All Forum Posts by: Jon Taylor

@Craig Orput

Dave's right, the TIC structure is the way to hold fractional ownership in a real estate venture with the ability to go your separate ways upon the exit of the project.

@Ed Moran

There is a grey area regarding the deferred sales trust and the IRS. Recently, the California FTB Notice 2019-05 has officially put taxpayers and Qualified Intermediaries on notice of its position that the “fallback,” “1031 rescue,” “Deferred Sales Trusts,” “Monetized Installment Sales,” and other quasi 1031 / 453 conversions are invalid.

Ultimately, many real estate investors want to get out of actively managed rentals and into securities, but the 1031 exchange is the only widely accepted way to defer the capital gains incurred through real estate holdings.

If you are talking about a Deleware Statutory Trust, that is a completely different conversation. If that's what you meant by DST, we can continue to have that conversation.

@John Alosio

• Reliquished Property Current debt: $135k / 2 = $67.5k
• Relinquished Property Sale price $250k / 2 = $125k
• Relinquished Investment Property Equity = $57.5k
• Estimated Closing Costs ($7500)

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• Replacement Property Cost: $375k
  

Let's estimate $7k for closing costs (probably high), you'll have approximately $50k of cash in the QI when you sell and pay off your mortgage. 

You'll need to invest all of that equity into $50k into your replacement investment property while acquiring at least $125k worth of property ($375k is significantly over the minimum requirement). 

You'll either have to come out of pocket or acquire financing to cover the balance between the $50k of equity coming from your current rental and the $375k price. You won't have to add any cash to the deal if you can acquire $325k of financing (approx).

If your closing cost estimate was off, it would impacts the equity number slightly, but wouldn't change the strategy or cause much of a difference in your decision-making criteria.

@John Alosio 

You're on the right track.

You've done a good job of separating the primary residence from the investment property in your mind. A few additional things to consider. Let's continue to keep them separate for the purposes of this scenario.

• You sold an investment property for a gain of $50k. That is an important number for tax purposes, but you need additional numbers to understand the 1031 exchange implications. In order to satisfy the 1031 exchange, you need to replace the equity and the total value of the sale of your investment property less any transaction-related expenses. 
• So, your gain is only relevant as you weight the cost of cashing out. But it is not factored into the reinvestment rules for the exchange. In other words, your equity and your debt need to be reinvested into the quadplex. 
• If you want to provide those numbers, we can continue to model the scenario. 

Make sense?

@William Schlicher -

If your primary motivation to sell is "the constantly anti-landlord policies in Alameda county and fear of getting stuck with tenants who do not pay and who we cannot evict", then local properties won't mitigate that fear. Condos often come with an HOA on top of the property tax as a fixed expense that you'd have to carry in the event of a non-paying, difficult to evict tenant.

You could invest in turnkey rentals in another market, but the 1031 exchange timing is difficult to align with those companies. They often state that they are not 1031 friendly.

You could move into passive-income DSTs if you are an accredited investor, but it's difficult to find anything that expects to cash flow over 6%, and the risk of a passive investment needs to be weighed against the equity appreciation upside potential and current cash flow.

I would do a couple of things: 

1. Prioritize the following goals in order (defer your tax liability, preserve current equity, preserve current income, equity appreciation, income growth). 
2. Do the calculation to understand your current CAP rate. (Annual NOI divided by current total value - net, not gross)
3. Do the calculation to understand your cash on cash return.
4. Do your due diligence research in the professionally managed market outside of CA and see what opportunity comps exist. 

The most important thing to understand about DSTs is that you will need to partner with a firm to do due diligence at the property level. Think about a DST as the "container" that is used to fund property acquisition, property management fees over the hold period, any reserves estimated for the assets under the hold period, and syndication fees. Some DSTs contain many (I've seen up to 20 separate properties) properties in a single Trust.

Due diligence should include, ground-up property information (current occupancy rate, current rent, etc...), geographic considerations (population in the 3 and 5 mile, population growth, rent, occupancy, and cap rate comps, crime statistics, traffic count), sponsor/general partner track record and expertise, asset class considerations (it is possible to invest in an asset class with a small amount of equity that you may have no experience in), master lease, exit strategy (you do not get to control the exit, the general sponsor will trigger the exit based on their goals and objectives).

The other thing to consider is that sponsors will sell equity on a first come first serve basis. The best DST programs only stay open for a few weeks in today's market, making ID'ing them difficult.

DSTs could also be a great option to "clear out your Qualified Intermediary account" to satisfy the debt and equity replacement requirements of the exchange, as you can fund the portfolio with an exact (to the penny) amount of equity. 

There are also DSTs that have a heavy debt component, making it possible to balance an exchange if you have a high LTV.

The DSTs vehicle is a wonderful tool, but it should be viewed as such. It's a tool for a specific purpose and should be implemented as a part of a full wealth management plan, led by a team who deeply understands real estate in a variety of capacities outside of just being a DST wholesaler.