Replacement Property Interests, or RPI is the term Realized uses to describe equity ownership in large properties by multiple 1031 exchange investors through Delaware Statutory Trusts (DST) and Tenant-In-Common (TIC) co-ownership structures.
Replacement Property Interests allow a 1031 investor to co-invest with other in a property, rather than owning 100% (i.e. sole ownership). By their pooling capital, it enables investors to own an individual portion of one or more larger, high-quality properties that would otherwise be out of reach, given the amount of their 1031 exchange proceeds.
Each RPI offering is put together by a “sponsor” — a real estate company with experience owning and operating properties comparable to those they offer through our marketplace. Investing in 1031 Replacement Property Interests relieves investors of any landlord obligations. The sponsor is responsible for all operations of the property (management, leasing, upkeep, taxes, insurance, investor reporting, etc.) from the time it is purchased through a sale. Also, the sponsor secures the mortgage, which relieves investors of the headache of obtaining financing.
Replacement Property Interests offered through the Realized marketplace are typically structured as a Delaware Statutory Trust (DST). The DST owns the property (or properties), and each investor owns an interest of the DST. The size of each investor's ownership interest in the DST is proportionate to the amount they invest, relative to all other investors. For example, if the total equity offering is $5 million, an investment of $250,000 represents 2.5% of the DST.
Yes, they are one and the same. A direct investment is a property on the Realized marketplace that a single investor (or entity) can purchase from the current owner. Direct investments are acquired through a traditional real estate transaction. The investor/purchaser is responsible for negotiating the purchase price and contract with the seller, requisite due diligence, lining up mortgage financing, closing, and all on-going landlord responsibilities. Direct investments on the Realized marketplace consist of single-tenant properties under long-term triple net (“NNN”) leases, whereby the tenant is usually responsible for paying property taxes, insurance, and maintenance.
A Delaware Statutory Trust is a separate legal entity created as a trust under the laws of the state of Delaware. When used for a 1031 exchange, the DST owns the property (or properties), and each investor holds “beneficial interests” in the DST. For tax purposes, the IRS recognized each investor's ownership in the DST as an undivided interest in the property belonging to the DST. The size of each investor's ownership interest in the DST is proportionate to the amount they invest, relative to all other investors. For example, if the total equity offering is $5 million, an investment of $250,000 represents 2.5% of the DST.
For tax purposes, each owner of a DST receives depreciation expense deductions in proportion to the beneficial interest they own in the DST.
The purchase of Replacement Property interests in a DST are much simpler and quicker than sole ownership and require much less paperwork and time.
With a typical minimum investment of $100,000 for 1031 investors and $25,000 for non-1031 investors, Replacement Property Interest offer many advantages over purchasing a property directly, these include:
Deferring Capital Gains and Depreciation Recapture Taxes
Wealth Building Tool Through Subsequent Exchanges
Relief From Landlord Obligations
Typically, each DST investor receives their proportionate share of:
Periodic Cash Flow Distributions;
Annual Depreciation/Tax Deductions;
Paydown of the mortgage balance, and;
Appreciation when the property is sold
The owners of the DST may complete a 1031 exchange upon the sale of the property, even if was purchased without 1031 exchange proceeds. This is not the case for real estate co-ownership through LLCs, partnerships, corporations or most other entities.
The DST is a pass-through tax entity, and similar to an LLC or partnership; it is not subject to federal income tax, nor the Delaware franchise or income tax.
Because the DST is the mortgage borrower, the lender does not require individual guarantees from investors in the DST, nor does the lender require them to submit personal financial information to qualify for the mortgage loan.
Similar to an LLC, corporation, or limited partnership, the owners of the DST are personally shielded from any liabilities of the property held by the DST. As a result, an investor’s maximum pre-tax loss is equal to the amount they have invested in the DST.
The IRS has determined that for a Delaware Statutory Trust (DST) to qualify as replacement property in a 1031 exchange, each investor must be absolutely passive in the on-going operations of the property and any investment decisions.
Owning a beneficial interest in a DST means you do not have ANY operational control over the property, nor ANY control over the sale of the DST property.
There is no secondary market for DST beneficial interests, and substantial restrictions may apply to the transfer of DST beneficial interests.
This is a general explanation, and by no means a comprehensive list of all the disadvantages and risks of investing in a DST. Carefully review the offering materials of the investment you are considering, and seek the advice of financial advisors and legal counsel familiar with your individual situation to determine if an investment is right for you.
Replacement Property Interests (RPI) gained wide-scale popularity in the early 2000’s after the IRS approved Delaware Statutory Trust (DST) and Tenant-In-Common (TIC) co-ownership for 1031 exchanges. Since then, investors have channeled more than $15 billion in equity and completed an estimated 50,000 exchanges using Replacement Property Interests.
Investing in properties through RPI give investors the option to complete individual 1031 exchanges in the future. This is not the case when investors co-invest in real estate through a Partnership or Limited Liability Company (LLC).
Yes; investment minimums vary for each offering, but typically are $100,000 for 1031 investors and $25,000 for non-1031 investors. Minimum investment amounts are clearly disclosed on our Marketplace and the respective Offering Materials. Investment minimums are set by the offering ponsor. Please contact Realized if you have specific questions on minimum investment amounts.
Maximum investments vary depending on the size of the investment and are the discretion of the offering sponsor.
For investors with more than $1 million to invest, Realized offers customized 1031 options. Please contact David Wieland at (877) 797-1031 to discuss your needs.
NO, There is no secondary or public market for investor to resell DST beneficial interests purchased through the Realized Marketplace, Most offerings include substantial resale restrictions. Investors should NOT expect to be able to resell any investment in a secondary transaction.
However, many offerings permit the transfer of Replacement Property Interest for estate planning purposes. If you have questions concerning restrictions on the resale of these securities, please refer to the offering materials of the investment you are considering, and seek the advice of financial advisors and legal counsel familiar with your individual financial situation.