Real estate investors LOVE the 1031 tax-deferred exchange.
But when you want to exchange your equity into a partnership so you can get into bigger, better deals in new markets with professional management … a 1031 comes up a little short.
A great solution? Delaware Statutory Trusts.
Even though they have been around for years, many investors don’t know about this powerful investment tool. That’s why we are talking with a syndicator who knows how to use this strategy to keep your equity compounding.
In this episode of The Real Estate Guys™ show, hear from:
- Your powerful and trustworthy host, Robert Helms
- His tool of a co-host, Russell Gray
- Delaware Statutory Trust organizer, Paul Moore
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Building on the 1031 exchange
One of the things we have to manage as real estate investors is our tax liability. We want to pay as little tax as possible, but we also want every tax advantage we can get today.
Today, we’re going to talk about a relatively unknown technique that’ll help you preserve tax and make more money.
There is a strategy behind how and when you change assets. If you sell a rental house after five years, you’re going to do something with the proceeds.
In this episode, we’re talking about a structure that doesn’t get talked about enough, because it allows people some really great benefits.
As always, we are not tax professionals. We don’t give advice … but we will share some ideas and information.
One of the great tools we have to repurpose and reposition wealth is a 1031 tax deferred exchange.
People talk about this strategy as a way for an individual investor to avoid tax … but it has been more difficult for syndicators.
How do you implement this strategy in a group investment?
Solving that problem has been really difficult … but there have been some new innovations in terms of the way people are using some of the structures available.
What is a Delaware Statutory Trust?
Paul Moore from Wellings Capital is a syndicator who specializes in some great asset classes … but he has also helped unlock the key to a new chapter of 1031 investing.
“The 1031 exchange is great. When the 2017 tax law came out, we were all concerned that maybe they were going to take it away, and they did for almost everybody except real estate investors,” Paul says.
As real estate investors, we are really fortunate that we were able to keep the 1031 exchange. It gives us great leverage and the ability to compound tax deferred.
And … you could even swap till you drop and never pay capital gains or recapture tax.
But even with all the advantages of a 1031 exchange … it’s really hard if you want to go from an active manager to a passive manager.
Paul says over the last three or four years he has had many people call him with 1031 exchange money that his funds couldn’t help.
They were frustrated and his team was too.
The last thing any investors want is to see other investors give up and pay taxes or invest in something that they might not have otherwise just to avoid taxes.
So, Paul started looking into the Delaware Statutory Trust … an ownership model in which a legal entity allows people to buy fractional interest in a property and even diversify among several DSTs.
This takes away the time pressure, the negotiation, and the management hassle of the 1031 exchange.
It also gives direct ownership … which means that the replacement property is going to flow the tax deferrals to the individual investor.
Now let’s be clear … it’s a Delaware trust … but the property doesn’t have to be in Delaware, and the person doesn’t have to be in Delaware.
The beneficiaries are actually the people who buy the fractional interest, but the professional manager who runs it takes on all the hassle.
A DST also allows the 1031 exchange investor to get a stabilized, predictable return.
Another benefit is the ability to slowly transition your portfolio over time into bigger and bigger projects under the watchful eye of professional management.
In a nutshell, the Delaware Statutory Trust allows people the same benefits of a 1031 exchange … but rather than investing in a specific property, you’re investing alongside other folks.
One big downside to the 1031 that does carry over to the DST is the debt rule.
If you’re investing $100K and you have 40% debt and 60% equity, you have to have that same percentage in the new investment.
If you don’t, you just pay tax on the part that’s out of whack. But you still have to pay some tax.
Types of properties for a DST
The return and the income model for the investor will depend on the property itself.
What are the range of types of properties that make sense for Delaware Statutory Trust operators to consider?
For a long time, the most popular properties for DSTs have been things like triple net leases … a long-term lease that delivers predictable income.
But now, DST providers have also gone into multifamily. There are self-storage DSTs. There are even mobile home park DSTs.
The important thing is to have a stable, predictable, passive income. If the property isn’t generating something that’s predictable and stable, it will throw off the DSTs.
But, that’s why investors can expect a set return.
For more on 1031 exchange and Delaware Statutory Trusts … listen in to the full episode!
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