Possible Failed 1031 & Alternative? Deferred Sales Trusts?

Question

I'm in the middle of a 1031 exchange with three multi-family properties identified and at the end of my 45 day window. I originally had two student housing projects in escrow and on day 43 of 45, the lenders backed out and I had to scramble to find new properties in less than 48 hours. I completely understand why they did, with universities closing and students vacating

With the volatility of the markets right now, I'm more than a bit reluctant to pull the trigger on any of the multi-family projects that I selected, knowing that I will be walking face first into issues with vacancies, moratoriums on evictions and ensuing legal issues not to mention the possibility that the lender could decide not to fund at the very last minute.

I've been investigating possible alternatives to a 1031 exchange (outside of paying capital gains) and the only real alternatives I'm seeing are the Deferred Sales Trusts and 453 Installment Sale options. With the Deferred Sales Trusts, I see that there are built in fees (~1.5%) that are there to pay legal in the event of an audit, which begs the question...if they are legit, then why would the possibility of an IRS audit be built into this transaction?

Any other options out there I'm not seeing?

Alex Olson · Answer

@Matthew Orton You need to speak to a real 1031 expert that has done many different types of exchanges. You can find either a CPA or a tax attorney that is an expert in real estate. Call around until you find one who is a true expert and has done many transactions a year. Every CPA and re attorney may claim they are an expert. But, use only ones that have been recommended to you.

Dave Foster · Answer

@Matthew Orton, You're on top of it analysis wise.  Wish I had a magic bullet for you.  But there is on fourth and long play left here - a possible extension of your 45 days due to the national emergency.  Tax return filings just got extended.  Dates of other filings could be as well.  The problem is no one knows for sure.  And if they do extend filings they usually do say saying something like "any tax filing due between x and x dates may now extend their filing until x date.  So what makes it doubly iffy for you is how far will they reach back?  Will it be far enough to affect your 45 day deadline.

Hang on and keep looking.  It might happen.  I also agree with @Michael Plaks.  Fear and motivation are on both sides of the negotiating table.

Mark H. Porter · Answer

My apologies, I didn’t fully explain.  There are QI’s on here who can answer this more fully but I think you’re stuck with one of your three choices.  Also, I am about put 36 units on the market and fold them into a Delaware statutory trust as I’m ready to retire.

Edward Fernandez · Answer

@Matthew Orton

A Delaware Statutory Trust would help as well.

At lease you can ID them and then have time to do your Due Diligence.

But if there is equity available you are almost guaranteed to close.

I hope this helps!!!!

Brett P Swarts · Answer

Matthew, Good questions! Thanks for asking and bringing here on Bigger Pockets. I'm a CRE Broker like you and CRE investor so I understand how stressful 1031 exchanges can be. I'm also confident the Deferred Sales Trust may be the perfect solution you are looking for...if you are looking to be out of debt, want liquidity, and the option to purchase CRE at any time all tax-deferred with a new deprecation schedule. Starting a Marcus & Millichap in 2006 and seeing friends and family lose some or all of their wealth during the 2008 financial crash changed everything for me. Don't get me wrong, I still love 1031 if you can find a value add fair priced deal; while not being forced to purchase equal or greater value in 180 days and take on equal or greater debt in today's market; then, by all means, buy it! However, I think now is the time to be out of debt and think CRE values are likely to drop and there will be deals to be had...if you can wait. The deferred sales trust empowers you with this option.  To answer your question on the legality of the deferred sales trust: The Deferred Sales Trust has been vetted and lauded by various law firms, accounting firms and financial professionals throughout the United States over 24+ years. These include an array of major national firms with prominent state and federal tax practices. Collectively, The DST Attorneys have had closed thousands of transactions with zero cases rescinded by the IRS. There is also a PLR which was successful in forma and substance. The foundation of the structure is IRC Section 453 in the tax code which has been in place for over 90 years.

It has been reviewed by IRS (12 of the DST clients have had random audits not triggered by the DST and they were reviewed by the IRS and closed out as no change audits). The IRS has conducted two Formal Audits of the Structure and Law Firm with no particular case in 2008 & 2019 and these were also “no change audits”

It has been reviewed by FINRA and multiple National Tax Law Firms

The Deferred Sales Trust attorneys offer Audit Defense for each Deferred Sales Trust for the life of the trust.  Over 150 Financial Advising Firms with 1000+ Financial Advisors offer deferred sales trust. It has also never been on an IRS watch list nor has any pending litigation as of right now.

All of that said, you do want to make sure whatever tax deferral strategy you choose has been audited, has a PLR, and the attorneys stand behind their work (audit defense built into the strategy in case you get audited.

More than all of that you want to make sure you ask these questions and have them put in writing:

1) Are there pending legal cases with you, any of your clients or the structure with U.S. Government or State Authorities? If so, what is the current status of such cases?

2) How many current IRS audits or court cases are pending with your structure?

3) How might the outcome of #1 and #2 affect a client's tax liability?

4) How many of your personal clients' cases for your structure have had an IRS audit?

5) Did you defend your client(s)? What was the outcome of these audits? Who paid for the legal costs?

6) Will the legal team indemnify your case? Will the legal team put this in writing and send you the cases?

7) Is there a lifetime audit defense built into the deal? If so, who pays?

In short, if you use a medical analogy: You want a brain surgeon who has never lost a patient and nor have any patients have been sent to jail.

We just help a new client save his 1031 exchange on Friday. His story is below:

Saving a failed 1031 exchange used to be complicated. Not anymore.

Meet Dave. #BabyBoomer.

☝️

Long Term CRE Owner and Developer. Closed 100's of transactions and numerous 1031 exchanges. 💪

Sold his 128 unit apartment complex in Georgia and funds were sitting at the 1031 exchange qualified intermediary.

🤝 Problem? YES. He has $1.1M in Capital Gains Tax he owes if he doesn't complete his 1031 exchange ☹️ + #Covid19 has turned the marketplace upside down and the prices of real estate are too expensive still. 🤢

He doesn't want or need to take on Millions in Debt via a 1031 exchange strict requirement of equal or greater value for the replacement property.

🤨 Solution? Yes the Deferred Sales Trust! Dave takes action!

🧐 He meets with Capital Gains Tax Solutions team (my team) and has his CPA review and give him the approval of the Deferred Sales Trust.

He then USES THE DEFERRED SALES TRUST TO SAVE HIS 1031 EXCHANGE WHICH DEFERS $1.1M IN TAX AND DOES NOT HAVE TO GO INTO MILLIONS IN DEBT!" 😎

Hear from Dave during a live broadcast of Capital Gains Tax Solutions Podcast as he shares his deferred sales trust story of selling his120+ unit #multifamily complex and then using the deferred sales trust to save his 1031 exchange. ✊

GET YOUR FREE GUIDE AND STRATEGIC CONSULTATION CALL: Click this link now to Watch the Full Video>>> bit.ly/HelpSaveFailed1031

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Thomas Rutkowski · Answer

@Matthew Orton

When you create a deferred sales trust, you create an annuity. You sell to the trust and the trust sells to your end buyer. Any money that comes out of the trust to you is taxable. Monthly interest payments, for example.

When you couple a monetization loan to a qualified intermediary installment sale transaction, you have loan proceeds that you can invest anywhere you want. The advantage over a 1031 exchange is that you can take your time to find your next deal, invest outside of real estate, and, when you find your next property, you'll start over with a fresh depreciation schedule.

In regards to your legal concerns, I look at it this way: the law tells us what we can't do. Anything not specifically mentioned is usually analyzed by the IRS to see if current statutes/rules apply (step transactions, pledge rule, economic substance, etc.). This is the realm of tax attorneys. Most of my clients who have done these transactions have paid for a legal opinion to support the transaction. I think its money well spent.

Matthew Orton · Answer

Thank you for all of the great info! Although I’ve always shied away from REITs, I’m also considering this as a possibility. With the latest stock market plunge, I would guess that there are at least a few COVID-19 resistant REITs trading at bargain prices although it’s difficult to determine whether we’ve actually seen the bottom yet.

Can a REIT be coupled with a specific type of insurance to guard against catastrophic loss?

Can they be traded Into different REITs once purchased through a 1031 via a Delaware Statutory Trust or are you stuck with the REITs you’ve chosen?

Any suggestions for specific REITs and advisors to get through this process?

https://www.fool.com/millionac...

Mark H. Porter · Answer

By any chance do you mean Delaware Statutory Trust?

Michael Plaks · Answer

@Matthew Orton

I agree with your risk assessment, however every risk means an opportunity. The MF prices should be negotiable under the current situation.

As to your tax question, you other alternative is Qualified Opportunity Zones funds - look into them.

Deferred sales trusts have always been and continue to be controversial. Search this forum, and you will see many threads debating their benefits and risks.

Possible Failed 1031 & Alternative? Deferred Sales Trusts?

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