All Forum Posts by: Joshua Wright

How is the fund structured? Is it a TIC?

I second that. Yes, happens all the time :)

I’m not a tax expert, but if they can get out of the property with zero tax...by all means do it. If they can’t, then I’d definitely consider a 1031 exchange to other investment property. If they don’t want to manage property, then they might look into some kind of managed property or check out a DST (depending on qualification). Good problems to have :)

Agree. Need to talk to a qualified intermediary.

@Victoria C. I checked with my QI and was told that they could definitely do a 1031 exchange on the portion that is investment property. She also said that they wouldn't owe tax on the sale of the "personal residence" portion of the property as long as the gain on that piece wasn't over $250k for Individual / $500k for Joint.  

Your friends will be able to take the proceeds from the sale that is attributable to their "personal residence" and buy whatever they want. The bigger issue is what they do with the proceeds from the "investment" portion of the property. If they don't want to exchange into more investment property right away, they'll end having to pay taxes.

But there are options they can explore. DSTs are just one of the options. It stands for Delaware Statutory Trust and is a trust / pass through entity in which a sponsor (think big real estate investment corporation) buys institutional property (apartments, self storage, commercial, medical office, etc) and then sells interest in the Trust/Property to investors. DSTs are 1031 eligible and can work great for people looking to avoid tax on their sale and just want hands off real estate plus the income. 

However, pros and cons... In your friends' case, that might be liquidity. DSTs are not liquid like any other real estate. So if you're friend put the proceeds there, for the most part they can't get their money back out until the sponsor sells the investment property at some point down the road (time frames vary by DST, but for sake of this feed..lets say 7-8 years on average). Your friends would really need to think about their time frame and wants. But it can be a good solution. I can message you an article or two to check out on these if you want.

Is your friend wanting to go to another piece of real estate with the proceeds of the potential sale? Do they need the cash? Could do a 1031 exchange for the portion of the property that they didn’t live in. Avoid tax and roll those proceeds into other investment property... Could also potentially exchange to a DST if they qualify - avoid tax and get income off of passive real estate. I’d talk to a qualified intermediary about 1031 exchange options as well as their CPA about what the potential gains look like if they don’t exchange. Definitely some planning that needs done :)

Check out DSTs. If he (or you) don’t want to deal with real estate any more in his retirement, you could 1031 exchange to a DST (or portfolio of DSTs) - defer all the tax - get income from the portfolio - and still get benefits of real estate (depreciation, possibly tax advantaged cash flow). It’s an option to consider.

Full disclosure - I'm in the DST space. Pros and Cons. Do you want to be totally hands off?

DST - no voting rights, but don't have to deal with whims of other owners, non-recourse debt, substitute 1099 reporting instead of K-1, access to institutional real estate deals and management, can typically be much more diversified geographically and in property type. In a DST, you're just dealing with the sponsor.

TIC - every investor has to be approved by the lender, you have a relationship with every other investor in the deal, voting issues, K-1 reporting, have to set up an LLC (cost to setup and maintain), could do a TIC with other investors if you didn't go the syndicated route. In a TIC, you're dealing with the sponsor and all the other investors.

There's very few sponsors that do syndicated TICs anymore.  I moved away from them a long time ago.

Hi Stuart. Your parents are definitely able do a 1031 exchange, but they can’t take the proceeds to pay off a residence. That would void the 1031 and make the whole thing taxable. They could consider doing an exchange to a DST which is 1031 exchange eligible, but would provide managed real estate (completely hands off), but they still get the income off the DST along with the benefits of real estate (such as depreciation). They can also pass on DST interest to listed beneficiaries. I’m in the 1031/DST space and come across this scenario quite a bit. Question: to whom did the ownership share of the LLC that passed away go to? All current owners would have to be in agreement to execute. Also, have your parents put something in their estate plan to make sure their LLC interest passes to whomever they want it to go to? Also, you have 45 days to identify replacement property, but you have to close within 180 days total from date of sale of the old property. If you do an exchange, make sure to use a qualified intermediary (I can recommend one or two) and I’d also recommend listing more than one potential replacement property (can list up to 3 and it can be property you found as well as a DST or a combo of both). Food for thought. Happy to help.

Hi Lydia. If you need to any help late in the process naming some backup properties for the exchange, a DST could be a good solution. Reach out if that issue pops up.