Benefits Of 1031 DST And TIC 1031 Property Investments

Benefits Of 1031 DST And TIC 1031 Property Investments
Posted by on Sep 14, 2016

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Real estate investors contemplating a 1031 exchange must make many decisions. Perhaps the most important, but often ignored, is the replacement property they need to purchase in order to defer their capital gains taxes. Investors have just 45 days from the date they sell their property to find, evaluate and notify the IRS of the potential replacement properties. This is a daunting challenge for even the most experienced investors, particularly in markets where a 1031 investor has competition from other buyers.

Purchasing replacement properties through Delaware Statutory Trust (DST) and Tenants-in-Common (TIC) investments is a popular option for many 1031 investors. Replacement Property Interests (RPI)™ is the term Realized uses to describe equity ownership in large properties by multiple 1031 exchange investors through DSTs and TIC co-ownership structures. These “fractional” or “co-investment” properties allow multiple 1031 investors to purchase equity ownership interests in large, high-quality properties that would otherwise be out of reach. For example, Replacement Property Interests™ can allow an investor with $100,0000 in exchange funds to make a 1031-qualified investment in a professionally managed $50 million apartment property.

Additional benefits of Replacement Property Interests™ include:

  • 1031 Eligible
  • Timing
  • Pre-Packaged
  • Institutional-Grade Assets
  • Flexibility
  • Diversification

1031 Eligible

In order to qualify for a 1031 exchange, an investor must have direct ownership in a property, as defined by the IRS. Unfortunately, the tax benefits of an exchange do not apply if the individual taxpayer reinvests in property through a partnership, corporation or LLC. Although Replacement Property Interests™ are typically deemed securities under federal securities laws, they are treated as direct ownership of real estate under Section 1031 of the IRS tax code.

Timing

The biggest concern for many 1031 investors is meeting the IRS-imposed timeframes. As previously noted, an investor must find a suitable replacement property within 45 days of selling their relinquished property. Furthermore, the investor must complete the acquisition within the 180-day closing period. If either of these timeframes are missed for any reason, the exchange will very likely be disqualifying and the investor will have to pay taxes.

Replacement Property Interests™ are a “Pre-Packaged” investment, which means the property has already been acquired thereby reducing the risk of missing 1031 timeframes.

Pre-Packaged

In addition to already owning the asset, the Sponsor has conducted due diligence on the property, secured the mortgage and has the property management team in-place. The benefits for the 1031 investors of Pre-Packaged properties include:

Expedited evaluation. All of the property inspections, environmental reports, rent rolls, financial statements, etc. have been procured and made available to potential investors.

Mortgage financing is in place. Investors assume a proportionate share of the debt on the property when they purchase interests in a DST. The loan is typically non-recourse”, meaning the loan limits the lender’s remedies to the property itself and an investor’s assets outside the property are protected.

No landlord duties. Professional property and asset management are provided by the Sponsor or a third-party management company.

Institutional-Grade Assets

By exchanging into a Replacement Property Interest™ and pooling equity with other co-owners, the investor is able to own a portion of one or more institutional-grade properties, which are significantly larger than the investor can purchase on their own.

Flexibility

Investors may purchase a Replacement Property Interest™ in the exact amount (subject to the minimum investment amounts set by the Sponsor) necessary to satisfy their exchange requirements.

Diversification

One of the most compelling attributes of Replacement Property Interests™ is the ability to diversify into multiple DST or TIC investments. Since there is no limit on the number of Replacement Property Interests™, investors can exchange into several properties, allowing for diversification in property types and locations. For example, Replacement Property Interests™ can allow an investor to make a 1031-qualified investment in a professionally managed $50 million apartment property, a $100 million portfolio of Walgreeens stores, and a $50 million downtown office building.

For many 1031 exchange investors, Replacement Property Interests™ can be an appealing alternative to acquiring a property on their own. It offers a combination of investment efficiency, quality properties, and flexible options, makes meeting IRS-imposed timeframes simpler and alleviates on-going landlord duties.

To explore a variety of current DST offerings visit the Realized Marketplace.

To learn more, download our Investor's Guidebook to Fractional 1031 Replacement Properties.

 


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