Well prepared CPA assist in §1031 Emergency.

Investor (near­ly out of time) Pan­ics but CPA has the Answers. Mis­sion Pos­si­ble!

There are moments when an investor may pan­ic and turn to their CPA for answers.  We received a tele­phone call from an investor who had 6 days remain­ing (start­ing on a Wednes­day) to iden­ti­fy poten­tial replace­ment prop­er­ties in a 1031 Exchange (known as the 45-day iden­ti­fi­ca­tion peri­od).

By Al DiNi­co­la, AIF®, CEPA™
Novem­ber 24, 2023
Adinicola@namcoa.com
DST 1031 Spe­cial­ist
NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC
Secu­ri­ties offered through MSC-BD

The Qual­i­fied Inter­me­di­ary (QI) was hold­ing the pro­ceeds of a $6.2M sale.  The investor was con­vinced to sell the apart­ment com­plex (by the real estate agent) and do a 1031 exchange.  Pri­or to the clos­ing of the apart­ment prop­er­ty the investor and the real estate agent spend 70 days look­ing for replace­ment prop­er­ty to sat­is­fy the exchange. They faced a dead end and a loom­ing dead­line.

Com­pli­ca­tion: The sale of the apart­ment build­ing includ­ed replac­ing near­ly $2.7 mil­lion mort­gage as well as receiv­ing boot to pay off oth­er bills result­ing in an approx­i­mate cash posi­tion of $3.3 mil­lion. The investor also need­ed to extract some cash from the trans­ac­tion to pay oth­er debts. Any cash received would be sub­ject to cap­i­tal gains tax­es.

Mis­sion crit­i­cal ele­ment: Six (6) days to iden­ti­fy poten­tial prop­er­ties. The investor did not want to be liable for any of the replace­ment mort­gage (debt replace­ment is required by the 1031 rules).

Com­pe­tent advi­sors: The CPA was on top of all the ele­ments of the sale includ­ing the poten­tial cap­i­tal gains impli­ca­tions as well as depre­ci­a­tion recap­ture that indi­cat­ed a large tax bill.  The QI was also well informed as to the time peri­ods that need­ed to be adhered to for sub­mit­ting the replace­ment prop­er­ty list. The CPA also ver­i­fies the investor client was an accred­it­ed investor (as required).

Finan­cial Advi­sor Method­ol­o­gy: Being well pre­pared for the emer­gency calls that occur at the end of the 45-day iden­ti­fi­ca­tion peri­od pro­vides an advan­tage and oppor­tu­ni­ty to assist investors. How­ev­er, the finan­cial advi­sor was added by the well-informed CPA who pro­vid­ed all the tar­get num­bers for cash to be rein­vest­ed, boot (cash) tak­en and loans to be replaced. The finan­cial advi­sor who is well versed in 1031 alter­na­tives includ­ing Delaware Statu­to­ry Trust (DST) and Oppor­tu­ni­ty Zones may assist investors in strate­gies to defer cap­i­tal gains depend­ing on the investor suit­abil­i­ty.  Under­stand­ing the secu­ri­tized asset class­es offered as DST includ­ing the geo­graph­i­cal loca­tion through research and due dili­gence enables finan­cial advi­sors the abil­i­ty to match investor needs with asset selec­tion.

Poten­tial Solu­tions: After a few hours of con­sul­ta­tion with the var­i­ous DST spon­sors the advi­sor was able to out­line a poten­tial solu­tion. The poten­tial solu­tion was some­what com­pli­cat­ed involv­ing the 200% iden­ti­fi­ca­tion rule (1031 tax deferred exchange) and iden­ti­fy­ing 13 var­i­ous prop­er­ties. The advi­sor had pre­vi­ous­ly com­plet­ed due dili­gence on all the poten­tial assets/properties.

Investor Focus: The investor want­ed cer­tain ele­ments includ­ed:

• to own a diver­si­fied port­fo­lio of prop­er­ties
• To receive a cer­tain amount of month­ly income.
• To defer cap­i­tal gains.
• to avoid sign­ing up for any of the loans.  DST are prepack­aged with non-recourse loans and have debt assign­ments depend­ing on the amount of cash (equi­ty) invest­ed into the asset.
• To iden­ti­fy the poten­tial replace­ment prop­er­ties with­in six (6) days
• To com­ply with all the ele­ments of the IRC 1031 tax deferred exchange

The Results: After sev­er­al phone calls between the investor and the CPA a game plan was adopt­ed, and the final list turned into the QI before the dead­line.  This may be con­sid­ered a finan­cial 911 avoid­ed.

Here is a redact­ed view of the final closed replace­ment prop­er­ties.

Sum­ma­ry:  Mis­sion accom­plished by rein­vest­ing the $3.3 mil­lion in cash and replac­ing near­ly $2.7 mil­lion in debt.  Investor retained cash as boot to pay off oth­er oblig­a­tions.  Investor has a diver­si­fied port­fo­lio of assets in a vari­ety of states.  CPA was well versed in the 1031 process. The finan­cial advi­sor bal­anced the loan to val­ue of the dif­fer­ent assets to arrive at a blend­ed cal­cu­la­tion to sat­is­fy the 1031 require­ments. The DST option is not for every investor but may assist investors as a pri­ma­ry solu­tion or back up.  The non-recourse ele­ment of the DST offer­ing also pro­vides investor with the abil­i­ty to replace their debt with­out any lia­bil­i­ty for the loan. Clos­ing on all iden­ti­fied assets occurred and all IRC 1031 tax deferred exchange were sat­is­fied.

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