Josh talks alternative investments during our second firm podcast with the Aspen team.
Leveraging 1031 Exchanges and DSTs With Brandon Bruckman
Great conversation with the Aspen Team.
https://aspenfunds.us/podcast/leveraging-1031-exchanges-and-dsts-with-brandon-bruckman/
Here is the summary:
One of the primary tools the ultra-wealthy use to defer taxes and maximize their investments in real estate is 1031 exchanges. This tax-advantaged strategy is unique to real estate, and today’s guest will be sharing how all real estate investors can leverage it. Brandon Bruckman‘s firm facilitates 1031 exchanges and DST investments for their clients. He has a diverse background in hedge funds, real estate, and consulting.
Understanding the Role of 1031 Exchange in Successful Passive Investing
IRS Section 1031 allows taxpayers to defer capital gains taxes and is mostly used by investors in real estate. Understanding the rules and having the knowledge of doing it is really important. It is highly recommended to have the best people or parties and have planned everything to avoid the common mistakes of most real estate investors. In this episode, you will learn more about 1031 Exchange as Brandon Bruckman shares his knowledge and experiences in this business. You’ll also learn its basic rules, some of the things that you should do, and things to avoid to have it done correctly for a successful passive investing.
Watch or listen to the podcast here
https://bonavestcapital.com/sa099/
Delaware Statutory Trust (DST)- An Introduction
Let's understand the basics and address common misconceptions.
What is Delaware Statutory Trust (DST)?
A Delaware Statutory Trust, or DST for short, is a trust that typically holds real estate and is offered as replacement property for a 1031 exchange transaction.
The structure allows for fractional ownership. Investors can diversify real estate holdings with multiple DSTs or one DST with multiple assets within it. Most programs have a minimum of $100,000.
The investor in a DST is a beneficial owner of the trust, not a limited partner. Each owner receives their share of cash flow, tax benefits and appreciation. Basically, the DST investor has the same benefits and risks as a large-scale investment property owner.
What Does a DST Invest in?
DSTs hold all sorts of real estate assets such as multifamily, industrial, self-storage, senior housing, office buildings, retail properties, student housing, medical office and others. These assets are typically large and of institutional quality. DSTs are professionally managed by the program sponsor or an appointed property manager.
How are DSTs Different than Investing Directly as the Property Owner?
There are two distinct differences:
Management and all decisions on the disposition of the property are the responsibility of the sponsor.
All loans are non-recourse to the investor.
DSTs are financial securities and require the presence of a financial professional such as a Registered Investment Adviser or Financial Adviser to execute the transaction.
Who are DSTs for?
Investors must be accredited to invest in a DST. An accredited investor is:
Anyone with earned income of $200,000 ($300,000 together was a spouse) in each of the prior two years and reasonably expects the same for the current year or
has a net worth over $1 million, excluding the value of the person's primary residence.
DSTs can be a good fit for investors looking to protect wealth, defer large tax bills associated with real estate, and receive a step-up in cost basis for family members once the investor has passed away.
DSTs can be defined as a passive asset. It provides mailbox money. DST is a great fit for investors that seek to prioritize lifestyle over economics.
What are the negatives about DST?
Two items are often identified as negatives with DSTs. They can be expensive and, as an investor, you have no decision making control.
Both of these concerns are valid. DST upfront cost can sometimes reach 15% and, as previously mentioned, you do lose control of the investment management and disposition decision associated with the property.
On cost, the majority of upfront expenses, about 6% typically, can be credited back to investors if they work with a Registered Investment Adviser instead of a Financial Advisor.
We can't help you on the control issue. If this is too big of an obstacle, investors should look elsewhere.
Two other negatives to consider:
DSTs lack liquidity. You are in the investment for 3-10 years depending on the business plan of the sponsor.
The inability to refinance debt used inside of the DST. This forces the sponsor to sell by the end of the financing period. The exit strategy on financed properties is critical.
What are the advantages of DST and what steps should investors take before investing?
Some of the advantages of DST are the following:
Passive Income (mailbox money)
No management of the property.
Ability to diversify your investment with multiple institutional quality assets and different geographic locations.
Ability to defer tax in a 1031 exchange.
Non-recourse debt
DST Could be a Good Option for me. What Should I do Now?
Before investing, potential DST investors should consider the following:
Assemble a team: CPA, attorney, qualified intermediary and investment adviser to assist in DST purchase and 1031 exchange transaction.
Work with your investment adviser to understand your investment requirements.
Consider more than just cash-on-cash returns. Returns are important, but so is risk. Evaluate the deal like any other real estate transaction.
Speak with DST sponsors. Ask questions about investment strategy, experience and exit plan.
Read the private placement memorandum (PPM). This is a painful activity. Your investment adviser should help you with what to focus on in each PPM.
DST, Short for Delaware Statutory Trust
In this podcast, Brandon Bruckman describes the benefits and challenges of Delaware Statutory Trusts.
Best,
Josh
The Biggest and Most Common Error in 1031 Exchange
Understanding the difference between permissible and non-permissible selling expenses is difficult. The line between the two is not well defined in law or most cases. However, the consequences certainly are. In the worst case, a failed exchange. In the less extreme, “boot” for the investor to pay tax on.
However, there are enough guidelines to avoid the grey areas of an exchange.
The following are permissible and non-permissible expenses:
Permissible
Escrow agent, settlement agent or closing attorney fees
Real estate broker's commissions
Tax advisor fees related to the disposition or acquisition
Attorney fees and costs related to the disposition or acquisition
1031 Exchange Qualified Intermediary fees
Finder fees or referral fees
Recording or filing fees
Documentary transfer taxes
Owner's title insurance premiums
Non-permissible
Financing or lender costs such as loan fees, loan points, appraisal fees, mortgage insurance premiums, lender's title insurance policy premiums, and other loan processing fees and costs
Insurance premium payments
Repairs and/or maintenance costs
Prorated Property taxes
Prorated rents
Security deposits
Payoff of credit card balances
This simple list does no justice to the potential complexities of this transaction. There is no substitute to engaging tax, legal and financial 1031 experts prior to starting your exchange. Most non-permissible items can be avoided with a properly structured deal.
Best
Josh
