Listen to Brian Lang’s live presentation of the material covered in podcast #193. A quick disclaimer: This was recorded during a live event and the audio quality is a little rough. The information Brian presents is a deeper dive into the 10 reasons to consider DSTs with Inland Capital along with answering some great questions from the audience. Although the audio is a little rough at times it is definitely worth a listen.
10 Reasons to Consider DSTs.
Inland Private Capital Corporation (IPC) is the industry leader in offering replacement properties, typically through a Delaware Statutory Trust (DST), for Section 1031 exchange transactions, as well as quality, multiple-owner real estate solutions. Here are 10 reasons to consider DSTs.
Avoid Financing Obstacles
In a 1031 exchange transaction, the debt placed or assumed on the replacement property must be equal to or greater than the debt relieved in the relinquished property. Property owners may run into a road block when they try to get financing on their replacement properties. For example, a property owner may wish to sell an apartment building worth $5 million with $2.5 million in debt, or 50% loan-to-value (LTV). If that property owner cannot get approved for a $2.5 million loan on their replacement property, then most likely the owner will not sell.
The majority of IPC’s programs are structured so that the replacement property is owed by a Delaware Statutory Trust, or DST. The DST is a pass-through entity that owns the real estate assets. When a replacement property is owned by a DST, the DST will be the borrower of any loan and investors in that DST will not need to be individually qualified with a lender.
DSTS Make Great Back Up Properties
A common strategy to identify replacement properties is the “3 Property Rule,” where an exchanger may identify up to three properties, without regard to their fair market value, within 45 days. Identifying only one property may be dangerous because a property can fall out of escrow for many reasons: financing, inspections, etc. To secure an opportunity to execute a successful 1031 exchange, the exchanger could identify the first property as defined by the investor/commercial real estate broker. The exchanger can then identify two additional properties owned by DSTs. It costs the exchanger no extra money to identify additional properties. Taking this precaution insures that the exchanger has adequate choices.
Property #1: Property identified by investor/broker
Property #2: Property owned by DST
Property #3: Property owned by DST
Avoid Taxable Gains on Boot
The exact dollar amount of the replacement property is a common challenge in 1031 transactions. In one example, the relinquished property sells for $2.0 million and the exchanger identifies a replacement property for $1.8 million. The difference in the price of the relinquished property and the price of the replacement property results in a taxable amount on the remaining $200,000. Under the “3 Property Rule,” DSTs provide a solution:
Sale Price of Relinquished Property: Replacement Property #1:
Replacement Property #2:
Replacement Property #3:
$1.8 million property identified by investor/broker $100,000 investment in property owned by DST $100,000 investment in property owned by DST
No Property Management Headaches
Property is professionally managed by a third party in a DST-structured 1031 exchange. Professional managers handle the Terrible T’s: Tenants, Toilets, Trash, Turmoil, Termites. The investor enjoys the Terrific T’s: Travel, Time, Tennis. IPC-sponsored DST programs offer additional benefits, including the direct deposit of distributions, if any, and reporting through Substitute 1098/1099s.
Investing in a DST can provide portfolio diversification. For instance, an investment could be made in a single DST that owns multiple properties in several states. It would be almost impossible for a broker to identify three replacement properties in three different states within the allowed 45-day timeframe. So DSTs are an optimal way to achieve diversification.
Don’t Get Sidelined
Many realtors have clients that will not sell until they find the “right” property. Having the option to invest in institutional-grade properties owned by professionally managed DSTS may get investors off the sidelines, and the realtor receives their commission.
Swap Till You Drop
A DST is different than a 721 Exchange (UPREMT) transaction where the investor’s exchange journey ends with the sale of the UPREIT. The DST structure allows the investor to continue to exchange properties over and over again until the investor’s death. Upon the death of the investor, under current tax laws, the heirs would get a “step up” in basis, thereby avoiding capital gains taxes on the original and subsequent properties.
Estate Planning Tool
Everyone wants the best possible scenario for their heirs before they pass. Investing in a DST eliminates the opportunity for heirs to argue over what to do with an investment property when the owner passes away. The heirs continue to receive distributions from the investment, if any, and upon the sale of the property owned by the DST, each of the heirs can choose what to do with their inherited portion. One heir can continue to exchange the investment, while another can sell and receive cash proceeds.
Quality Properties and Leverage Options
IPC maintains a diversified portfolio of properties across the United States, and a wide variety of property types and leverage options. This wide range of opportunities enables investors to select a high-quality, institutional-grade private placement program that best suits their needs.
Low Minimums An investor can exchange as little as $100,000 into an IPC-sponsored DST. This can include the remaining assets leftover from a property exchange.
We believe Leaders are READERS, below are a few of our favorite leadership books:
- Entreleadership – 20 years of practical business wisdom, Dave Ramsey
- The Ideal Team Player – How to recognize and cultivate three ideal traits in your team, Patrick Lencioni
- Business Boutique– A woman’s guide for making money and doing what she loves, Christy Wright
Our 3 Most Recent Episodes:
- EP #191: Dirt Rich Our guest this week is known as “The Land Geek”. Mark Poldolsky started his career as an investment banker but found himself burned out and miserable. He wanted more time and money freedom so when he heard about buying and selling raw, undeveloped land, he had to learn more.
- EP #190: Get More Seller Leads Esteban Andrade, the founder of Hesel™ Media, knows the power of investing in yourself and your business. He is an engineer by profession and has extensive knowledge of product development and project management after spending years leading teams of designers, product engineers, and brand experts.
- EP #189: Capture. Categorize. Create. Douglas J. Beck is a life coach, an entrepreneur, and a business growth strategist. He always felt the traditional career path wasn’t right for him, so he made the bold decision to give up his 9-to-5 for the freedom of entrepreneurship. Though challenging, Douglas has learned a great deal on his journey, and became passionate about helping other people succeed through what he learned.
Written & Produced by Andrew Foresman
Hosted by Kyle Malnati
Content written by, Brian Lang with Inland Capital Corporation
Calibrate Real Estate
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