All Forum Posts by: Jon Taylor

This is a question for your accountant primarily. But, @Dave Foster probably has a good read on your situation and will likely weigh in. 

A few thoughts:

Generally, we like to see tax returns for two years that show rental income coming from the property in order to qualify as an investment property.

To clarify your question, the 1031 exchange only applies to real property held for investment. The 2-out-of-five-year rule applies to individuals who are looking to defer that capital gain on a *primary* residence. 

@Drew T. - 

To answer your questions in order:

"Can I still do a 1031 exchange?" - Yes, as long as you haven't taken possession of the proceeds. You need to establish a relationship with a Qualified Intermediary ASAP who will act as custodian and accommodator, holding the proceeds on your behalf. 

"or reverse exchange?" - Yes. Probably doesn't make sense though.

"does the Cash-out refi my costs basis?" - No. Debt is not a part of your Cost Basis calculation.

In order to successfully defer your complete tax liability, you'll need to 1) set up a QI; 2) Purchase a property worth at least $165k (or your net sales price); and 3) Invest all of your $38k. You may choose to replace your debt with new debt or new cash. 

Hope this helps some!

oh boy… let the sales people come out of the woodwork on this one!

Listen specifically to investors who have done what you are attempting to do. There are plenty of them here.

Good luck!

@Maresa Decena -

There are a few pieces to this question: 

1) If the SFH in NC (property A) was an investment property, then you can use the 1031 to defer capital gains and depreciation-related taxes. You'll need to purchase property B (or your share of property B) at the same or greater net value as property A, using all of your proceeds. It does not matter that the property is in California. If you purchase multiple properties or a share of one property, the sum of all transaction values are taken into consideration.

2) Regarding, "My understanding is that w a 1031 Exchange, the new property must hold tile in the same way as the old property. In this case, that would have to be under my LLC?" The tax-paying *entity* that sells property A must purchase property B. If your LLC is a disregarded entity for tax purposes, then you personally are actually the tax-paying entity performing the transaction - choosing to wrap it in a disregarded entity is optional at this point.

3) In order to purchase or dispose of 1031 property fractionally, the umbrella entity must be a vehicle that permits this. The most common fractional ownership 1031 structures today are the Delaware Statutory Trust, or the joint Tenants in Common. *(The DST is not relevant to your situation). If you work with a real estate attorney to set up a TIC on property B, you'll unlock the ability to purchase (under yourself personally, or the LLC) a fractional percentage of that property with your 1031 funds. The TIC also allows partners to 1031 separately upon disposition.

@Dave Foster is an excellent resource and a recommendation for your Qualified Intermediary. I'd highly recommend you connect with him personally. 

@Will F. -

Great questions! I didn't buy a NNN investment property personally last year, but I work with an acquisition team that purchases $100M/mo of this asset class specifically for retail and institutional buyers.

Goals (reasons for purchasing NNN): Typically, the buyer is looking for income, not growth. The data through the last 20 years of bull and bear markets show amazing consistency of income over the hold period. Most investors are looking for "mailbox money," however, it's not 100% automatic.

Exit strategy: My buyers were looking to hold in perpetuity. The retail buyers expected a step-up in basis event (death) at some point within the next 20 years, and they expected this asset to enter their estate. Again, they were looking for stable income as a % of their total net worth in investment real estate (something like 20-50% depending on age and exposure). The exit entirely depends on your ability to work with the tenant on lease options and extensions (which depends entirely on the quality of YOUR asset within THEIR national portfolio.)

Difficult to sell: Not today! Demand is crazy high for this asset class across all investor classes. NNN assets trade on the lease and the demographics of the location. Valuation is entirely different than residential investment RE. Factors include: length of the lease, quality of the tenant, traffic, population count, crime stats, retail sales ratios etc...

Management considerations: The three most imporant events in a NNN lease that are absolutely critical are 1) The acquisition, 2) The lease negotiations; and 3) The exit. A comprehinsive understand of the way that each tenant trades is critically important. There are brokers who focus on each tenant, I'd makes sure you are dealing with an expert in Walgreens, Dollar General, CVS, Kroger, etc...   

Risks: Tenant quality and location are major risks. For instance, 10 years ago you could have chosen to buy a Walgreens or a RiteAid. Your investment outcomes would have been very different had you chosen one over the other - and that's in a VERY similar asset class! The value of the property (hypothetically) is depreciating over the lease term (as the length of the lease expires). You trade upside for income stability, and your ability to preserve equity entirely depends on the acquisition techincals and the performance of the specific location and the national tenant over time. 

2021 saw record high demand in that asset class, and we're seeing continued focus on that asset class into 2022. 

Happy to talk more specifics if you focus on a tenant, and I'm sure others will have plenty of input.

- Jon

Good luck @Nick C.! I've worked with CS in the past. Nice people. 

@Todd - 

I think the heart of your strategy question is based a slight misunderstanding of the 1031 rules.

You must replace the total value of what you sell with the net proceeds from the sale.

You can replace debt with debt, or equity.

You are taxed on your capital gain in addition to depreciation recapture with no regards to your loan to value at the point of sale.

@Kevin Hubbard - 
Dave Foster did a nice job of outlining the mechanics of transactions. The hard part of investing is sifting through everything on the list and picking the best opportunity. The nice thing about DSTs, much like a publically traded equity, there is so much information that has to be filed for each offering that if you have the time and expertise, you can really understand the good deals from the bad. You wouldn't buy any "house" just because a "house" is for sale. You shouldn't by a "DST" or a "stock" just because it's for sale. It's just doing your own research that has made you a good investor in the past.

The nice thing about DSTs, is there are entire research companies dedicated to 3rd party analysis on every individual DST offering. I'd start there. 

1031 in general is a powerful tool for all RE investors to absolutely take advantage of. There are loads of CPA's on this forum who would advise. If you need a recommendation (I am NOT a CPA) DM me and I'll pass a long. 

This is an interesting opportunity to exchange the value of your property for REIT shares. I'm curious, do they care how leveraged you are? My company does financial analysis and research on REITs. I'm not familiar with Flock. I'll check it out. Thanks for sharing!

@Ian K. - We also have research on every publically available DST. There are some really good programs, but some landmines out there as well. I like the idea of investing into a program that preserves 1031 options on the back-end. Once you 721, that's the last tax-deferred transaction that you'll do. It's generally a useful tool for an investor who is estate planning and has a step-up in basis event on the horizon and can liquidate out of the REIT easier than out of the traditionally held property.