I received a call from a current client who I will refer to as “Tom” at 4 pm on Good Friday afternoon while I was driving up to spend time skiing with friends at Lake Tahoe the following day. Tom indicated that he had just lost an opportunity to acquire a replacement property for a pending 1031 Exchange and that his 45thday was the very next day.He further shared that he was facing a large tax liability if he could not immediately identify a suitable property and asked for my assistance. Fortunately, we had discussed DST investment options several weeks earlier. While Tom was aware of DST benefits and tradeoffs, he had decided to move forward to acquire a single replacement property. At the time we first talked, he was so certain that could close on the property that he did not see a need to identify any back-up options.
After conferencing in our office personnel on the phone call, we were able to match up several DST options that fit Tom’s objectives and sent him offering materials which he was able to review beginning that evening. He made a final selection on Saturday and we assisted him in completing his identification paperwork in time to meet his 45-day deadline thereby saving him a six-figure tax bill.
Unfortunately, we receive many calls from investors who, like Tom, were unable to obtain a preferred replacement property and then find themselves in a panic to find an alternative investment property before they run out of time.
Here are the main reasons we encourage all 1031 Exchange clients to list at least one DST property as a back-up option:
- 100% Certainty to Close: Because DSTs are pre-packaged, “ready-to-invest” properties, with no loan qualifying required, there is minimal risk that a selected DST will not be available to complete the Exchange. Unlike traditional real estate, investors are not competing with other investors to obtain the investment and are not subject to financing contingencies.
- Well Documented Due Diligence: Since DSTs are securities, the available documentation and disclosures are sufficiently comprehensive that most investors evaluate and select investments without investing the added time to visit the property. While investors always do have the option to visit properties (and many sponsors reimburse travel costs if an investment is concluded), DST due diligence materials provide added information and data that can spare investors the need to conduct a site visit.
- Little Downside: There are generally no costs associated with reserving a DST 1031 property. If an investor chooses to not move forward, there will be no fees owed to FGG or other intermediaries involved in the transaction.
- Maximize Tax Deferral: In many 1031 Exchanges, exchange proceeds do not exactly match selected replacement properties and there may be excess gains that cannot be deferred resulting in “boot” or added taxes. Since DSTs are available in a wide range of loan-to-values with minimum investments to $25K, they can be mixed and matched with traditional real estate investments to soak up boot and minimize taxes.
Even if you are certain that your preferred replacement options will close, it may make sense to add a suitable DST back-up option to your list of identified properties in order to reduce potential anxiety and a tax bill.
BIO : Paul Getty
Paul Getty is a licensed real estate broker in the state of California and Texas and has been directly involved in commercial transactions totaling over $2 billion on assets throughout the United States. His experience spans all major asset classes including retail, office, multifamily, and student and senior housing.Paul Getty’s transaction experience includes buy and sell side representation, sourcing and structuring of debt and equity, work-outs, and asset and property management. He has worked closely with nationally prominent real estate brokerage and investment organizations including Marcus Millichap, CB Richard Ellis, JP Morgan, and Morgan Stanley among others on the firm’s numerous transactions.Paul Getty also maintains a broad network of active buyers and sellers of commercial real estate including lenders, institutions, family office managers, and high net worth individuals.
Prior to founding First Guardian Group/FGG1031,Paul Getty was a founder and CEO of Venture Navigation, a boutique investment banking firm specializing in structuring equity investments made by institutions and high net worth individuals. He possesses over 25 years of comprehensive worldwide business management experience in environments ranging from early phase start-ups to multi-billion dollar corporations. His track record includes participation in IPOs and successful M&A activity that has resulted in investor returns of over $700M.
Paul Getty holds an MBA in Finance from the University of Michigan, graduating with honors, and a Bachelor’s Degree in Chemistry from Wayne State University. He is a member of Institute of Real Estate Management (IREM), a Certified Property Manager Candidate (CPM), and a member of the US Green Building Council.Paul Getty holds Series 22, 62, and 63 securities licenses and is a registered representative with LightPath Capital Inc, member FINRA /SIPC .
Paul Getty is a noted speaker, author, and actively lectures on investments and sales and management related topics. He is author of The 12 Magic Slides ,Regulation A+: How the JOBS Act Creates Opportunities for Entrepreneurs and Investors , and Tax Deferral Strategies Utilizing the Delaware Statutory Trust (DST), available on Amazon and other retail outlets.
Disclaimer
This material is not intended as tax or legal advice so please do speak with your attorney and CPA prior to considering an investment. This material contains information that has been obtained from sources believed to be reliable. However, FGG1031, First Guardian Group, LightPath Capital, Inc., and their representatives do not guarantee the accuracy and validity of the information herein. Investors should perform their own investigations before considering any investment. There are material risks associated with investing in real estate, Delaware Statutory Trust (DST) and 1031 Exchange properties. These include, but are not limited to, tenant vacancies, declining market values, potential loss of entire investment principal.
Past performance is not a guarantee of future results: potential cash flow, potential returns, and potential appreciation are not guaranteed in any way and adverse tax consequences can take effect. The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities. All financed real estate investments have a potential for foreclosure. Delaware Statutory Trust (DST) investments are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments. Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions. Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits.
IRC Section 1031, IRC Section 1033, and IRC Section 721 are complex tax codes; therefore, you should consult your tax and legal professional for details regarding your situation. Securities offered through registered representatives of LightPath Capital, Inc. Member FINRA / SIPC. FGG1031, First Guardian Group, and LightPath Capital, Inc. are separate entities.
DST 1031 properties are only available to accredited investors (generally described as having a net worth of over one million dollars exclusive of primary residence) and accredited entities only (generally described as an entity owned entirely by accredited individuals and/or an entity with gross assets of greater than five million dollars). If you are unsure if you are an accredited investor and/or an accredited entity, please verify with your CPA and Attorney prior to considering an investment. You may be required to verify your status as an accredited investor. Member of LightPath Capital, Inc.