All Forum Posts by: Conner Jackson

@Pete Harper - a 721 UPREIT is essentially converting your interest in a property into operating units of a REIT. One of the easier ways to do this would be to 1031 exchange into a DST where the sponsor owns a REIT and utilizes the 721 as part of their strategy. Once you convert to operating units in the REIT you can't 1031 exchange anymore, but you may have the ability to sell your interest in small amounts to pay capital gains tax over time. Feel free to PM me if you want to discuss further!

The targeted distributions with DSTs are based on the original investment amount. But, theoretically, if you invest $100,000 in a DST with a 10% load and five years later the property sells for the same price it was purchased, you would have $90,000 left to roll into an exchange. It's important to look at the track record of the sponsor and how successful they've been in returning at least the original capital to investors at the sale. While that isn't a guarantee of future success, it gives you an idea of their experience. Some sponsors sell to REITs that may pay a premium, others may have different relationships/strategies for exits. Most DSTs have a disposition fee on the back end that they only receive after they've returned original capital, giving them an incentive to do so.

Work with a group that has experience with the sponsors and knows what potential red flags to look for in each offering so you might mitigate potential risks.

@Alberto Cioni Typically, the broker commissions within a DST investment are 4-6%, and the rest of the fees are used by the sponsor to structure the offering, marketing fees, lender fees, reserves (any remaining returned at disposition), etc. While these fees are higher than purchasing another rental property, it's a tradeoff to investing in a passive real estate investment and not having to put more money into capital calls if there were big ticket items needing repairs in a rental.

Conner Jackson

Tangible Wealth Solutions

@Matt W. Good question and we get this one a lot. There are a lot of factors and a few different ways to go about this. As you mentioned, you can go the DST route, and options may depend on the amount of debt you have on these properties. Another could be exchanging into DSTs that will convert with a 721 UPREIT, allowing you to have some liquidity in ~3 years to go into syndications. Or you can pay the taxes now and invest the remaining proceeds into syndications that potentially offer higher returns than DSTs.

I'd be happy to get you more information and look at the comparisons between the different options. I'll PM you for more details.
 

@Ran Fridman it's highly likely if you talk to a tax professional that they will advise against a cash-out refinance before you sell your property for an exchange. Unless it's done well in advance of a sale, the IRS views the refinanced loan proceeds as taxable boot since it is equity that won't be reinvested as part of the exchange. If you want to do a refi, wait until you complete your exchange and do a refinance on your replacement property. Some call it the nanosecond rule because you only have to wait a nanosecond to cash-out refi on the replacement property after closing on it. 

You will need to work with a QI for your 1031. They will receive and hold the cash proceeds from the sale and you will need to reinvest that into one or more replacement properties. Your reinvestment goal for a complete tax deferral will be your net sale price (sale price less allowable closing costs).

 Good catch! I meant it more in terms of how much cash proceeds there will be after closing, and if there is enough to invest the gain in the QOZ and place the leftover amount into notes.

I agree with Brandon's note. I'd also consider the amount of debt you have on the apartment. Depending on the LTV, it may be difficult to get into QOZs or DSTs for passive investments.

@David Meusborn I'd be happy to go over your questions. I'll PM you to discuss further.

You can cash out refinance as soon as you close on the replacement property. It's sometimes referred to as the nanosecond rule.

Dave makes a great point above. I'd crunch the numbers on using the HELOC vs your own cash and go with whatever you are most comfortable with.

@Ryan Fox The debt does not have to be a new mortgage on that property. You could replace the $75,000 of remaining debt with cash or funds from a HELOC on your primary residence. Just make sure you are purchasing a property, or multiple properties, that are equal to or greater than the net sale price of your relinquished property if you want a complete tax deferral.