DSTs, Taxes, PPMs & Raising Capital

DSTs, Taxes, PPMs & Raising Capital

Los Angeles · Member since 2018 · 16 posts · 2 votes

Hello all, I am a general partner in apartment syndications and have a tax/legal question. Many in my investor network have indicated that they want to sell their rental properties, and move those funds into our deals.  One of the recurring objections however is taxes, my investors don't want to incur the capital gains taxes.  The deals I raise capital for have very high minimums to do a full 1031, far above what the average investor in my network has.  

I spoke with my securities attorney, and he mentioned its possible to set up a DST which my investors could roll their 1031 money into for our deals. They would sign my PPM, and the DST would sign the PPM for the deal itself. So my question is mainly centered around taxes, does this sound like a feasible option to avoid the taxes?

How can this be done?  Any of you out there who are GPs bringing in capital, how do you all tackle this?

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
7y

LOL . @Michael Plaks, shame on me for taking time for dinner :) . @Bruno Araujo the answer to part of your question is yes, investors can 1031 exchange from investment real estate into a Delaware Statutory Trust modeled after Rev proc 2004-86. Other than a tenant in common interest in the actual property, a DST structure is the only one that will accommodate 1031 money and maintain the tax deferral when working with syndications.

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  • Investor · brentwood, CA · Member since 2016 · 1k+ posts · 730 votes
    7y

    There are a number of organizations that run DST structured investments. Fees are typically very high because DSTs are relatively complex vehicles perhaps not that well suited for the uninitiated.

    They are a neat idea in principle, but they are very real issues underneath when you go to put things into practice.

  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    7y

    @Bruno Araujo

    Tax angle. Your investors can certainly sell their rental properties and do a 1031 Exchange into shares of a DST. They have to engage a 1031 intermediary before they sell, watch the timing and other rules. I'm surprised @Dave Foster is not on this thread yet - he is our resident 1031 expert, as well as @Bill Exeter.

    Tax angle part B. Not sure what your investors mean by not wanting capital gain taxes. Are they talking about CG on the properties they own already and will be selling in order to invest with you? Then it's addressed with a 1031 exchange. If they do not want capital gain taxes on your investments - then it's not going to work with a 1031, because they won't be able to 1031 their interests in a partnership, which is what most syndications are. And capital gain taxes are the lowest taxes one can achieve, other than $0 taxes if investing thru self-directed retirement accounts.

    Legal angle. I second @Christopher Smith: if your attorney is planning to set up a DST himself, he better know what he is doing. I'm not an attorney, but I have heard that this is a very complex task, with lots of pitfalls.

    Economic angle. Compare the cost of setting it up and maintaining (1031 + DST), including tax compliance cost, against savings on capital gain taxes. Sometimes paying the tax is a better route.

    An alternative. If you set up syndications inside the new Opportunity Zones - you have a different tax deferral and tax reduction strategy there.

  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    7y

    LOL . @Michael Plaks, shame on me for taking time for dinner :) . @Bruno Araujo the answer to part of your question is yes, investors can 1031 exchange from investment real estate into a Delaware Statutory Trust modeled after Rev proc 2004-86. Other than a tenant in common interest in the actual property, a DST structure is the only one that will accommodate 1031 money and maintain the tax deferral when working with syndications.

    The 1031 Investor5140 Reviews
  • Rental Property Investor · Glen Rock, NJ · Member since 2015 · 3k+ posts · 2k+ votes
    7y

    @Bruno Araujo

    I was going to suggest looking into Opportunity Zones Fund investing for your investors but @Michael Plaks beat me to it. This may be a lot more economical and advantageous in a long run. Definitely compare the two strategies. And of course you'd need to find the right OZ deal for your investors!

    My best!

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