6A — September 11 - 24, 2020 — Financial Digest — 1031 Exchange — M id A tlantic Real Estate Journal
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1031 E xchange
ne of the most attrac- tive real estate tax benefits available in Kay Properties Before you do a 1031 Exchange, consider these four alternative investment options O company that offers the DST to investors. Bottom line: You have confidential Private Place - ment Memorandum (the “Memorandum”). Please read potential exposure to a black swan event like COVID-19 if the tenant turns out to be
the U.S. is the like-kind ex- change, which is governed by Section 1031 of the Internal Revenue Code. About one- third of all commercial and multifamily property sales in the U.S. involve a like- kind exchange, according to Bisnow. A like-kind exchange al- lows an investor to defer capital gains, depreciation recapture and other taxes at the time an investment prop- erty is sold if the net equity from the sale is reinvested into a property of the same or greater value. But “property” does not mean the proceeds have to be reinvested directly into another property that you purchase outright. There are multiple ways the gain can be reinvested to qualify for preferential tax treat- ment. Here’s a look at four alternative 1031 exchange investment options. #1: Qualified Opportunity Zone Funds Qual i f ied Opportunity Zone Funds, allowed under the Tax Cuts and Jobs Act of 2017, are an alternative to 1031 exchange investing that offers similar benefits, including tax deferral and elimination. A fund of this type can invest in real prop- erty or operating businesses within a designated Op- portunity Zone, typically a geographic area in this U.S. that has been so designated because it may be under- served or blighted. As such, there may be a higher level of investment risk. Also, the time horizon of the fund may be as long as 10 years, which means tying up your capital for that length of time. If you seriously consider this investment option, be aware that these funds may have been set up to invest in only one property or busi- ness, in which case there is no diversification. But the re - verse may also be true. With a fund of this type, there can be potential cash flow and positive economic and social impacts on a community. This fund option also works
One of the most attractive real estate tax benefits available in the U.S. is the like-kind exchange, which is governed by Section 1031 of the Internal Revenue Code.
if you are selling other ap- preciated assets like stocks or businesses. #2: Tenants-in-Common Cash Out In addition to using a 1031 exchange to defer taxes, some investors also want to improve liquidity so they can take advantage of other buying opportunities in the future. With a Tenants-in- Common (TIC) investment, you own a fractional interest in a commercial, multifam- ily, self-storage or other type of investment property. The TIC cash-out is a specific strategy where the invest- ment property is purchased using zero leverage so it is debt-free, with no mortgage, going in. Then, after a year or two, the property can be re- financed at 40%-60% loan to value, effectively providing investors with a large por- tion of their initial principal back tax-free in the form of a cash-out refinance. Under this scenario, the remaining equity in the investment stays in the TIC, providing potential distributions to investors while they get to enjoy liquidity with a large portion of their funds. #3: Direct Purchase of Triple-Net (NNN) Properties With a triple-net leased property, the tenant is re- sponsible for the majority, if not all, of the maintenance, taxes and insurance expens- es related to the real estate. Investors utilizing a 1031 exchange often directly pur- chase NNN properties, which typically are retail, medical or industrial facilities occu- pied by a single tenant. On the surface, these invest- ments may seem passive, but there are three distinct downsides, including con- centration risk (if an inves- tor places a large portion of their net worth into a single property with one tenant);
hard hit (examples: Star- bucks asking for major rent relief, 24 Hour Fitness filing Chapter 11 and Souplanta- tion declaring bankruptcy); andmanagement risk. I have owned dozens of triple-net properties over my career and in order to effective- ly manage them I’ve had to employ a team of asset managers, accountants, at- torneys and administrative staff — the investments are anything but passive. #4: Delaware Statutory Trusts In contrast to the example above where you buy the whole property yourself, Delaware Statutory Trusts (DSTs) are a form of co- ownership that allows diver- sification and true passive investing. Most types of real estate can be owned in a DST, including retail, industrial and multifamily properties. A DST can own a single prop- erty or multiple properties. In a 1031 exchange scenario, you can invest proceeds from the prior property sale into one or more DSTs to achieve diversification. DSTs often hold institu- tional-quality properties. (An example would be a 300-unit multifamily build- ing in a secondary market such as Charleston, Raleigh or Savannah.) A DST may hold one or more properties occupied by single tenants operating under long-term net leases, such as a FedEx distribution center, Amazon distribution center, a Wal- greens Pharmacy or a Fre- senius dialysis center. DSTs can be one of the easiest 1031 replacement property options to access because the real estate already has been acquired by the DST sponsor
many options to consider before entering into a 1031 exchange. Regardless of the approach you choose, the net effect of 1031 exchange investing is generally the same: The initial invested capital and the gain can continue to grow, potentially, without immediate tax con- sequences. Then, if and when the new investment is sold down the road without the equity reinvested in another exchange property, the prior gain would be recognized. There are some finer points, and investors should consult their tax or legal advisers prior to selling or exchang- ing a property. Everyone’s tax situation is different, as is their time horizon, diver- sification strategy, risk tol - erance and interest in being a passive versus an active investor. About Kay Properties and www.kpi1031.com Kay Properties is a na- tional Delaware Statutory Trust (DST) investment firm. The www.kpi1031.com plat- form provides access to the marketplace 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 DSTs) and a DST secondary mar- ket. Kay Properties team members collectively have over 115 years of real estate experience, are licensed in all 50 states, and have par- ticipated in over 15 Billion of DST 1031 investments. This material does not constitute an offer to sell nor a solicitation of an offer to buy any security. Such of- fers can be made only by the
the entireMemorandumpay- ing special attention to the risk section prior investing. IRC Section 1031, IRC Sec- tion 1033 and IRC Section 721 are complex tax codes therefore you should consult your tax or legal professional for details regarding your situation. There are mate- rial risks associated with investing in real estate se- curities including illiquidity, vacancies, general market conditions and competition, lack of operating history, interest rate risks, general risks of owning/operating commercial and multifamily properties, financing risks, potential adverse tax conse- quences, general economic risks, development risks and long hold periods. There is a risk of loss of the entire in- vestment principal. Past per- formance is not a guarantee of future results. Potential cash flow, potential returns and potential appreciation are not guaranteed. Nothing contained on this website constitutes tax, legal, insurance or investment ad- vice, nor does it constitute a solicitation or an offer to buy or sell any security or other financial instrument. If you are not the intended recipi- ent of this message, any use, dissemination, distribution or copying of this communica- tion is strictly prohibited. If you have received this com- munication in error, please immediately notify the send- er and permanently delete all copies that you may have. Securities offered through Growth Capital Services, member FINRA, SIPC, Office of Supervisory Jurisdiction located at 582 Market Street, Suite 300, San Francisco, CA 94104. MAREJ
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