Real Estate Syndication in DST 1031 Exchanges

Delaware Statutory Trust (DST) 1031 exchanges are becoming increasingly popular among investors due to the advantages of real estate syndication. Real estate syndication is a key aspect of the structure of DST 1031 investments and is a significant factor in their growing popularity as an alternative investment for accredited investors.

What Exactly Is Syndication?

Syndication refers to the process of bringing together a group of investors or organizations to collectively invest in an asset that requires a large amount of capital. In the context of real estate, it means organizing a group of investors to pool their financial resources to purchase one or more properties. Investors are issued beneficial interests or shares in the property, and profits and losses are distributed according to their percentage of ownership.

This concept is particularly relevant when discussing Delaware Statutory Trusts (DSTs) because they allow for multiple investors to own a property for their 1031 exchange or cash investment, unlike traditional 1031 exchanges which typically involve a single investor.

Additionally, DSTs can have a much higher number of investors (usually up to 499) compared to other group investment structures like Tenant in commons (TICs), which have a limit of 35 investors, making them a suitable option for those looking to invest in larger and more diverse real estate assets. However, unlike regular syndications, the DST property or properties have already been acquired by the DST sponsor before being offered to 1031 exchange investors.

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The Benefits of Syndication:

One of the major advantages of DST 1031 exchange investments for investors is that they eliminate the challenges and responsibilities of active ownership and management. In DST investments, the sponsor creates the trust and takes on the responsibilities of managing the assets and the business of the trust. These responsibilities can include:

- Underwriting the Deal

- Conducting due diligence on the property(ies)

- Arranging financing

- Creating a business plan for the property(ies)

- Finding a property management company

- Coordinating investor relations and potential monthly distribution checks to investors

- Delaware Statutory Trust syndication provides investors with a passive ownership structure

In exchange for giving up active management, the passive investor of a DST 1031 property will typically receive 100% of their pro-rata portion of any potential principal pay-down from the loan on the property, thereby potentially building equity. In addition, DST 1031 properties are structured so that the investors in the DST receive 100% of their pro-rata portion of the potential rental income generated by the property's tenants.

Other Benefits To DST Syndication:

Get ready to upgrade your real estate game, folks! With a syndicated Delaware Statutory Trust 1031 exchange, you'll have the chance to snag a piece of some seriously impressive, institutional grade assets.

We're talking industrial distribution centers, medical buildings, self-storage facilities, and even massive apartment communities worth $50 million or more! And the best part? With a typical minimum investment of $100,000, regular investors can get in on the action. It's like a VIP pass to a whole new level of real estate investing.

Want to spread your investment wings and fly? Then a Delaware Statutory Trust (DST) is just what you need! With a DST, you'll have the ability to invest in multiple properties, reducing your risk and increasing your chances of success.

Plus, you'll be able to choose from a variety of asset classes, like multifamily, commercial buildings, self-storage, medical facilities, and industrial distribution centers. And, with the ability to invest in multiple geographic locations, you'll be able to diversify your portfolio like a pro! And let's not forget, portfolio diversification is a tried and true economic theory, recognized by none other than Nobel-Prize winning economist Harry Markowitz.

Just remember, diversification does not guarantee profits or protection against losses and that investors should read each DST offerings Private Placement Memorandum (PPM) paying attention to the risk factors prior to considering a DST investment.

Investing in commercial real estate can be challenging, as it requires a significant amount of experience and resources. Even for experienced investors, it can be difficult to source, inspect, underwrite, and close on large institutional properties within the timeline of a 1031 exchange.

However, with a Delaware Statutory Trust (DST) syndication, investors can work with the specialized team at Perch Wealth, a national DST expert advisory firm. They have created a platform, www.perchwealth.com, that provides investors with access to a marketplace of DSTs from more than 25 different DST sponsor companies. Additionally, they have custom DSTs available only to their clients and provide independent advice on DST sponsor companies as well as full due diligence and vetting on each DST investment.

Are There New Rules for 1031 Exchanges in 2022?

Every year, concerns about the future of 1031 exchanges surface among investors. The ability to defer capital gains through a 1031 exchange has long been a point of contention among politicians. For those wondering whether changes to this real estate investing tool have been made recently, the answer is no. Rather, interest in 1031 exchanges has grown among investors throughout the country, and new questions have emerged. Here is a glimpse at the most common questions asked by today’s curious investors.

What happens when a 1031 exchange property is sold?

A 1031 exchange allows investors to trade one investment property (“relinquished property”) for another (“replacement property”) and defer capital gains taxes they would otherwise pay at the time of sale of the relinquished property. According to the Internal Revenue Service (IRS), the two properties must be “like-kind,” which under Section 1031 of the Internal Revenue Code is defined as any property held for investment, trade, or business purposes.

What are unrealized capital gains?

When investors and real estate professionals discuss unrealized capital gains, they refer to the gains made on an asset that has not yet been sold. If capital gains are unrealized, they are not taxed. Instead, these gains exist only on paper. Only when an investor disposes of the asset must taxes on capital gains be paid.

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When can an investor use a 1031 exchange in real estate?

A 1031 exchange can be used anytime properties are exchanged as long as the properties meet the IRS’s definition of like-kind. Properties commonly traded in a 1031 exchange include commercial assets, such as apartment buildings, hotels and motels, retail assets and single-tenant retail properties, offices and industrial complexes, senior housing, farms and ranches, and vacant land. Additional trades that qualify as like-kind include investments in Delaware Statutory Trusts (DSTs) and residential properties held for investment purposes.

Can an investor avoid capital gains by buying another house?

Property owners commonly ask if they can sell their home and buy another house using a 1031 exchange. Unfortunately, the answer is no. Per the IRS, primary residences and vacation homes do not qualify for a 1031 exchange; only residential properties held for investment purposes for at least 12 months qualify.

Can an investor take cash out of a 1031 exchange?

For capital gains to be deferred, the total value of the relinquished property must be replaced, including both an investor’s equity and debt in the property. Therefore, if an investor sells a $1 million asset and has 50% leveraged, the investor will need to purchase a replacement property for $1 million and either leverage a loan for the $500,000 or pull from personal capital. Any cash taken out from the transaction is taxable.

Exceptions to the rule, however, do exist. One exception involves investing in a DST. A Delaware Statutory Trust is a legally recognized real estate investment trust that allows investors to purchase fractional ownership interest. When exchanging into a DST, investors can determine how much they want to invest and how much debt they want the DST sponsor to assign to them. A property owner could take out cash via a sale through this investment.

How does a 1031 exchange work?

A 1031 exchange requires investors to follow a strict timeline outlined by the IRS. Missing a deadline in the 1031 process generally results in taxes due on the relinquished property.

The timeline for a 1031 exchange starts when the relinquished property closes. The property owner has 45 days to identify their replacement properties and 180 days to close. The replacement properties must meet one of three rules defined by the IRS.

The seller can identify up to three properties of any value with the intent of purchasing at least one.
The seller can identify more than three properties so long as the aggregate value does not exceed 200% of the market value of the relinquished property.
The seller can identify an unlimited number of properties, knowing that 95% of the market value of all properties identified must be acquired.

Do I need an intermediary for a Section 1031 exchange?

Yes! The IRS requires that 1031 exchanges use a qualified intermediary (QI) or exchange facilitator. After the sale of the relinquished property, all proceeds are held with the QI, who will release the funds for the acquisition of the replacement properties. If funds are held with the seller or any other party that does not qualify as a QI, the sale will not qualify for a 1031 exchange, and the seller will be responsible for paying capital gains.

How does a 1031 exchange work in a seller financing situation?

While seller financing is permitted in a 1031 exchange, it is not commonly used.

Seller financing reduces the immediate capital available for an exchanger; however, this does not exempt them from IRC section 1031 that states an investor must replace the entire value of the relinquished property. Therefore, an investor must identify how they will purchase their replacement properties when offering seller-financing. The most obvious solution is to offer short-term financing. This, however, does not solve most buyers’ problems. Instead, the exchanger can work with a qualified intermediary (QI) to sell the promissory note received from the buyer to cover the funds for the exchange. The exchanger can purchase the note or sell the note to the lender or a third party. Whatever option is used, all funds need to be with the QI by the end of the 180 days to prevent the proceeds from becoming taxable. Once proceeds are available, the investor can trade into a chosen like-kind property.

Can an investor still file a 1031 exchange after closing on a property?

No, a seller cannot file a 1031 exchange after closing a property because all proceeds from the sale must be placed with a QI. Therefore, if the exchange is not preplanned, the proceeds cannot be distributed appropriately for a 1031 exchange. Investors interested in a 1031 exchange should identify a QI before selling their real estate.

Can investors avoid capital gains tax if they reinvest?

A 1031 exchange allows property owners to defer capital gains when they reinvest and follow the rules outlined by the IRS. Reinvestment gives investors access to the numerous benefits offered by a 1031 exchange, including portfolio diversification and deferment of capital gains. Additionally, reinvestment via a 1031 exchange resets the depreciation schedule on the investment, providing investors access to additional tax advantages.

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What are the hottest markets for real estate investing in 2022?

The hottest market for real estate investing depends on an investor’s investment strategy. Is the investor risk-averse and looking for only stabilized assets in primary markets? Or are they willing to take on some risk for higher returns and invest in a value-add asset or a secondary or tertiary market?

To best understand which asset and market are best for you, contact a qualified 1031 exchange specialist. The team at Perch Wealth can guide you through the process and introduce you to 1031 qualified properties that are in line with your financial and investment objectives.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only, and should not be relied upon to make an investment decision. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure:

There is no guarantee that any strategy will be successful or achieve investment objectives;
Potential for property value loss – All real estate investments have the potential to lose value during the life of the investments;
Change of tax status – The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;
Potential for foreclosure – All financed real estate investments have potential for foreclosure;
Illiquidity – Because 1031 exchanges are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments.
Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;
Impact of fees/expenses – Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits