All Forum Posts by: Jon Taylor

In regards to evaluating DSTs, each asset class needs to be evaluated with an understanding of the technical fundamentals that matter, AS IF you were purchasing those properties outright.

Questions like:

Were the properties purchased at the right price?

Are the properties being marked up before they are sold to investors.

How is the cash-on-cash being modeled?

What are the assumptions that are being factored in - namely occupancy rate and rent per square foot per unit type - and how do they compare to the local market?

What are the terms of the debt?

What are the demographics of the area? (Population in the 5-mile, population growth, etc…)

What's the exit strategy?

I generally stay up to date on the current DST market, and there are a few that are currently attractive enough to invest money in. A lot has changed since the fed started to raise rates. And a lot changed since the COVID crisis. Some are great. Most are not… (IMO)

So, proceed with caution.

@Garry Hoffmann

As Matt mentioned, the step-up in basis doesn't depend on the 1031 or the Trust. *(In some cases holding your property in specific kinds of trusts does limit the step-up event). I've linked a basic definition of the step-up below. 

The short answer is, anyone who accumulates significant gain in real estate investments often will work with an advisor or estate planning professional to avoid capital gains tax - in some cases until they die.

https://taxfoundation.org/tax-...

Yes. It's doable.

There are likely multiple ways to structure a transaction like this. The one way that I have seen this done in the past is by holding title to the property as joint tenants in common.

This will allow the same property to be treated as both investment property and a primary residence. You can use something like square footage to delineate the ownership or appraised value of the units.

This effectively creates two separate properties and two separate transactions. 

@April Eilers,

All answers above are correct. 

However, let's modify your intent hypothetically. Let's say you use your remaining proceeds of $100,000 to purchase a property with the intent to hold it for investment. You secure a $200,000 loan, and invest $50,000 to improve the property.

*At some point*, it becomes advantageous to sell the property. **Usually, we'd expect to see 2 tax years of income to support your intent to hold the property for investment.** This is not a rule, but rather a guideline to support your intent.

Now (new topic), upon the sale of this property, you would need to fulfill both obligations of a 1031 exchange.

1. Replace the entire net value of what you have sold.

2. Spend all of your net proceeds. 

* if you have debt on the property, you can replace that with new debt, or new capital. It does not matter.

Intent is the most important word here.

Hope this helps some!

The DST structure actually provides a 1099 to investors as well as a list of property building and land values…

Your cost basis is adjusted and carried forward, and any additional debt (non-recourse) is depreciable as new basis.

If you want to see a name-redacted sample return for a previous tax year, I could provide one. 

As @Dave Foster  said, each asset class needs to be evaluated with an understanding of the technical fundamentals that matter, AS IF you were purchasing those properties outright.

Questions like:

Were the properties purchased at the right price?

Are the properties being marked up before they are sold to investors.

How is the cash-on-cash being modeled? 

What are the assumptions that are being factored in - namely occupancy rate and rent per square foot per unit type - and how do they compare to the local market?

What are the terms of the debt?

What are the demographics of the area of it’s a net lease deal? (Population in the 5-mile, population growth, etc…)

I generally stay up to date on the current DST market, and I doubt there are 15 offerings that you'll think are attractive enough to invest your money in. A lot has changed in the last 3 months. And the 18 months before that. Some are great. Most are not… (IMO)

So, proceed with caution. 

Yes, likely, depending (how do you like that answer?).

The IRS is concerned about the tax-paying entity being the same on the relinquished and replacement side of the exchange. If the LLC is a *disregarded* entity, and the taxes and income flow through to you, individually, then you are the taxpayer performing the transaction, and it's likely that you can combine the exchange.

It's an accounting question that the accountants should answer. The 1031 intermediaries, like myself, have seen a lot of transactions and can comment on how they've seen accountants advise. 

@Dave Foster will chime in here. He may disagree with me, and if so, I'd take his advise :)

@Matthew Holland - You can. You can structure the acquisition as joint tenants in common on the replacement side, but you'll have to fulfill the obligations of your 1031 exchange with your proportional share of the acquisition. Replace the net sale price of your relinquished property and spend all of your net proceeds. You can own whatever portion of the replacement property that you choose in the joint tenants relationship. 

I’d be interested to connect with you!

DM me and I’ll share my contact info

@Joe Splitrock

Thanks. The disposition of the business and/or the property is something I hadn't thought about. That makes a lot of sense.