1031 exchange - need feedback quickly

6 Replies

My 72 y.o. mother just sold her only property to simplify her life. She has $1.1M in a 1031 exchange and is planning on purchasing three to four Deleware Statutory Trusts (DSTs) that contain Class A, mostly large scale residential communities in growing, economically strong regions. The DSTs expect to deliver 5% to 6% cash on cash plus appreciation. The cost to buy in is 9.5% in commissions/sales fees.

If she pulls cash out of the 1031, she’ll be taxed heavily - 28% to 30% on the first $100k, 34% on anything over that. She has around 1 week to decide what to do. 

How much cash should she pull out of the 1031 exchange? This money will be invested in Vanguard Lifestrategy Moderate Growth (a 60% stock / 40% bond fund) .

Living Expenses: $75k per year
Current Income: $50k/yr rent from real estate if her $1.1M in 1031 is invested in DSTs
$15k/yr Social Security
$30k/yr Limited Partnership (ends 2024)

Current Portfolio - $530k Cash (not including the $1.1M real estate)
We plan to invest her cash into 85% Vanguard Lifestrategy Moderate Growth Fund and 15% Vanguard California Intermediate-Term Tax-Exempt Fund

Thank you,

Jey

Hi @Jey Berke , when someone exchanges into a DST the only fee they pay are to the qualified intermediary for the exchange. There are no closing costs or commissions paid by the investor.

Thanks Leslie.

Here's the costs for the DST offered by AEI Net Lease Portfolio VI DST - Closing Costs (0.06%), Selling Commissions (5.00%), Due Diligence Expenses (0.21%), Offering and Organization Expenses (4.05%)

If the investors do not pay for these, who does and how do they get the money to pay it? Doesn't the money eventually come out of the investors' pockets, if not directly, then in a round about way?

Hi again Jey- when someone sells a duplex, for example, the commissions get paid, yes?  By the seller.  Its the same situation here. The Sponsors pay the fees out of the equity raise.

It sounds as if you are already working with an advisor, however, if you need any assistance, I am here to help.  We are very, very discriminating regarding what sponsors and offerings we will recommend, and I personally inspect all multifamily and student housing myself.  Perhaps you could use a copy of my book too.  Please let me know.  Best- Leslie

"The Sponsors pay the fees out of the equity raise."

When the sponsor sells the properties, they pay out 5% in sales commissions, but that money is taken out of the investor's equity. If the properties did not appreciate, the investors will end up with 5% less than what they started with, correct?

@Jey Berke never did a DSTs but I have done Tenants in Common (TIC) agreements. We just did this for a purchase in simpsonville with a group of investors and a 1031 component

hi again Jey- TICs and DSTs are very similar.  In the established syndicated industry, DSTs are most often employed today.  Best- Leslie

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