4A — October 22 - November 18, 2021 — M id A tlantic Real Estate Journal


M id A tlantic R eal E state J ournal

By Chay Lapin, Kay Properties & Investments Why the Delaware Statutory Trust Specialist Can be a Real Estate Broker’s Best Friend


or secure a $100,000 mort- gage. Effectively, investors are working in a much nar- rower box with fewer alterna- tives – all while the clock is winding down on the 180-day timeframe allowed to complete an exchange. Including a DST 1031 property option creates a reliable backup plan for inves- tors like Alison T. in case her original property exchange falls through. That’s why DST specialists are a great resource for real estate brokers because they can help ensure the client has a reliable backup plan ready to go. Smart brokers who rep- resent investment property owners should always have a relationship with a DST 1031 specialist advisory firm like Kay Properties and Invest- ments. They can present the DST 1031 strategy to their clients as an added benefit that they bring to the table, while also providing an expert resource for creating a back-up 1031 identification tool and creating a safe tactic to avoid a mortgage “boot”. (*Every investor’s tax situ- ation is different, and this ar- ticle is not tax or legal advice. Investors should inquire with their CPA/Accountant to ver- ify their 1031 requirements) “When brokers are getting close to listing a property, it is important that they contact Kay Properties in an ample amount of time before their client’s deadline. This will give them enough time to under- stand the risk and business plan of each offering. We are always available for confer- ence calls and or in-person meetings with your clients,” said Dwight Kay, founder and CEO of Kay Properties & Investments. 1https://www.cbre.us/research-and-reports/2021- US-Real-Estate-Market-Outlook-Multifamily Chay Lapin is president of Kay Properties & Invest- ments. MAREJ About Kay Properties and www.kpi1031.com Kay Properties is a nation- al Delaware Statutory Trust (DST) investment firm. The www.kpi1031.com platform provides access to the mar- ketplace of DSTs from over 25 different sponsor companies, custom DSTs only available to Kay clients, independent advice on DST sponsor companies, full due diligence and vetting on each DST (typically 20-40 continued on page 18A

ey Takeaways : ● Why should real estate brokers pres-

An Example of How a DST 1031 Exchange Can Replace Both Equity and Debt

ent a DST 1031 Expert to their cli- ents? ● Why i s a DST 1031 perfect for a multifamily investor who is ready to sell their asset?

1031 Debt & Equity Replacement Amounts Need to Replace $100,000 in Debt & Need to Replace $200,000 in Equity

Option One

Option Two

Option Three

Invest $100,000 into one all cash DST

Invest $50,000 into an all-cash DST

$67,000 with a 60% LTV

Invest $100,000 into a DST with a loan at 50% Offering Loan to Value

Invest $75,000 into two DSTs that have a 40% LTV each.

$133,000 All- Cash/Debt-Free DST Investment

Chay Lapin

● What is “mortgage boot” and why should it be avoided? ●What do DST 1031 experts bring to the table for both the seller and real estate broker? Today’s multifamily market is bustling with activity as the number of owners and inves- tors from Maine to California are executing thousands of sell/buy transactions every single day. According to a recent multifamily market report 1 by CBRE Real Estate Group, this deal velocity can be attributed in part to favor- able economic conditions and reduced negative impacts from COVID-19. So far in 2021, the multifamily market saw $148 billion in transactional activity, a 33 percent total increase over the previous year. Owners of appreciated rental properties may have equity potentially “locked up” in their investment real estate. Selling in this bustling market can potentially unlock this trapped equity. Find- ing replacement properties to 1031 exchange into that provide passive income and potential for diversification is a challenge many sellers face. Delaware Statutory Trust may be a potential solution to this challenge. That’s why more and more brokers are turn- ing to DST specialists to help advise their clients on how to avoid being hit with a large capital gains tax following the sale of their multifamily investment property. In a nutshell, DST 1031 exchanges allow multifamily sellers to defer the income from the sale of their property by in- vesting in a co-ownership real estate portfolio as outlined in the Internal Revenue Service Revenue Ruling 2004-86. The DST 1031 structure allows a trust to be set up that consists of multiple investors who share passive ownership of a designated building or entire portfolio of investment prop- erties. This strategy allows

key deals and that have a lot of moving parts. In addition, very few brokers can find ap - propriate property options for their investors that fit for a cli - ent with very specific require - ments for debt replacement parameters. Enter the Delaware Statutory Trust Specialist This is where a Delaware Statutory Trust specialty firm can be of real value to a real es- tate broker who is represent- ing a multifamily investor who just sold a property. One of the potential advantages of a DST is that it provides beneficial interest in a property that has non-recourse debt that is already “pre-packaged” for a 1031 exchange. Effectively, what that means is that it is relatively simple for the real estate investor to make the 1031 exchange math work – almost down to the penny. Investors also have greater flexibility in putting their in - vestment dollars into multiple DSTs in a variety of real estate combinations and still achieve their desired equity and debt targets. A hypothetical investor named Alison T. needs to re - place $200,000 in equity and $100,000 in debt. Now she could put $100,000 into one DST with no debt (an all-cash debt free DST) and the re - maining $100,000 into a DST that has a loan on the property at 50% Offering Loan to Value (LTV). Another option would be to put $50,000 into a DST with no debt and $75,000 each into two additional DSTs that both have 40% LTV. In comparison, an investor conducting an exchange with a single property, such as a rental home, would have to find a property they want to buy at the desired $300,000 price. They would then have to bring their own money to the table for an all-cash purchase

investors to create customized and diversified portfolios, alle - viate the daily landlord duties, reduce the financial burden by spreading costs across mul- tiple investors, provide inves- tors the potential for monthly income potential, and offers significant tax advantages. DST properties are typically institutional-grade real estate assets like net lease buildings, self-storage facilities, logistics and transportation centers, and multi-family apartments, offering investors the opportu- nity to own assets that would normally be financially out of reach for them. Brokers Need a Delaware Statutory Trust 1031 Specialist to Help Them Advise Their Clients 1031 exchanges are often the “preferred solution” for investors who have sold their investment property. Because no matter who the investor is or what type of investment asset that has been sold, they will always face the same chal- lenge at the end of sale of an appreciated property: a big tax bill. This tax event is called “capital gains” and is calcu- lated by taking the difference between a property’s cost basis and the sale price, typically at a rate of somewhere between 15 percent and 28 percent for federal capital gains taxes. Add to that depreciation re- capture rate of 25 percent, state capital gains tax, and medicare surcharge and the tax consequences could be devastating. In fact, many in- vestment property owners de- cide not to sell because of the significant tax implications. A DST 1031 Over a Straight 1031 Exchange? At this point, the real estate broker will most likely recom- mend the seller enter a “1031 exchange”. This strategy is named after section 1031 of the Internal Revenue Code

and allows a property owner to defer capital gains taxes on a profitable sale by reinvesting the proceeds into another prop- erty of “like kind,” and there is no limit to how many times it can be done. In theory, there could be a successive series of exchanges that defer capital gains taxes indefinitely, which allows an investor’s income to potentially grow tax-free over a long period of time. However, the rules of a 1031 exchange can be complicated and incredibly difficult (and potentially expensive) to ac- complish without the advice of a true 1031 expert. Generally speaking, all 1031 exchanges follow these parameters: ● The replacement property must be “of the same nature or character” (i.e. “held for investment purposes”) as the relinquished one. ● The new property must be “identified” within 45 days of the close of the sale, and the purchase transaction must be completed within 180 days of the sale. ● The amount of money in - vested into the new property must be the same as the sale proceeds from the old prop- erty. If there is a difference, it is known as “boot,” and it becomes taxable. ● Exchangers must hold title to replacement property in the same way as the relinquished property. ● Any errors in the transac - tion or violations of the rules can cause the transaction to become a failed exchange (meaning any applicable taxes will be due). Many brokers confess that identifying a replacement property and then successfully completing the exchange is exceedingly difficult to accom - plish in the required timeline. TSometimes brokers can only present their clients with properties that are not turn-

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