6A — September 17 - October 21, 2021 — Financial Digest — M id A tlantic Real Estate Journal
1031 E xchange
By Alex Madden, Kay Properties & Investments, LLC How real estate investors can use DST properties to replace debt in a 1031 Exchange
avvy real estate inves- tors understand the pri- mary reason for selling
1031 exchange can greatly help solve the debt replacement equation, imagine an investor exchanging a piece of real estate with a net value (sale price mi- nus closing costs) of $2 million. The investor has a mortgage on the property of $750,000. That $750,000 will be paid off at closing and must be replaced as part of the acquisition. In order to complete the exchange, the acquired property must be worth $2 million or more. The investor has several op- tions and may replace that $750,000 mortgage debt or be hit with capital gains taxes: • Take out another mortgage of $750,000 (or more if the new property costs more than the net sales price.) • Combine a smaller mort - gage of, say, $500,000 plus add- ing additional cash of at least $250,000 (to equal the original debt figure.) • Inject $750,000 which in cash which would basically re- place the original debt with cash. • Invest in a Delaware Statu - tory Trust 1031 exchange that already has built-in debt. How to Replace Debt using Delaware Statutory Trust 1031 Exchanges DST 1031 exchanges already have debt prepackaged into the investment, so they make the debt replacement component of a 1031 exchange relatively sim- ple to accomplish. In addition,
investors also have greater flexibility because they can put their investment dollars into multiple DSTs with a variety of debt and equity combinations which helps investors achieve their required debt replace- ment targets. Compare this scenario to an investor who conducts a 1031 exchange with a single property, like an apartment building. Not only would they have to find a replacement investment property within the desired price range, they most likely would also have to bring in their own money to the deal while working against the mandated 180-day time- frame allowed to complete the exchange. Delaware Statutory Trust 1031 exchanges allow investors a much greater choice of replacement property options with much less effort. One of the things many in- vestors like about Kay Proper- ties & Investments is the firm’s ability to provide investors seeking debt replacement a myriad of choices. Because of the firm’s ability to work with so many different sponsor companies, it provides clients the ability to participate in custom, exclusively available, off-market DST properties as well as those properties that are available to the wider marketplace. 8% Preferred Return* Debt- Free continued on page 10A
and buying rea l es tat e via 1031 ex- change is to defer capital gains tax that would other- wise be due on the sale. By “exchang -
3-month free trial
ing” one or more pieces of prop - erty for one or more like-kind pieces of equal or great value helps the investor defer capital gains taxes. However, one of the critical re- quirements that must take place to make any 1031 exchange work in the eyes of the Internal Revenue Service (IRS) and the individual real estate investor is to ensure that some form of debt replacement occurs in the event the relinquished property has been leveraged. Debt replace- ment practice basically states that when an investor acquires a replacement piece of property in a 1031 exchange, they must incur a level of debt that is equal to or greater than the amount owed on the former piece of real estate at the time of sale. A Simple Example of How a Delaware Statutory Trust 1031 Exchange Can Help in Debt Replacement To illustrate the concept of how a Delaware Statutory Trust
Mid Atlantic Real Estate Journal
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