced as NNN), or real estate, such as multifamily apartments.  In all cases there needs to be a master lease in place. There are no new leases (with the master tenant) during the life of the DST. In a multi-family situation individual leases for tenants will be acceptable.

The cost for the DST is simpler and less expensive than the TIC structure. In a TIC everyone signs on the loan. In a DST only the DST Trustee signs on the loan.  The loan (if applicable since some DST are all cash) is completely “non-recourse” to the individual investors. TIC are limited to 35 investors but with DST there are many more participants. Normally the minimum investment in a DST (with a 1031) is typically $100,000. The acquisition process is very simple with  one agreement for the investor to sign. The  1031 Exchange QI arranges the transfer of funds.

DST Asset Classes follow Commercial Asset classes. Investors may continue to pursue their favorite sector of commercial real estate.  Typically, multi family (including student housing) make up nearly 50% of DST acquisitions.  However other sectors including self-storage, office, industrial, health care, hospitality all have their sweet spot for investors.

Making it on the 45 day list!

You may have heard about the three-property traditional list you need to provide to your Qualified Intermediary if doing a 1031.   If you are identifying a DST with multiple properties in the portfolio more than likely your QI will use the 200% rule.  You as an exchanger can identify as many properties as you like for the 45-day list as long as the combined total does not exceed 200% pf the property you just sold (relinquished property).   Recently the DST was intended to be a back up to other properties that were placed under contract during the 45-day period.  Fortunately, the exchanger identified several DST because the original property fell apart and required the exchanger to sign on a recourse loan that was cross collateralize with other real estate the exchanger owned.

One last thought, since DSTs may be purchased in small amounts this is a perfect solution for any leftover proceeds (known as potentially boot) to avoid paying taxes or at lease defer paying taxes.

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.

By Al DiNicola
DST.Investments, LLC

Securities offered through MSC-BD, LLC

Delaware Statutory Trusts (DSTs) have been around for about 20 years.  This strategy has be a viable part of the 1031 exchange process and a solution for accredited investors since the late 1990’s.  Many investors may not have heard of this because it’s a Reg D security. The awareness of DSTs remains relatively low because advertising, promotion or solicitation is prohibited. You will not see an ad for DSTs in magazine, financial newspaper (Wall Street Journal, etc.) similar to an advertisement for a Mutual Fund.

However, the popularity for DST cannot be denied.  Currently, DSTs now make up about 10 percent of properties used in 1031 exchange. This may be planned for the relinquished property or even as a backup for when a replacement property falls out of contract. DSTs can come to the rescue to back up a potentially broken 1031 Exchange.

The reason for the popularity is very, very simple.  It’s almost exclusively a demographically driven phenomenon, meaning the population getting older. So maybe we can blame this on the Baby Boomers. Boomers have had a disproportion impact on everything that they’ve come into contact with from consumption standpoint since the get-go.  There is no secret that boomers like o consume things.  Over the years this special group of consumer has bought tennis shoes (Nike) luxury cars (BMWs) second homes or even large homes affectionately called McMansions.

The energy the boomers had when they were younger cannot be denied.  Time has a toll on many people and yes, we hate to admit it boomers now have less energy now that they had when they were young. This group is reaching the retirement age and they represent a demographic block with shifting needs.  There is no secret the boomers had the energy to manage their own properties when they were in their 30’s & 40’s.  Some event enjoyed in their 50’s & 60’s.  Turning the corner into their 70’s and the situation may have changed.   DST popularity is be driven by this demography.

Many boomers have built their wealth in the ownership of real estate over their lifetime. This drive may have been to create a legacy to leave to their children or simply to have income from other sources. Real estate was easy to understand and provide a comfort level when it came time for investment. The real estate asset class was accepted. Over the years the boomers have shifted from residential real estate rentals to commercials asset like office, retail, or multi family.

Many boomers have accumulated their wealth through a series of IRC 1031 Tax Deferred Exchanges.  In their mind they’re been able to avoid capital gains, tax liability, almost all of it.  The word “avoid” is not correct and should be replaced with “deferred”. For those who understand the legacy of wealth building there could be a step up in basis upon a specific event (not to be review in this writing). So how do they continue to have current income from real estate and also build wealth?  That is where the boomers are looking to a DST for a solution.

The DST solution provides tax advantaged recurring income, no landlord duties, simplified investment process, can fit any size exchange, institutional quality properties and diversifies real estate holdings.   Boomers continue to use a 1031 Exchanges as well as direct cash investment in a DST enjoy this newfound freedom. For boomers looking to simplify their investment lives, and check all the boxes on their list, the DST seems to be a fit.