A 1031 exchange lets you defer gain on the sale of real estate. However, many variables are involved that can go wrong and leave you without a property to close into. Then, you’ll have taxable gain. Today, Clint Coons of Anderson Business Advisors talks to Scott Hendrix, wealth manager at Upstream Investment Partners. Scott shares the perfect backup solution to save 1031 exchanges.

Highlights/Topics:

Fastest growing area of Scott’s business: Real estate investors who want to sell property that’s gone up in value above what they originally purchased it at

Delaware Statutory Trust (DST): Legitimate replacement property recognized by the IRS, but relatively unknown option for real estate investors doing a 1031 exchange

Tax Cuts and Jobs Act (TCJA): Rules out all appreciated assets, except real estate, as eligible transfer under Section 1031

1031s don’t work without a qualified intermediary (QI) that holds and sends funds for specific time periods

Similarities and differences between DST and Real Estate Investment Trust (REIT):Both are passive real estate ownership

REITs are not eligible as replacement properties

REITs are not legally structured as actual property under management

DST owns the real estate that qualifies as legitimate reinvestment of tax-deferred gains under 1031 exchange; REIT may or may not own it, so it doesn't qualify

Find and Identify DSTs: Work with advisors/brokers to look at available open trusts, find trusts that meet your needs and goals, and use them as a backup:Investors have only 45 days from closing date on property being relinquished to identify where they intend to reinvest their proceeds

If intended deal doesn’t work after 45 days, IRS makes you liable for capital gains tax and depreciation recapture tax (if applicable)

DSTs offer classes of real estate assets to give investors an opportunity to passively own a class of real estate without any expertise, but interest in additional diversification

Return Rate: 90% of net operating cash flow comes back to investor on a monthly basis at an annual rate; rates vary depending on prevailing conditions

1031s can be repeated; sponsor provides notification about selling property and can tax defer it again under Section 1031 or take their gains and incur tax liability

Sponsors usually liquidate their entire portfolio at one time; but they could choose to sell only a portion, depending on current condition of real estate market

Biggest Risk with DST: Once you're an investor in a piece of property, you can’t get out of it until a buyer comes along - could take years

Three reasons real estate investors use DST as a backup plan: Can be named backup property during 45-day identification period

Taxable boot (a.k.a. leftover cash)

Still want to own real estate, but don't want to do the work; done being a landlord and dealing with tenants, plumbers, contractors, and building inspectors

Resources

Upstream Investment Partners

Scott Hendrix on Twitter

Scott Hendrix’s Phone Number: 512-861-0523

Scott Hendrix’s Email

Opportunity Zones FAQ

Opportunity Zone Heat Map

1031 Exchange

Delaware Statutory Trust (DST)

Real Estate Investment Trust (REIT)

Opportunity Zones Resources

Tax Cuts and Jobs Act (TCJA)

Clint Coons’ Webinar on Qualified Opportunity Zones

Clint Coons

Anderson Advisors

Tax and Asset Protection Event

Anderson Advisors on YouTube

Anderson Advisors’ Blog