1031 Exchange into DST or TIC

[Rhonda Wilson]

Hello BP community, we have done a couple of 1031 exchanges into apartment buildings. Next year, we would like to sell one of our smaller properties (a 4-plex) and do a 1031 exchange to defer capital gains taxes. As everyone knows, it's been difficult to find good deals on multi-family these days. Also, my husband especially, would like for us to move into more "hands off" investments even if that means somewhat lower returns.

I have seen Delaware Statutory Trusts advertised as a vehicle for investing 1031 funds. Does anyone have any experience with this? What kind of returns can one expect? Does anyone have companies that do this that are good to work with and offer strong investments? If you don't care to share specifics in the open forum, you are welcome to send me a private message. 

I should say that we haven't, by any means, ruled out purchasing a replacement property on our own as we have in the past. However, I'm wanting to explore the alternatives. 

[Dave Foster]

@Rhonda Wilson, You're anticipating the classic exit strategy from a career of 1031 investing.  The goal of course is to keep those deferred tax dollars working for you through your life and then passed to your heirs tax free.  But two things always demand attention - the desire and need to move from active to passive attention, and the need to move defensively in late markets and late investing careers.

Defensive investing is a way of separating your cash from debt in a mature market to mitigate the impact of any kind of correction.  Our clients will sell and complete one last (at least that's what they say until the next deal comes along) 1031 into an all cash position in a passive asset.  Or if there is debt they will purchase one or more all cash assets and concentrate their leverage on one or more.  So some of their replacements are minimal leveraged and some are maximal leveraged.  In this way they get the benefit of the safety of cash still getting good returns and the potential bounce from strong leverage but concentrated in fewer properties so risk is less.

The other issue is the desire to wind it down.  Again, the ability to move using the 1031 into passive 1031 compliant properties is a huge potential benefit to you. Very few people want to land lord all their life.  Even fewer want to work for years deferring tax only to pay it at the end.  

Up until 2002 options for the above two scenarios were pretty much limited to NNN properties and actively managed small group properties held as tenants in common. Two significant revenue procedures created a structure that allowed groups of investors to go into a property specifically structured by a sponsor as totally passive tenants in common ownership. The other structure that came long in 2004 in response to wall street wanting a product to access 1031 money was blessed as the Delaware Statutory trust.

These three - the NNN properties, Land leases, the TIC and the DST are the four options used by the great majority of our clients who are reluctant to give up those hard earned tax dollars at the end like you expressed.

They're all 1031 compliant so tax deferral works the same.  The difference in structure creates a  different set of issues and opportunities for each of the three.  

But bless you faithful 1031 investor.  There is a way out for you without giving in to Uncle Sam!