By Al DiNicola, AIF®
December 15, 2022
DST 1031 Specialist
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC
December DST closing Stressful or Stress Free
When we reach the end of the year there are a multitude of events and personal tasks on our list. The list may include family events, business and holiday parties as well as all the last-minute shopping. Cash investors and especially the 1031 tax deferred exchange investor may be feeling the stress of acquiring a Delaware Statutory Trust (DST). This may be as a direct cash investment or as the replacement property for a 1031 exchange. Investors may want to tie up and close on investments prior to the end of the year. Some CPAs find it an advantage for the 1031 exchange investor to have the sale of the relinquished property fall within the same tax reporting period. Whatever the case there are many factors that can lead to a stressful end of 2022 as well as a few strategies to relieve the pressure and ring in 2023.
Identifying options
One of the strategies for relieving the stress for the 1031 investor would be to have alternative options on your replacement properties. We have written other articles on the timing for identifying replacement properties. Suffice to say if you are within your 45-day window the clock is ticking. A financial advisor who specializes in DST properties should be able to suggest several alternatives depending on your individual risk profile. DST properties include all the same commercial asset classes with a securities wrapper so to speak. Replacement options may be multifamily, student housings, senior housings, manufactured housings, industrial, self-storage, life science, hospitality, necessary retail, or medical office. At any given time, there may be a variety of options available depending on the geographic location that may be of interest to the individual investor. On your list a big suggestion would be to have a few backups as certain DST maybe fully subscribed quicker than other.
Portfolio Structure
One strategy that may work for certain investors is to approach the 1031 requirements on replacing the total price would be to look at more than one DST property. This works well if your target replacement property is more than the typical minimum required by the DST which is $100,000. If the value of your relinquished property was $1M (with or without debt being paid off) there may be advantages to acquiring two or three DST. This is one advantage of the 1031 exchange enabling an investor to acquire more than one property. We have been fortunate to work with investors who are open to reviewing a portfolio of DST that would be comprised of different asset classes (for example multifamily & self-storage) as well as different geographical locations (for example Texas & Georgia). There are also DST that are structured as a diversified portfolio. For example, there may be a necessary retail portfolio of properties that is made up of 18 locations in 9 different states.
“All Cash” Advantage vs. “In cash” Advantage
There is a difference between All Cash & In Cash. All cash investors are sitting on cash ready to invest. These investors are not utilizing a 1031 exchange and may invest in a variety of DST regardless if the DST is an all-cash DST (with no debt) or a DST that has leverage (non-recourse debt). The reference to “In Cash” means the investor is utilizing a 1031 exchange and the Qualified Intermediary (QI) has the proceeds from the sale of the relinquished property. This is one of the mandatory IRS requirements, meaning the QI has the cash, to successfully utilize a 1031 exchange.
Replacing Debt May be a Challenge
Over the past year we have written about the structures of the DST reducing the LTV on properties that carry debt. The IRS requirement to replace the debt paid off on the relinquished property may becoming a little more difficult. DST sponsors are looking to reduce risk by reducing the amount borrowed on the initial acquisition of the property that will be offered as a DST. This has been prompted by the increase in borrowing rates. For 1031 investors who paid off a highly leveraged relinquished property there are several successful strategies we have suggested. This strategy may include a highly leveraged DST with another DST that created a blend that satisfies the overall debt replacement requirements.
Qualified Intermediaries (QI) case load
We communicate with many QI throughout the country. Once December arrives many Qis know their work will pile up because of the yearend target for closings. This year-end target may be a psychological issue or real issue. QIs handle all types of 1031 exchanges including DSTs. The communication between the Financial advisors, the DST sponsor and the QI is critical for a quick successful closing. There are a number of acknowledgements that need to be in place. The Financial advisor needs to ensure that all email communications flow clearly and all documents that require signatures are processes. Many QIs and sponsors are on top of their game regarding closing. The individual investors need to respond when ask for signatures and initials on all materials. If the investor is utilizing a trust the trustees need to be standing by for all signatures that are required.
Get the funds wired and close the transaction
There are a few extra steps that may be required when it comes time for the wire to be sent. There will be a specific set of wire instruction sent from the sponsor to the QI. The QI may require additional verifications to avoid any type of potential problems. The advantage DST have over other traditional real estate is the amount of paperwork at the end appears to be less than traditional real estate. There is a caveat to the suggestion that the paperwork if less than traditional paperwork. All DST investors must receive the Private Placement Memorandum (PPM) prior to any closing on a DST.
Final Thought and a Word of Caution
Taxpayers after closing on a Relinquished (old) Property typically have 45 days to identify new property. Under normal time frame they have 180 days to complete the purchase for a successful 1031 Exchange. If you have closed on the relinquished property from Mid-October through the end of the year, the timeline to complete the exchange is shortened.
Often overlooked is Section 1031 (a)(3)(B) which shortens the exchange period. The investor must close by April 17, 2023. This potentially would be before the assumed 180-day period. The taxpayer must file a tax extension for their entire tax return to get the full 180 days period.
Keep up with other topics on https://dstnews.org/
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. 1719 NW Edgar Street, McMinnville, OR 97128 MSC-BD, LLC and NAMCOA are independently owned and are not affiliated.
Thank you.
NAMCOA® – Naples Asset Management Company®, LLC
