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1031 Tax Deferred Exchange & Delaware Statutory Trust

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A 1031 exchange lets you defer gain on the sale of real estate. However, many variables are involved that can go wrong and leave you without a property to close into. Then, you’ll have taxable gain. Today, Clint Coons of Anderson Business Advisors talks to Scott Hendrix, wealth manager at Upstream Investment Partners. Scott shares the perfect backup solution to save 1031 exchanges.

Highlights/Topics:

  • Fastest growing area of Scott’s business: Real estate investors who want to sell property that’s gone up in value above what they originally purchased it at
  • Delaware Statutory Trust (DST): Legitimate replacement property recognized by the IRS, but relatively unknown option for real estate investors doing a 1031 exchange
  • Tax Cuts and Jobs Act (TCJA): Rules out all appreciated assets, except real estate, as eligible transfer under Section 1031
  • 1031s don’t work without a qualified intermediary (QI) that holds and sends funds for specific time periods
  • Similarities and differences between DST and Real Estate Investment Trust (REIT):
    • Both are passive real estate ownership
    • REITs are not eligible as replacement properties
    • REITs are not legally structured as actual property under management
    • DST owns the real estate that qualifies as legitimate reinvestment of tax-deferred gains under 1031 exchange; REIT may or may not own it, so it doesn’t qualify
  • Find and Identify DSTs: Work with advisors/brokers to look at available open trusts, find trusts that meet your needs and goals, and use them as a backup:
    • Investors have only 45 days from closing date on property being relinquished to identify where they intend to reinvest their proceeds
    • If intended deal doesn’t work after 45 days, IRS makes you liable for capital gains tax and depreciation recapture tax (if applicable)
  • DSTs offer classes of real estate assets to give investors an opportunity to passively own a class of real estate without any expertise, but interest in additional diversification
  • Return Rate: 90% of net operating cash flow comes back to investor on a monthly basis at an annual rate; rates vary depending on prevailing conditions
  • 1031s can be repeated; sponsor provides notification about selling property and can tax defer it again under Section 1031 or take their gains and incur tax liability
  • Sponsors usually liquidate their entire portfolio at one time; but they could choose to sell only a portion, depending on current condition of real estate market
  • Biggest Risk with DST: Once you’re an investor in a piece of property, you can’t get out of it until a buyer comes along – could take years
  • Three reasons real estate investors use DST as a backup plan:
    • Can be named backup property during 45-day identification period
    • Taxable boot (a.k.a. leftover cash)
    • Still want to own real estate, but don’t want to do the work; done being a landlord and dealing with tenants, plumbers, contractors, and building inspectors

Resources

Upstream Investment Partners

Scott Hendrix on Twitter

Scott Hendrix’s Phone Number: 512-861-0523

Scott Hendrix’s Email 

Opportunity Zones FAQ

Opportunity Zone Heat Map

1031 Exchange

Delaware Statutory Trust (DST)

Real Estate Investment Trust (REIT)

Opportunity Zones Resources

Tax Cuts and Jobs Act (TCJA)

Clint Coons’ Webinar on Qualified Opportunity Zones

Clint Coons

Anderson Advisors

Tax and Asset Protection Event

Anderson Advisors on YouTube

Anderson Advisors’ Blog

Full Episode Transcript

Clint: Welcome, everyone. It’s Clint here at Anderson Business Advisors and this is another Anderson Podcast. Today, I have Scott Hendrix, wealth manager with the credit investment fiduciary, Upstream Investment Partners. Scott is an individual who I met when I was in Austin, Texas not too long ago, teaching on asset protection topics. He came up to me and he brought up this concept about how to save 1031 exchanges. I assume that listeners, so that you all know what a 1031 exchange that allows you to forgain on the sale of real estate. In fact, you may have caught my webinar on the qualified opportunity zones that I recently did where we talked about another potential to forgain from the sale of real estate.

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