PROCESS & STRATEGIES
“Most people don’t plan to fail; they fail to plan” – John L. Beckley
The process required for a successful exchange starts with the planning.
The more time put into the planning of an exchange prior to the disposition of your current investment property, the more successful and rewarding your exchange will be.
We will sit and get to know you and your needs and wants. Unpack your long-term investment criteria and how we can best use this tax benefit to add value to your current financial plan.
We will show you and discuss with you all of the options available, as well as drawing up different strategies, all for the purpose of achieving a successful 1031 Exchange transaction.
Long before your property is put on the market, you want to know what all of your exchange options are and which ones best fit your investment goals, because at the end of the day, the 1031 Exchange is one of the best opportunities we have as real estate investors to preserve and build wealth. This planning in advance will remove the stress and anxiety of the stringent identification and closing timelines, as we will be able to move confidently towards a successful exchange transaction the moment your current investment property closes
You’ve decided to sell your long-term hold and to reinvest by performing a 1031 Tax Deferred Exchange.
In a perfect world, you started planning your exchange before you even put your property on the market, giving you the opportunity to become educated on the process, but more so, to get clear on where and what you would like to place your proceeds.
We find many investors do not plan their exchange in advance, including not even deciding to exchange at all until their property is in escrow, which is troublesome when you consider that the IRS clock starts ticking the day after your escrow closes.
There are many options available, mostly able to satisfy just about any financial plan and favorable property type.
Remember the objective here is to preserve what you have and utilize it to build wealth, all the while saving thousands of dollars by deferring taxes.
This is the most common choice among investors who are simply looking to not pay taxes. You only place what there is to place in order to comply with the tax code requirement, only placing debt when it is a necessity. This would be when the original proceeds are just not enough to purchase a fee simple property, which is where a Delaware Statutory Trust possibly comes into play. Example: Proceeds are $1MM and you buy a $1MM property. When proceeds are typically less than $500K, it is very difficult, not impossible, but difficult to find decent options at that price point. See Glossary for Delaware Statutory Trust.
It is not uncommon to see investors leverage their proceeds up to 50% ($1MM proceeds purchasing $1.5MM in property). Lenders look quite favorably at 50% Loan to Value (LTV).
For those investors who want to maximize the potential of this tax benefit, we can examine taking the proceeds and leveraging to a maximum loan. As mentioned earlier, using the 30% down strategy, you could take your $1MM proceeds and leverage that into as much as $3MM in property purchases. This strategy also allows for favorable diversity, as this could also afford the ability to buy multiple properties; three (3) $1MM properties, for example.
Single/Multi-Tenant, Fee Simple Properties
While typically completed with single tenant properties, there are cases of multi-tenant, NNN or Absolute Net Lease structured assets. These property types are typically of a retail nature, i.e. drug stores, discount stores, banks, fast food drive-thrus, restaurants, outpatient medical, daycare, auto parts and others. There are decent industrial options at higher price points.
Monetized Installment Sale (M453) Transactions
Monetized Installment Sales (M453 Transactions) also known as “collateralized installment sales” or “C453 transactions” are based on Section 453 of the IRS Code. This planning approach uses a third-party dealer in capital assets to defer sale proceeds (and the tax on those proceeds) for lengthy periods of time. Because it does no good to defer taxes if you do not have access to the funds, this strategy includes a monetizing loan to provide liquidity during the installment period.
Delaware Statutory Trust (DST)
A Delaware Statutory Trust (DST) is a legally recognized trust that is set up for the purpose of business, but not necessarily in Delaware. DST Investments are offered as replacement property for accredited investors seeking to defer their capital gains taxes through the use of a 1031 tax deferred exchange and as straight cash investments for those wishing to diversify their real estate holdings. The DST property ownership structure allows the smaller investor to own a fractional interest in large, institutional quality and professionally managed commercial property along with other investors, not as limited partners, but as individual owners within a Trust. Each owner receives their percentage share of the cash flow income, tax benefits, and appreciation, if any, of the entire property. DSTs provide the investor the potential for annual appreciation and depreciation (tax shelter), and most have minimum investments as low as $100,000, allowing some investors the benefit of diversification into several properties. The DST ownership option essentially offers the same benefits and risks that an investor would receive as a single large-scale investment property owner, but without the management responsibility. Each DST property asset is managed by professional investment real estate asset managers and property managers.
*These are among the most popular options used. There are a number of others. Consult your wealth manager, financial planner & CPA.