By Steve Haskell, Vice President, Kay Properties and Investments
There are various strategies when using DSTs (Delaware Statutory Trusts) for a tax-free, 1031 exchange. Some investments are easy and can be as a simple exchange from one property into a single DST. Other times DSTs are used to invest leftover equity from an exchange so an investor is not taxed on leftover funds, called “boot.” Investors may routinely use DSTs as a backup identified property just in case their target replacement property does not work out. In addition, on occasion, investors may utilize all of these strategies in one sophisticated effort to mitigate risk and defer as much tax as possible. This article covers one such example.
A real estate investor sold an investment property for approximately $2 Million. Roughly 25% of his property was leveraged; therefore, $1.5 Million was sitting in his qualified 1031 Exchange intermediary account. He then pursued a partial 1031 DST exchange. The real estate investor / seller wanted to purchase a property on his own, but something smaller and easier to manage than the property he recently sold. He wanted to put part of his exchange funds into a completely passive DST option that would require no management on his part. The DST part was relatively easy. However, he was having a hard time finding a replacement property to own outright, and the 45-day period for identifying a replacement property was about to end. With the help of Kay Properties and Investments, the real estate investor created a multifaceted strategy that supported him and met his goals from a variety of angles.
First, the real estate investor / exchanger used the debt built into the DST to replace his mortgage. Through the help of Kay Properties and Investments, a DST portfolio was created for the real estate investor with a loan-to-value of approximately 50% to match the exact debt required to satisfy the 1031 exchange regulation. The debt was non-recourse, meaning the investor did not need to apply or sign for the loan, nor did it show up on his personal balance sheet. This freed him up to purchase a smaller property to own outright without taking out a mortgage, which increased his probability of closing.
Next, the real estate investor / exchanger used a DST as a backup identified property in case the target property did not work out. The due diligence period on the replacement property extended past the 45-day period. If inspections exposed an issue that compromised the deal, the exchanger would be vulnerable to over hundreds of thousands of dollars in taxes. However, because the real estate investor / exchange was able to use a DST as a backup identified property, the exchangers risk of a failed exchange was significantly mitigated.
Finally, the real estate investor / exchanger was able to ensure there was no leftover equity by using the DST to invest the leftover boot. After the real estate investor / exchanger and the seller agreed on a price, he realized there was approximately $50,300 of exchange funds left over. With the assistance of Kay Properties and Investments, our real estate investor / exchanger found a DST to invest that exact amount to finish up the exchange.
When you have the knowledge and the assistance of a skilled DST 1031 specialist, you can mitigate risk and protect yourself from a possible failed exchange in a variety of ways. Through the assistance and guidance of Kay Properties and Investments, the exchanger in this case split funds into both DSTs and his own property, replaced his debt with a non-recourse loan, protected his exchange with a backup identified property, and took care of the leftover “boot.” These high-level DST skills often are not available to investors who choose to work with inexperienced financial planners with little-to-no understanding of real estate, 1031 exchange strategies, and DST investments.
Fortunately, the client in this case was working with Kay Properties and Investments. If you are interested in learning more on how to use a DST to mitigate risk and defer taxes in your 1031 exchange, contact Kay Properties and Investments by registering at www.kpi1031.com.
Kay Properties is a national Delaware Statutory Trust (DST) investment firm. The www.kpi1031.com platform provides access to the marketplace of DSTs from over 25 different sponsor companies, custom DSTs only available to Kay clients, independent advice on DST sponsor companies, full due diligence and vetting on each DST. Kay Properties team members collectively have over 115 years of real estate experience, are licensed in all 50 states, and have participated in over 15 Billion of DST 1031 investments. For a look at the types of DST properties investors are using for estate planning purposes please visit the Kay Properties marketplace at www.kpi1031.com. This material does not constitute an offer to sell nor a solicitation of an offer to buy any security.