6A — March 13 - 26, 2020 — 1031 Exchange — Financial Digest — M id A tlantic Real Estate Journal
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Financial Digest / 1031 Exchange By The Kay Properties Team What is a DST 1031?
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get these calls. Someone else handles the professional man- agement while you sit back and still have your investment money working for you. This is called a passive investment. So investing in a DST with multiple properties would let me put my eggs in multiple baskets without needing to manage any of the properties. If I sell my property to invest in a DST, wouldn’t I lose a lot of that money to taxes? You can defer the Capital Gains Tax through a 1031 ex- change. If you’re going to sell your property, you only have 45 days to identify replacement property or else you are going to be slapped with the Capital Gains Tax and/or the Deprecia- tion Recapture Tax (usually at a rate of 25%) along with state taxes and sometimes the NIIT (the Medicare sur tax). If you’re an accredited investor (mean- ing you have an annual income of at least $200,000 or have a net worth of over $1 million exclusive of primary residence), you can defer the Capital Gains Tax and its friends by investing your money into another prop- erty within the mandated time- frame. This property replace- ment is called a 1031 exchange after IRC section 1031, which allows for you to postpone pay- ing the aforementioned taxes if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange. Yes, exciting! But before you get carried away, there are a few more things you need to know about a DST 1031 ex- change. First, you can only acquire “like-kind” property. This means you can only invest money from a qualified real estate sale into DST property. A qualified real estate sale would typically be any property held for investment or business purposes. You also cannot invest mon- ey from selling your primary residence into a DST prop- erty (since you cannot 1031 exchange out of your primary residence) nor can you sell an investment property and invest it into a primary residence that you would live in. You must have both properties open to in- vestment or business purposes. Your debt counts as money you need to invest in the new property. If you have $700k in equity, and $300k in debt, Uncle Sam requires you to purchase $1 million or more in
property in order to defer taxes. You cannot get cash directly from the exchange. Instead, you need a Qualified Intermediary (also known as QI) to facili- tate the exchange. A QI is an independent third party who will hold the proceeds and be a part of enacting the 1031 ex- change through purchasing the replacement property. That’s where Kay Properties comes in. We provide DST properties that have passed our due dili- gence program and connect you with the properties that make sense for each investor’s situa- tion. We work with our clients to extensively review different real estate asset classes, loca- tions, the use of debt vs. debt- free real estate, etc. For more details on 1031 exchanges, DSTs and our process, please register at www.kpi1031.com or contact your Kay Properties representative. About Kay Properties and www.kpi1031.com Kay Properties is a national 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 compa- nies, full due diligence and vet- ting on each DST (typically 20- 40 DSTs) and a DST secondary market. Kay Properties team members collectively have over 115 years of real estate expe- rience, are licensed in all 50 states, and have participated in over 15 Billion of DST 1031 investments. This material does not con- stitute an offer to sell nor a solicitation of an offer to buy any security. Such offers can be made only by the confiden- tial Private Placement Memo- randum (the “Memorandum”). Please read the entire Memo- randum paying special atten- tion to the risk section prior investing. IRC Section 1031, IRC Section 1033 and IRC Sec- tion 721 are complex tax codes therefore you should consult your tax or legal professional for details regarding your situation. There are material risks associated with invest- ing in real estate securities including illiquidity, vacan- cies, general market condi- tions and competition, lack of operating history, interest rate risks, general risks of owning/ operating commercial and
multifamily properties, financ- ing risks, potential adverse tax consequences, general economic risks, development risks and long hold periods. There is a risk of loss of the entire investment principal. Past performance is not a guarantee of future results. Potential cash flow, potential returns and potential appre- ciation are not guaranteed. Securities offered through WealthForge Securities, LLC. Member FINRA/SIPC. Kay Properties and Investments, LLC and WealthForge Securi- ties, LLC are separate entities. This email, including attach- ments, may include non-pub- lic, proprietary, confidential or 90% test. This rule will enable much more flexibility in plan- ning multi phased projects; 6. Timing – clarity and ad- ditional flexibility on timing of the 180 day investment from the date of a gain was provided for partners of a partnership and sharehold- ers of an S corp. to invest amount of capital gains in a QOF 180 days from the due date (without extension) of the tax return of the entity they are involved with – this provides additional time for the partners or shareholders to participate in the program and will likely result in in- creased investment; 7. Business Property Gains – the ability to not have to net capital losses with capital gains on 1231 property enables more gains to be eligible for investment within OZs. The proposed regulations required gains to be netted against losses – the final rules allow for total gain to be invested, thus increas- ing the amount eligible for investment; 8. Personal property used in an opportunity zone busi- ness can be counted for pur- poses of meeting the “substan- tial improvement” test. This includes section 1245 prop- erty that is not included in the basis of a building which again increases the amount available for investment; and 9. Leases – • Leases from state and local governments and tribes are not required to be at market rate. This policy is intended to facilitate arrange- ments where governments
legally privileged information. If you are not an intended re- cipient or an authorized agent of an intended recipient, you are hereby notified that any dissemination, distribution or copying of the information contained in or transmitted with this e-mail is unauthor- ized and strictly prohibited. If you have received this email in error, please notify the sender by replying to this message and permanently delete this e- mail, its attachments, and any copies of it immediately. You should not retain, copy or use this e-mail or any attachment for any purpose, nor disclose all or any part of the contents to any other person. hope to encourage develop- ment by offering favorable leasing terms. • Leases that are not be- tween related parties are pre- sumed to be at market rate. • The working capital safe harbor is extended 24 months, for a total of 55 months, when a project is delayed due to a disaster and the opportunity zone is located in a federally declared disaster area. 10. Sin Businesses – Some would say that the allowance of less than 5% sin business as part of a property should not be a top ten, but we will leave that topic for a differ- ent day, in particular if the sin business is a cannabis business. Suffice it to say the final regulations allow for a 5% sin business component of overall revenue which is a useful clarification. On balance, the Final Regu- lations provided additional clarity and additional flexibil- ity for the Opportunity Zone programas a whole. Scheduled to become effective on March 11, 2019, these final regula- tions provide further impetus for investors and owners to engage in the program and continue the rapid pace of investment in qualified Oppor- tunity Zone areas throughout the US and in the US Virgin Islands and Puerto Rico. My view is that 2020 should continue to be an active in- vestment year for OZ projects and will continue the high velocity pace we saw through- out 2019. Brad A. Molotsky, LEED AP O+M is a partner with Duane Morris LLP in Cherry Hill, NJ.
hat is a DST 1031? I’m hearing my real estate inves-
tor friends and CPA men- tion it may be a good exit strategy for my appreciated real estate but I need to know more about it… First, let us explain a DST. DST stands for Delaware Statutory Trust. Here’s the full technical definition: a separate legal entity established under a trust created for the purpose of holding, managing, administer- ing, investing, or operating a property, or for allowing busi- ness/professional properties to have multiple trustees where each owner has beneficial in- terest for federal tax income purposes and every owner gets an undivided fractional inter- est in the DST property. These properties are not limited to the state of Delaware, but the idea of a DST was created under Delaware law. A DST allows each investor to own a fractional interest in a property with other investors, not as limited partners, but instead as their own individual owner inside the trust. Every- one will receive his or her own percentage share of the poten- tial income, tax benefits, and potential appreciation of the whole property. Each owner is treated as owning an undivided fractional interest. This allows the minimum investment to often be as low as $100,000, allowing investors to not only be able to invest in properties that can be too expensive to purchase individually (like large multifamily apartment communities, office buildings, industrial properties, single tenant net lease retail, self- storage facilities, and medical offices), but to invest their money into multiple properties, diversifying their real estate portfolios. Okay, so a DST is a type of property ownership that can have multiple trustees where each owner gets their own fractional interest while being treated as an individual own- er…why should I be interested in that? Well, let’s say you’re a land- lord of a multifamily residen- tial property. You’re the one the tenants call when there’s a leak, a mouse, cockroaches, loud tenants upstairs, bed bugs… it’s your job to handle all the problems. Fun! So much for retiring from the daily grind! But in a DST, you wouldn’t
continued from page 2A Top 10 Opportunity Zone Clarification . . .
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