1031 Exchange into DST or TIC

8 Replies

Hello BP community, we have done a couple of 1031 exchanges into apartment buildings. Next year, we would like to sell one of our smaller properties (a 4-plex) and do a 1031 exchange to defer capital gains taxes. As everyone knows, it's been difficult to find good deals on multi-family these days. Also, my husband especially, would like for us to move into more "hands off" investments even if that means somewhat lower returns.

I have seen Delaware Statutory Trusts advertised as a vehicle for investing 1031 funds. Does anyone have any experience with this? What kind of returns can one expect? Does anyone have companies that do this that are good to work with and offer strong investments? If you don't care to share specifics in the open forum, you are welcome to send me a private message. 

I should say that we haven't, by any means, ruled out purchasing a replacement property on our own as we have in the past. However, I'm wanting to explore the alternatives. 

Hi Rhonda. I work with clients in the DST space. They can work great depending on your goals, but there are pros and cons like any real estate investment. They are definitely hands off, 1031 exchange eligible, and have been a wonderful planning tool for a lot of folks...including those that still own/manage real estate in addition to their DSTs. But you're right, you typically won't get the types of returns you could get if you were buying and managing property on your own (But this really depends on the property type you're in, etc...and there are always exceptions to this ). There's something to be said for going passive when you're ready...and the stress reduction that brings :) They're a great planning tool for sure.

I found TICs and DSTs when doing research for a solution for my father who was in the hotel business and trying to find a tax favored exit strategy at retirement. 

I'll PM you with more details on these, what to look for, etc.

@Joshua Wright Thanks for responding. What you've said is definitely in line with what I assumed. There is no such thing as a free lunch after all. Somewhere, somebody is going to need to be paid for a service. And that doesn't bother me. I mean, the next time we sell there simply might not be a property that fits our objectives especially in the 45 day identification period. If that is the case, the choices might be to cash out and pay a lot of tax then buy a bond or something for 5%. Of course, after the 24% fed and local tax, the returns will be 76% x 5% on the gains. Obviously a 1031 exchange has a big advantage in preserving the equity. 

I'll PM you and we can discuss further.

@Rhonda Wilson , You're anticipating the classic exit strategy from a career of 1031 investing.  The goal of course is to keep those deferred tax dollars working for you through your life and then passed to your heirs tax free.  But two things always demand attention - the desire and need to move from active to passive attention, and the need to move defensively in late markets and late investing careers.

Defensive investing is a way of separating your cash from debt in a mature market to mitigate the impact of any kind of correction.  Our clients will sell and complete one last (at least that's what they say until the next deal comes along) 1031 into an all cash position in a passive asset.  Or if there is debt they will purchase one or more all cash assets and concentrate their leverage on one or more.  So some of their replacements are minimal leveraged and some are maximal leveraged.  In this way they get the benefit of the safety of cash still getting good returns and the potential bounce from strong leverage but concentrated in fewer properties so risk is less.

The other issue is the desire to wind it down.  Again, the ability to move using the 1031 into passive 1031 compliant properties is a huge potential benefit to you. Very few people want to land lord all their life.  Even fewer want to work for years deferring tax only to pay it at the end.  

Up until 2002 options for the above two scenarios were pretty much limited to NNN properties and actively managed small group properties held as tenants in common. Two significant revenue procedures created a structure that allowed groups of investors to go into a property specifically structured by a sponsor as totally passive tenants in common ownership. The other structure that came long in 2004 in response to wall street wanting a product to access 1031 money was blessed as the Delaware Statutory trust.

These three - the NNN properties, Land leases, the TIC and the DST are the four options used by the great majority of our clients who are reluctant to give up those hard earned tax dollars at the end like you expressed.

They're all 1031 compliant so tax deferral works the same.  The difference in structure creates a  different set of issues and opportunities for each of the three.  

But bless you faithful 1031 investor.  There is a way out for you without giving in to Uncle Sam!

@Dave Foster Wow! Thank you for the well written and thoughtful post. I have already read it a couple of times as there is quite a bit of information there. 

I hadn't really given consideration to the leverage aspect until reading your post. I'm quite used to increasing leverage with each 1031 exchange. Moving from a currently owned property to an all-cash investment in a TIC is interesting. True, it minimizes risk. In general, I'm a pretty big believer in having some degree of leverage. After all, if the cap rate is higher than the interest rate, then I'm making profit on the bank's money.

The advantage of having multiple medium sized properties, as we do is that I'm now thinking that I could refinance another property and use the cash to pay off the small mortgage on the property that I'm selling. That would increase the cash available for the all-cash investment and eliminate, I think, any danger of mortgage boot. 

Thanks again for the post! 

@Rhonda Wilson Another option for you to consider Monetized Installment Sale. While it doesn't allow for full tax deferral, it basically prompts you to pay taxes on the amount received each year.So essentially it prolongs your tax payments over the lifetime of installments you receive. 

Best!

Rhonda,

A Monetized Installment Sale fully defers capital gains taxes for up to 30 years while providing you with 93.5% of the net sales proceeds at closing. You can invest that cash as you please, including putting it back into real estate if you wish, without the time deadlines associated with 1031 exchanges. Or you can put it in a balanced portfolio of investments that you select, with or without a paid financial adviser. It's up to you.