November 2021- MONTHLY COMMENTARY: Investors Formulating Plans for 2022 Disposition

NAMCOA, LLC RIA

Secu­ri­ties offered through MSC-BD, LLC

As we have report­ed all year the increase in 1031 Tax Deferred activ­i­ty con­tin­ues through the third quar­ter as more com­mer­cial real estate agents report. In the secu­ri­tized world of real estate invest­ing, the Spon­sors and the Rep­re­sen­ta­tives of bro­ker deal­er (B/D) firms and Reg­is­tered Invest­ment Firms (RIA) have been some­times over­whelmed with requests for replace­ment prop­er­ties that can sat­is­fy the require­ments of the IRS 1031 Code.  It is always pru­dent to review the require­ments for a 1031 exchange.  Sim­ply put, there is a title require­ment, a tim­ing require­ment, and a finan­cial require­ment.

Title. The investor on title needs to have the same tax­pay­er ID on both the sold or dis­posed prop­er­ty (occa­sion­al­ly ref­er­enced as the ‘down-leg’) as well as the replace­ment prop­er­ty or prop­er­ties (ref­er­enced as the ‘up-leg’). Investors who are in part­ner­ships with oth­er investors need to seek advice on the need­ed qual­i­fi­ca­tions to bifur­cate the invest­ment per­mit­ting one investor to move into a 1031 exchange if the oth­er investors elect to seek their own exchange or sim­ply sell their inter­est in the prop­er­ty.  That would be a top­ic for anoth­er arti­cle to pro­vide past investor strate­gies.

The tim­ing require­ments are under a tremen­dous amount of pres­sure this year as the real estate mar­kets heat­ed up for three quar­ters and con­tin­ue to stay strong. Many real estate experts opine that the end of 2021 will con­tin­ue to be very active.  The biggest pres­sure point (or as one investor men­tioned to me a choak hold) is the 45-day iden­ti­fi­ca­tion peri­od. In the brick & mor­tar real estate are­na this is height­en by the influx of cash com­ing into hard asset as some investors take prof­its from the stock mar­ket. Anoth­er good top­ic since real estate invest­ment has been ref­er­enced to being ‘non cor­re­lat­ed’ to the stock mar­ket. Back to the 45-day peri­od, there is no exten­sion to the 45 days peri­od.  Investors need to pro­vide the Qual­i­fied Inter­me­di­ary (QI) their final list by the end of the 45 days.  Dur­ing the 45 days the iden­ti­fi­ca­tion peri­od the list may change as investors seek to nego­ti­ate con­tracts, prices, terms, and con­di­tions as well as line up their financ­ing if need­ed or required to pur­chase the new prop­er­ty.  The next manda­to­ry date is the clos­ing date of the replace­ment prop­er­ty (up-leg) from the deposed prop­er­ty (down-leg) which is a max­imin of 180 days.  There are no exten­sions, peri­od!  If the con­tract for the replace­ment prop­er­ty (iden­ti­fied on the 45-day list) implodes, there are no sub­sti­tutes if it is not on the list. Being able to secure a replace­ment prop­er­ty is vital for the suc­cess of the exchange.

The final aspect is finan­cial require­ment and there are three legs to that require­ment.  1. The price of the new prop­er­ty must match or exceed the prop­er­ty sold; 2. All the cash pro­ceeds from the sale (which must be held by a QI) needs to be used to avoid pay­ing any cap­i­tal gains tax­es or recap­ture depre­ci­a­tion; 3. Replace the debt that was paid off on the prop­er­ty sold.  The clos­ing agent will send your net pro­ceeds to the QI (you can­not take any pos­ses­sion of the funds or be sub­ject to all the cap­i­tal gain impli­ca­tions). Your QI will advise as to the amount of avail­able cash you have to rede­ploy (after their fees & expens­es for acqui­si­tion of the new prop­er­ty). One item which caus­es some con­fu­sion is the aspect of replac­ing the debt.  This means if you had a mort­gage or loan on the old prop­er­ty you need to replace that loan with a new loan or sell­er financ­ing on the replace­ment prop­er­ty. The oth­er alter­na­tive is to sim­ply bring more cash to the trans­ac­tion that adds up to the replace­ment val­ue of the prop­er­ty sold.

So, what is the advice for the last two months of the year?  If you have already closed on your down leg you need to secure your poten­tial replace­ment prop­er­ties and lock in. The Delaware Statu­to­ry Trust (DST) alter­na­tive may either pro­vide the total solu­tion or at least a back up for investors fac­ing the end of the year dilem­ma. There is a surge in the DST inter­est and acqui­si­tion.  DSTs pro­vide a very easy solu­tion for cer­tain investors.  The pur­chase may be scaled to sat­is­fy to the pen­ny the cash invest­ment.  In addi­tion, many DSTs by design have non-recourse loans already built in to sat­is­fy the debt replace­ment require­ments.  Skilled rep­re­sen­ta­tive can also bal­ance the over­all finan­cial needs of the investors.  Since the DST are prepack­aged clos­ing on the acqui­si­tion may hap­pen in a mat­ter of a week or less. In some sit­u­a­tion, when pru­dent, a diver­si­fied port­fo­lio of DSTs may be sug­gest­ed (for exam­ple two to three DSTs) to replace the one prop­er­ty that is being sold. Over the past year we assist­ed one investor sell­ing four prop­er­ties into a diver­si­fied port­fo­lio of 16 DSTs.  The diver­si­fi­ca­tion was both geo­graph­i­cal as well as asset class.

Already we have investors who are posi­tion­ing their real estate for sale in 2022 con­tact­ing us for strate­gies.  Plan­ning ahead on the poten­tial replace­ment prop­er­ty may also ease the ten­sions of decid­ing to list your cur­rent invest­ment. Once a real estate investor starts think­ing about list­ing their prop­er­ty that is the time to read and become famil­iar with the 1031 process as well as the poten­tial to uti­lize a DST as an alter­na­tive. The oth­er sug­ges­tion is to know and under­stand your cap­i­tal gain tax expo­sure. Your CPA or finan­cial advi­sor may be of assis­tance.  There would be tax on the cap­i­tal gains on the pro­ceeds on a fed­er­al lev­el and poten­tial­ly on a state lev­el.  Depend­ing on how long you have owned the prop­er­ty there would be a tax on the recap­ture of the depre­ci­a­tion (on the prop­er­ty not the land). We do have tools on our web­site that may pro­vide you with some insight.  Please remem­ber we are not pro­vid­ing tax advice.

DSTs are not for all investors.  The acqui­si­tion of a DST is for accred­it­ed investors only.  Con­tact your invest­ment advis­er for addi­tion­al details on how a DST may be a solu­tion to your 1031 Exchange and suit­ed for your invest­ment future. For more infor­ma­tion on how to prop­er­ly set up an IRC 1031Tax Deferred Exchange or if you are an accred­it­ed investor and would like addi­tion­al infor­ma­tion on a DST con­tact Al DiNi­co­la at 239–691-8098 or email adinicola@namcoa.com.

This is not an offer to pur­chase or solic­i­ta­tion to pur­chase any secu­ri­ty, as such be made only through an offer­ing mem­o­ran­dum or prospec­tus.  Invest­ing in secu­ri­ties, real estate or any invest­ment, whether pub­lic or pri­vate, involves risk, includ­ing but not lim­it­ed to the poten­tial of los­ing some or all of your invest­ment dol­lars when you invest in secu­ri­ties. You should review any planned finan­cial trans­ac­tions that may have tax or legal impli­ca­tions with your per­son­al tax or legal advi­sor.   NAMCOA, LLC is a Reg­is­tered Invest­ment Advi­sor, reg­u­lat­ed by SEC (Secu­ri­ties and Exchange Com­mis­sion). Our cor­po­rate office is locat­ed at 999 Van­der­bilt Beach Road, Suite 200, Naples Flori­da 34108. Secu­ri­ties Offered through MSC-BD, LLC, Mem­ber of FINRA/SIPC. 410 Peachtree Park­way Suite 4245, Cum­ming, GA 30041