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    Aubrey Morrow, CFP®

    Do You Own Investment Real Estate? Ever Consider a 1031 Tax-Deferred Exchange?
    It can be complicated – Here are 10 strategies for a complete and successful exchange.

    Debt Approach: As you know, you need to replace the same amount or more debt in a 1031 transaction to eliminate taxes due (boot). Many investors run into a road block when trying to get financing on the replacement / upleg property. Imagine, you have, an apartment building worth $5 million with a $2.5 million in debt or 50% loan to value. If you cannot get approved for a $2.5M loan then most likely you will not sell. This is where we can help. Our securities sponsors typically take one loan on a Delaware Statutory Trust (DST) property vs. qualifying each individual investor due to the time and costs associated to approve up to 500 investors for a DST. A credit check is not required for each investor. We can now help you on the replacement property transaction with providing DST with debt already placed on the transaction.

    Insurance Approach: One of the most common ways to ID replacement properties in the “3 Property Rule” which states someone can ID up to 3 properties with 45 days. We find that many realtors typically only ID one property for replacement which can be a disaster if the property falls out of escrow for various reasons including financing, inspection, etc. We can serve as a “backup” to your # 1 property ID by providing DST properties to assure the 1031 is completed.

    Property 1: Realtor choice

    Property 2: DST provided by financial planner

    Property 3: DST provided by financial planner

    Partials / Leftovers Approach: It’s typical that a realtor runs into a situation where the exact amount is not identified in a 1031 transaction. For example, you may run into an exchange situation where the relinquished property sold for $2M and the property identified was valued at $1.8M. This will result in a taxable boot event of $200k to the not-so-happy seller. Keep in mind that the minimum for DST is only $100,000. Results are a 100% 1031 with no tax boot paid.

    Property 1: $1.8M (Realtor deal)

    Property 2: $100k DST

    Property 3: $100k DST

    Passive Management Approach: When a DST exchange is elected, the Sponsor becomes the “Trustee” and property manager and the investor becomes a passive income owner without the Terrible T’s associated with property management: Tenants, Toilets, Trash, Termites, Teenagers, Telephone calls, and Taxes. A DST will allow you to have more Terrific T’s, more freedom of Time and Travel with the kids or grandkids. We can set up monthly direct deposits, handle all property management and provide a 1099 at the end of each year. Currently, based on the equity from the exchange, the net “take-home” income is in the 5% range and more good news is a great deal on the income is not currently taxable due to the mortgage interest deduction and property depreciation.

    Diversification Approach: Investing in a DST can provide wide diversification by owning interest in multiple properties in multiple states in a professionally managed portfolio. Diversification also helps provide safety. It is likely difficult to ID 3 properties in 3 states within 45 days. The best way for diversification is with a DST.

    Sidelines Approach: Many investors will not sell until they have found the right replacement property which is extremely difficult for the realtor. Situations occur where the seller turns down everything presented for various reasons. When the seller is shown high quality, institutional properties in DST’s, many times it gets the seller off the sidelines – property is sold and exchange completed.

    Swap to You Drop Approach: A DST is set up with to be exchanged over and over again with a step-up in the tax basis upon death and no taxes to heirs.

    Estate Planning Approach: Imagine an investor who owns an apartment property has 2 children. When the investor dies, the children are faced with decisions on the apartment property they wish to keep. The children may have different financial situations and income needs and what to do with the property can lead to disagreements. With an exchange into a DST, their net income and tax benefits better and upon the eventual sale of the DST, each will be in a position to reinvest in a new DST or cash out.

    Access to Quality Approach: Many investment properties are run down or low quality investments. Investing in a DST, you will get access to higher quality, institutional grade, long-term leases and high occupancy rates. This creates safety and higher income than you can get from a typical property – especially in Southern California.

    Low Minimum Approach: Where else can you find an exchange replacement property for a low as $100,000?

    Financial Designs, Ltd. has been involved in over 400 1031 security transactions since 2004. We have supported many investors in providing replacement 1031 properties as a backup to help in the listing and closing of 1031 transactions. Most of our Delaware Statutory Trust (DST) properties have minimums of only $100,000 and pay investors annually in the 5% range – paid monthly. For more information visit