Bob’s Insights

  • By Robert L. Boggess / July 12, 2018

    Using charitable contributions of a conservation easement, A Charitable Contribution of a Conservation Easement (CE) IRC § 170(h), may be used to mitigate taxes due to ordinary income. IRC § 170 (h) allows users to make contributions for charitable purposes that result in a reduction in tax liability.

    A CE can occur when a property owner gives up a viable right (such as a development, or a mineral right, etc.) associated with a property in perpetuity, via easement, that is monitored by an NGO or government entity, as long as it creates a public benefit.

    The CE is structured as a real estate investment that has three operational and exit strategies one of which is voted to be the strategy that will be used by the investors. Generally, the strategies are: hold the property for appreciation, develop the property to its highest and best use, or create a Conservation Easement.

    To determine the value of the conservation easement, two MAI appraisals of the subject property, meeting specific governmental criteria, are completed: the first appraisal is the before condition of the property’s highest and best use, the second is the after condition of the property’s highest and best use.  The difference in value between the first and second appraisal may provide a tax deduction to the investor.

    The tax benefits generated by a Conservation Easement are limited to 50% of adjusted gross income (AGI). Historically, the economics of a CE are such that for a $1 contribution into the CE, an investor’s income is reduced by approximately $4.00. At a 39.6% tax rate, for every $1 contributed, the investor’s taxes may be reduced by approximately $1.60.

    It should be noted the IRS is aware that Conservation Easements are subject to abuse because of the tax benefits received. The IRS put forth Notice 2017-10 January 23, 2017 to address these issues. CEs are now listed transactions. In the event the deduction is equal or greater than 250% of the amount invested, they are subject to further scrutiny and potential audit as being abusive. The CEs referenced in this case study have a deduction of approximately 1.6 to 1. Furthermore, in an abundance of caution, the sponsor has recently sought to get tax loss insurance on all CEs going forward. They have been successful in obtaining that insurance for all CEs since that decision.

    As with any tax strategy, clients should consult with their tax professional. Neither IREXA, LLC nor Great Point Capital are attorneys or tax professionals. All work regarding Strategic Tax Mitigation™ relies on collaboration with a tax professional.

    This example was in accordance of the applicable laws at the time of the transaction. The maximum deduction taken via Conservation Easement reduced the effective tax rate from 34.12% to 26.84%, a savings of $198,000 in federal taxes.

     

    *IRS tax code is subject to change and the IRS could disallow some or all of the benefits discussed above.  The above numbers are for specific cases. Past performance is not guaranteed.

    IREXA® Financial Services / Wealth Strategies collaborates with CPAs, attorneys, and other tax planning professionals to assist clients with tax mitigation strategies.  IREXA® and Great Point Capital, LLC are not tax professionals or attorneys. IREXA® only provides client tax mitigation strategies through, and with the approval of, the client’s professional counsel. You should review any planned financial transaction that may have tax or legal implications with your personal tax or legal representatives or advisors.

    Securities offered through Great Point Capital, LLC, Member FINRA/SIPC, 200 W Jackson Blvd #1000, Chicago, IL 60606, telephone (312) 356-4872. IREXA® Financial Services / Wealth Strategies is not affiliated with Great Point Capital, LLC

  • By Robert L. Boggess / June 14, 2018

    Many real estate investors buy property as a long-term wealth-building strategy. They start investing small, then reinvest to grow their portfolio. Investment property provides passive income and may create legacy wealth for investor and their family. Investors buy property as a vehicle to create wealth from cash flow and appreciation, but taxes are also a big piece of the puzzle especially when one sells their property.

    Real estate has a number of built-in potential tax advantages that are unavailable in most other investments, such as the ability to depreciate the building portion of the property, which can effectively reduce your annual income tax while you are in operation mode. And, when you sell you may be able to use other tax strategies to defer capital gains taxes resulting from the sale.

    Defer your Capital Gains Taxes at the Time of Sale

    The IRC §1031 exchange allows the investor to defer taxes on the capital gain to a more opportune time. A 1031 exchange allows the investor to keep more money in their pocket and use it as additional purchasing power on their next transaction. It’s like a gift from the government. The 1031 exchange can be a vehicle that can continue to grow your wealth.

    Get Out of Management (Retire) With Turnkey DST Properties

    In this time of unknown economic factors, diversification may provide more stability. And, “like-kind” for a 1031 exchange has a broad interpretation that may allow investors to exchange a warehouse for an interest in an office building, a shopping center, or an energy production property, as well as a different geographical area than your current property. Such diverse properties are often available as Delaware Statutory Trusts “DST”, or DST properties, in which you own a fractional interest with others.

    If you are ready to hang up your management duties, using a 1031 exchange allows you to move from management into a professionally managed, institutional quality DST properties that provides passive income.

     

    1031 Exchange Rules

    Requirements to qualify for a 1031 exchange.

    Sell and buy the right type of assets; the property is held for business or investment.

    • The Investor must acquire title to the replacement property in the same manner as title was held in the relinquished property.

    Requirements to fully defer 100% of capital gains tax.

    • Investor must reinvest all proceeds from the sale of the relinquished property(ies).
    • Investor must acquire debt equal or greater to debt paid off from the relinquished property (or replace the debt with additional cash)

    Time frames to complete exchange

    • Replacement property(ies) must be identified within 45 days calendar days of the relinquished property sale date.
    • The exchange must be completed by the earlier of:
    1. 180 calendar days from the date of the relinquished property closing; or
    2. The due date of the investor’s federal income tax return, together with all extensions.

    Identification rules for replacement properties:

    • 3-Property Rule—up to three (3) properties can be identified without regard to their fair market value.
    • 200% Rule—any number of properties can be identified, as long as their combined fair marketing value does not exceed 200% of the fair market value of all relinquished property.
    • 95% Rule – any number of properties may be identified, as long as the investor closes on 95% of the fair market value of the identified properties.

    Tax-deferred exchanges allow investors to defer capital gain taxes as well as potentially facilitate portfolio growth and return on investment.

     

    *  Income and net worth restrictions apply.

    1. Except where noted, the client must be an Accredited Investor as defined in Regulation D under the 1933 Act (i.e., $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly two of the last three years).
    2. IRS tax code is subject to change and the IRS could disallow some or all of the benefits discussed above.  The above numbers are for specific cases. Past performance  is not guaranteed.

     

    IREXA® Financial Services / Wealth Strategies collaborates with CPAs, attorneys, and other tax planning professionals to assist clients with tax mitigation strategies.  IREXA® and Great Point Capital, LLC are not tax professionals or attorneys. IREXA® only provides client tax mitigation strategies through, and with the approval of, the client’s professional counsel. You should review any planned financial transaction that may have tax or legal implications with your personal tax or legal representatives or advisors.

    Securities offered through Great Point Capital, LLC, Member FINRA/SIPC, 200 W Jackson Blvd #1000, Chicago, IL 60606, telephone (312) 356-4872. IREXA® Financial Services / Wealth Strategies is not affiliated with Great Point Capital, LLC

     

  • By Robert L. Boggess / May 10, 2018

    A married couple in their mid-forties approached me to have a financial analysis based on my Strategic Tax Mitigation™ protocol. Their chief concerns included: the lack of strategies they had to reduce their current taxes and to develop a better retirement income program. After the review, I developed a plan to meet the clients’ goals and objectives.

    1. The clients currently generate approximately $467,000 annual income.
    2. The clients each have older Variable Universal Life (VUL) Insurance policy

    With regards to income, a Charitable Contribution of a Conservation Easement (IRC § 170h) could be used to reduce taxes due to Ordinary Income (see Conservation Easement case study). In this couple’s case, a tax savings of approximately $24,500/yr could be achieved. Using this strategy, their taxes could be reduced from $123,500 to $99,000 in the proposal year.

    With regards to their life insurance policies, Variable Universal Life policies follow the market. Cash values in the policy can go up or down depending on the direction of the market. When I explained the volatility issues the clients also became concerned. The policies were out of date and didn’t meet the clients’ desire for creating additional income in retirement.

    The following proposal was made:

    Generate tax savings from the use of the conservation easement, then redeploy the savings to invest in a better life insurance policy. The tax savings from the Conservation Easement could be used to help create a life insurance policy more aligned with the clients’ goals and objectives.

    The existing VUL insurance policy was converted into an Indexed Universal Life (IUL) insurance policy by using a IRC § 1035 exchange. The clients were lawfully able to make this exchange without paying taxes. The two VUL policies had a cash value of approximately $200,000. The annual $12,000 premium for both clients was increased by $18,000 for a total of $30,000/yr, using most of the annual savings from the Conservation Easement. The CE acquisition and tax savings is repeated annually. As long as the couple’s income stays above $400,000, the new life insurance policy should be fundable from the Conservation Easement savings, with no additional money from the clients.

    Through the Indexed Universal Life policies, the clients may be able to create $161,541 per year tax-free retirement income for 25 years (65 to 90). The total cost of the policies is $830,000. If the clients survive for just over 5 years into retirement, they will have gotten their money back. If the clients live long enough to use all of the tax-free income available in the policy, they should be able to withdraw over $4,038,500, or nearly 5 times their cost.

    As with any tax strategy, clients should consult with their tax professional. Neither IREXA, LLC nor Great Point Capital are attorneys or tax professionals. All work regarding Strategic Tax Mitigation™ relies on the client’s tax professional. This example was in accordance of the applicable laws at the time of the transaction.

  • By Robert L. Boggess / April 9, 2018

    The Credit Tenant Loan 1031 exchange strategy focuses on the potential of obtaining the maximum cash out of a real estate transaction. It relies on a 1031 exchange, but the exchange is only a vehicle for providing cash from the sale of the relinquished property.

    Some property owners want to sell their property, cash-out, and pay the taxes rather than complete a 1031 exchange. Yet, most owners also want to reduce their taxes on capital gains from the sale. With a credit tenant loan, they may be able to do both. For this 1031 exchange strategy to be effective, the relinquished property should have limited or no debt.

    The Credit of the Retail Tenant is the Collateral

    The replacement property is purchased all cash via a 1031 exchange. Some time after the replacement property purchase has closed, the property is refinanced. The type of loan that is used is specific to the type of tenant and length of the lease. It is called a Credit Tenant Loan (CTL). With a CTL, collateral for the loan is not the property, it is the credit strength of the tenant. The better the tenant’s credit, the better the loan terms.

    The credit tenant is typically a national company with an institutional credit rating of BBB- or higher, and the primary term of the lease should be close to 20 years or more. Replacement properties with institutional quality tenants and leases of sufficient length can make this strategy viable and are available. With a lease that is close to twenty years, Credit Tenant Loans can exceed 80% Loan to Value (LTV). Some LTV approach 90%. The loan is fully amortizing over the remaining term of the lease.

    A shorter-term lease will reduce the LTV on the loan, because the length of the loan is the same as the remaining original term on the lease. If the loan/lease term is too short it can adversely affect the viability of this strategy. The loan has a one-to-one debt coverage ratio which means the loan payment is equal to the rents received from the tenant. In a loan, as leverage increases, cash flow decrease. Since the investment produces no cash flow, the loan proceeds are maximized.  Because this is a loan, it is a non-taxable event. And, since the loan is based on the tenant’s credit strength, mortgage risk to the investor is minimal.

    Tax Considerations

    One should note:  a CTL loan can create phantom income, which is taxable. Phantom income is effectively equal to the reduction in principal balance during the tax year. That is offset by the fact there is no cash flow from the property with which to pay tax liability. That’s why we recommend to investors, it is extremely important to evaluate the positives and negatives relative to the investor’s particular needs. Consulting with your CPA is recommended.

    Cash and Equity

    The net effects are very tax-efficient. By using a 1031 exchange in combination with a Credit Tenant Loan strategy, one can achieve a higher level of cash from the sale of relinquished property than by directly paying taxes. Another benefit of this strategy is that the loan on the property will be paid down according to the mortgage, which will allow gains from this property to be realized again.

     

    IREXA® Financial Services / Wealth Strategies collaborates with CPAs, attorneys, and other tax planning professionals to assist clients with tax mitigation strategies.  IREXA® and Great Point Capital, LLC are not tax professionals or attorneys. IREXA® only provides client tax mitigation strategies through, and with the approval of, the client’s professional counsel.

    Securities offered through Great Point Capital, LLC, Member FINRA/SIPC, 200 W Jackson Blvd #1000, Chicago, IL 60606, telephone (312) 356-4872. IREXA® Financial Services / Wealth Strategies is not affiliated with Great Point Capital, LLC. 

     

  • 1031 dst properties
    By Robert L. Boggess / March 14, 2018

    A partnership or limited liability company (LLC) cash-out 1031 exchange occurs when one or more of the partners or members want to cash-out of the investment property to be sold instead of re-investing all of the proceeds from the sale of the relinquished property into the replacement property. One popular method is a Drop and Swap.

     

    Assuming this fact scenario, ABCD, LLC has four members, one of which wants to cash out a 25% interest and not participate in the 1031 exchange, an example of a drop and swap transaction would be one in which:

    (1) ABCD, LLC would first distribute a 25% undivided interest in the relinquished property to Mr. C in liquidation of his ownership interest in ABCD, LLC, leaving the property being owned 75% by ABCD, LLC and 25% by MR. C as tenants-in-common,

    (2) ABCD, LLC would sell its 75% interest in the Property and Mr. C would sell his 25% interest in the Property,

    (3) Mr. C would keep his cash and pay tax on his sale transaction, and

    (4) ABCD, LLC would engage in a 1031 exchange and purchase new replacement property.

     

    Or, the same structure can be completed in a different order using a Swap and Drop. An example of a swap and drop transaction would be one in which:

    (1) ABCD, LLC sells the Property and engages in a 1031 exchange by buying new replacement real property,

    (2) ABCD, LLC then distributes a 25% interest in the new property to Mr. C in liquidation of his ownership interest in ABCD, LLC (resulting in the new property being owned 75% by ABCD, LLC and 25% by Mr. C as tenants-in-common), and

    (3) Mr. C then sells his 25% interest in the new property, either to a third party or to the remaining members of ABCD, LLC, and pays tax on his sale transaction.

     

    Structuring a partnership/LLC cash-out transaction is not simple or straightforward. It is important for anyone contemplating one to obtain the advice of an experienced tax professional familiar with structuring 1031 exchanges.

     

     

     

    * Partnerships are excluded from effecting a 1031 exchange per IRC section 1031 (a)(2)(D). Consult your tax and legal counsel for more information about partnership owned property.

    IREXA® Financial Services / Wealth Strategies collaborates with CPAs, attorneys, and other tax planning professionals to assist clients with tax mitigation strategies.  IREXA® and Great Point Capital, LLC are not tax professionals or attorneys. IREXA® only provides client tax mitigation strategies through, and with the approval of, the client’s professional counsel.

    Securities offered through Great Point Capital, LLC, Member FINRA/SIPC, 200 W Jackson Blvd #1000, Chicago, IL 60606, telephone (312) 356-4872. IREXA® Financial Services / Wealth Strategies is not affiliated with Great Point Capital, LLC. 

     

  • Save Taxes
    By Robert L. Boggess / November 22, 2017

    What if your financial advisor was always looking at your full financial picture and goals, then collaborating with your tax advisor to optimize tax savings? One of the biggest issues for high net worth individuals and small businesses is taxes.

    I used to be an architect, for me it was a natural progression from that profession to commercial real estate and on to financial analysis and investment strategies to maximize tax savings. The common threads are structure and strategy. These two components are the key to how I build tax mitigation strategies at IREXA.

    ‘Structure’ is a complex system considered from the point of view of the whole rather than of any single part. This is how I think of investment strategies and why I work so diligently to build the most tax-efficient outcomes.

    ‘Strategy’ is a plan, method, or series of maneuvers for obtaining a specific goal or result. Together structure and strategy are my methods for building Strategic Tax Mitigation™ for accredited investors.[1]

    In light of the financial whole, what series of maneuvers (strategic investments) will more probably obtain a specific goal. I always assume that one of the goals of high net worth individuals and small businesses is to reduce taxes and redeploy the savings to their own benefit.

    No one investment sits alone. It creates the potential for income, loss, tax, expenses, deductions, etc.  Why choose one investment vehicle over the other? I look at all aspects and possible outcomes.  For example, if you buy stock, it produces a dividend and sells for more than you paid, maybe; but buy fractional ownership in real estate and potentially have income, equity, plus the tax deductions.

    My clients are active participants in the process. I view my relationship with my clients as one of trust, common vision, good communication, and mutual respect. I plan and design a financial strategy in collaboration with their tax advisor and coordinate execution. The goal is to maximize the tax-saving impact by adding ideas, seeking clarity, finding what emerges as we work our way through the process.

    I build tax-efficient wealth strategies that may reduce overall tax liability. There may be many opportunities to reduce one’s current tax burden, and they are legal, set up as policy to encourage investment.

    Isn’t it worth a free consultation to make sure you are keeping as much of your money as possible?

     

    [1] IREXA may have investment solutions to help you with your individual tax situations as determined with your CPA, tax advisor, or attorney. Neither IREXA nor SANDLAPPER Securities, LLC are tax advisors.

     

     

    IREXA® Financial Services / Wealth Strategies collaborates with CPAs, attorneys, and other tax planning professionals to assist clients with tax mitigation strategies.  IREXA® and Great Point Capital, LLC are not tax professionals or attorneys. IREXA® only provides client tax mitigation strategies through, and with the approval of, the client’s professional counsel.

    Securities offered through Great Point Capital, LLC, Member FINRA/SIPC, 200 W Jackson Blvd #1000, Chicago, IL 60606, telephone (312) 356-4872. IREXA® is not affiliated with Great Point Capital, LLC. 

  • By Robert L. Boggess / September 5, 2017

    The 1031 exchange can be a powerful wealth-building tool available to taxpayers who have real estate investments. It has been a major part of the successful strategy of many real estate investors. At IREXA, we help you locate the right replacement property, then implement further investment strategies to mitigate your overall tax liability.

    Since capital gains tax on your profits could run as high as 15% to 30% when state and federal taxes are combined, why not take the necessary steps to avoid this loss? A big tax bite could wipe out money you need for further investments. Review our current inventory here www.irexa1031.net.

    Internal Revenue Code §1031, the tax-deferred exchange, allows a taxpayer to sell investment property and replace it with a like-kind property. Capital gains on the sale of this property are deferred as long as the IRS rules are followed. This is a wise tax and investment strategy as well as an estate planning tool. In theory, an investor could continue on investment property until death, potentially avoiding them altogether.

     

     

     

    IREXA® Financial Services / Wealth Strategies collaborates with CPAs, attorneys, and other tax planning professionals to assist clients with tax mitigation strategies.  IREXA® and Great Point Capital, LLC are not tax professionals or attorneys. IREXA® only provides client tax mitigation strategies through, and with the approval of, the client’s professional counsel.

    Securities offered through Great Point Capital, LLC, Member FINRA/SIPC, 200 W Jackson Blvd #1000, Chicago, IL 60606, telephone (312) 356-4872. IREXA® is not affiliated with Great Point Capital, LLC. 

  • By Robert L. Boggess / July 26, 2017

     

    At IREXA, LLC, we are not product providers, we are solution providers. We look at how we can improve tax savings with every action we advise. Real estate is one member of the non – traded alternative asset class we use to provide opportunities to reduce taxes and enhance after tax yield, wealth preservation.

    The hardest thing to explain to a client about our services is that at a base level we are product agnostic. We can speak about products, however, our best results are achieved when we fully understand our client’s needs. From that understanding, we develop solutions that use real estate, non-traded alternatives, and insurance in an integrated manner to meet the client’s stated needs as we understand them. We call our method Strategic Tax Mitigation™.

    For example, in a recent consultation a high net worth individual had inherited property in the middle of the country. The property was worthless until they found oil. He received an offer on the property, the net price of which was $9,000,000. As the seller, he was interested in deferring his taxable gain.

    He explained that he and his wife had already gifted the entire amount that they could to his children from the proceeds. Instead of a $9 million gain, he had created a $4,500,000 tax liability for his heirs.

    Using the following assumptions:

    1     The couple’s income of $1,500,000 was increased by $540,000 following the acquisition of the 1031 replacement property, for a total annual income of $2,040,000.

    2     The couple is in their 70s.

    We proposed this solution:

    1     By using a Charitable Contribution of a Conservation Easement to offset ordinary income, the estimated annual tax savings was approximately $181,000.

    2     The $181,000 tax savings was used to purchase a Second-to-Die, Indexed Universal Life insurance policy. The policy had a death benefit of approximately $10,000,000.00.

    3     The insurance policy was structured as an Irrevocable Life Insurance Trust ILIT to take the policy proceeds outside of their estate. This created an additional gift tax on the premium.

    The net result was that for nominal costs to the couple, their heirs could receive sufficient proceeds to offset the original estate tax liability as well as leaving them with an additional $5,500,000 that could be used to offset further growth in the parent’s estate.

    It is worth looking at all avenues of potential tax savings because each person’s situation is different. At IREXA, we offer a complimentary analysis and comprehensive tax mitigation strategy to every accredited investor.  What have you got to save?

     

     

     

     

    Disclosures: Actual performance will vary and may be more or less favorable than shown. Underwriting classes and criteria will vary with each carrier. Products’ specific features and the client’s use of those features will impact long-term policy performance. It is important that you consider your client’s goals and objectives carefully and discuss them at length before recommending any life insurance product. Values for all policies may contain guaranteed and non-guaranteed elements, including but not limited to current interest rate and current cost of insurance rates. This is not an estimate of future performance. Companies use different methods and setting these rates and there will be variations in their values and meanings. Products actual features and benefits, loads and charges will vary from company to company and will impact the values shown.

    IREXA® Financial Services / Wealth Strategies collaborates with CPAs, attorneys, and other tax planning professionals to assist clients with tax mitigation strategies. IREXA® and Great Point Capital, LLC are not tax professionals or attorneys. IREXA® only provides client tax mitigation strategies through, and with the approval of, the client’s professional counsel.

    Securities offered through Great Point Capital, LLC, Member FINRA/SIPC, 200 W Jackson Blvd #1000, Chicago, IL 60606, telephone (312) 356-4872. IREXA® is not affiliated with Great Point Capital, LLC.

     

     

  • By Robert L. Boggess / June 15, 2017

    Capital gains tax on the sale of your investment property could run as high as 15% to 30% when state and federal taxes are combined. Why not take the necessary steps to avoid this loss? A big tax bite could wipe out money you need for further investments. With an IRC section 1031 exchange, the saying, “Nothing is certain but death and taxes,” is only half true for an informed taxpayer who is planning the sale of an investment or business property.

    Depending upon the taxpayer’s situation, the type of property relinquished and the characteristics of the replacement property, other aspects of the 1031 exchange may be involved. Its completion may become complex and experts should always be consulted. This is not a task for a do-it-yourself investor.

    Using the power of the 1031 exchange to build and preserve wealth and assets, generate cash flow from investments, restructure, diversify and consolidate real estate holdings is the right of every owner of investment property in the United States. American taxpayers should never have to pay capital gains taxes on the sale of their investment property if they intend to reinvest those proceeds in more investment property.

    The 1031 Exchange can be a powerful wealth-building tool available to taxpayers. It has been part of the success strategy of financial advisors and real estate investors. Section 1031 of the Internal Revenue Code, the tax-deferred exchange, allows a taxpayer to sell income, investment, or business property and replace it with like-kind property. View 1031 replacement properties now.

    *Capital gains tax on the sale of this property is deferred or postponed as long as the IRS rules are meticulously followed. This is a wise tax and investment strategy as well as an estate planning tool. In theory, an investor could continue deferring capital gains on investment property until death, potentially avoiding them altogether.

     

     

     

     

     

    IREXA® Financial Services / Wealth Strategies collaborates with CPAs, attorneys, and other tax planning professionals to assist clients with tax mitigation strategies. IREXA® and Great Point Capital, LLC are not tax professionals or attorneys. IREXA® only provides client tax mitigation strategies through, and with the approval of, the client’s professional counsel.

    Securities offered through Great Point Capital, LLC, Member FINRA/SIPC, 200 W Jackson Blvd #1000, Chicago, IL 60606, telephone (312) 356-4872. IREXA® is not affiliated with Great Point Capital, LLC. 

  • By Robert L. Boggess / April 11, 2017

    Delaware Statutory Trusts (DSTs ) have emerged as form of ownership as an alternative to Tenants in Common (TIC).  Investors who hold highly appreciated real estate assets may be at a stage of their lives when they are seeking more passive investment opportunities. Passive, professionally managed ownership may allow them to concentrate on other opportunities in life that they have always been passionate and now have the time to pursue.

    Passive Investment Characteristics

    Rather than deal with the Terrible T’s consisting of toilets, trash, and tenants many long-time investors are in search of the Terrific T’s which give them time, travel, and teeing off.

    To accomplish these goals, some seasoned investors have turned to real estate investment strategies such as buying real estate with ownership forms like, Tenants in Common (TIC) property or Delaware Statutory Trust (DST) property via an Internal Revenue Code (IRC) section 1031 exchange, thereby deferring tax on the relinquished property’s capital gain.

    TIC 1031 and DST 1031 exchanges have long permitted investors to own institutional quality, professionally managed properties occupied by established tenants. They are offered on a turnkey basis with financing and management in place. Most investors have been able to accomplish these forms of ownership in a tax-deferred manner through a 1031 exchange.

    Delaware Statutory Trusts 

    Though the Delaware Statutory Trust (DST) is not a new investment vehicle, inherent weakness in the structure of the TIC form of ownership discovered during the Financial Crises of 2008, has made the DST a viable investment vehicle for passive 1031 exchange investors as well as direct investors.

    DSTs are derived from Delaware statutory law as a separate legal entity created as a trust, which qualifies under IRC section 1031 as a tax-deferred exchange. In 2004, the IRS blessed DSTs with an official Revenue Ruling about how to structure a DST that will qualify as replacement property for 1031 Exchanges.

    The Revenue Ruling (Rev. Ruling 2004-86) permits the DST to own 100 percent of the fee-simple interest in the underlying real estate with no IRS imposed limitation as to the number of investors who may participate as beneficial owners with a fractional interest in the property.

    Investors who are familiar with TIC investment strategies may see some similarities to the DST concept; however, it is important to understand the differences. While a TIC may have up to 35 investors, each owning an undivided, pro-rata share of title to the property, a DST may have many more investors, with each investor owning a beneficial interest in the trust which, in turn, owns the underlying asset. A major benefit is that more investors means lower investment requirements. DSTs are only available to accredited investors.*

       Student Housing

    How DSTs Work

    The real estate sponsor firm acquires the property under the DST umbrella and opens up the trust for potential investors to purchase a beneficial interest. The investors may either have their accommodator deposit their 1031 exchange proceeds into the DST or the investor may purchase an interest in the DST directly.

    DST investors may benefit from a professionally managed, institutional quality property. The underlying property could be a 300-unit apartment building, a 50,000 square-foot medical office property or a shopping center leased to investment-grade tenants. The possibilities are numerous.

    Most DST investments are assets that the average individual accredited investor, but for the opportunity to buy in to a fractional share, could not otherwise afford. However, by joining with other investors, they can acquire this type of asset.

    DST vs TIC Ownership

    There are two benefits that the DST structure offers over the TIC concept.  One is that because a DST is not limited to 35 investors, the minimum investment may be much lower, often as low as $100,000.  The second advantage is that in a DST the lender makes only one loan to one borrower, the DST Sponsor.

    In a TIC investment there may be up to 35 separate signers to the loan.  The DST gives the lenders greater security because the lender has fully qualified the sponsor, who is the underlying responsible party.

    DSTs Pose Risks

    DSTs are not without risks. As with any type of real estate investment, investors may be subject to high vacancy rates and loan defaults. DSTs are also not sole-ownership investments. A DST is a passive investment made up of multiple owners and ultimately controlled by the master tenant, the sponsor. It is important for investors who may be considering the DST strategy to consult with an experienced investment professional and to obtain competent legal advice and tax advice.

    Upon thorough evaluation, the DST structure may be a viable investment alternative for qualified real estate investors. But only your tax adviser and lawyer can tell you if it’s right for you.

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    *Accredited Investors are individuals whose net worth is more than $1 million and / or earn annual income of $200,000. Accreditation for entities means the entity’s assets are more than $5 million and / or each entity member must be an accredited investor as an individual.

    IREXA Financial Services / Wealth Strategies provides Strategic Tax Planning to owners of real estate. We assist clients by planning for the future. Our goal: To help you keep more of what you make by only paying the taxes you are legally obligated to pay.

    Robert L. Boggess, CCIM is the President/Chief Strategist with IREXA Financial Services / Wealth Strategies. Contact Bob at 206-548-1031, or rboggess@irexa.net.

     

    IREXA® Financial Services / Wealth Strategies collaborates with CPAs, attorneys, and other tax planning professionals to assist clients with tax mitigation strategies. IREXA® and Great Point Capital, LLC are not tax professionals or attorneys. IREXA® only provides client tax mitigation strategies through, and with the approval of, the client’s professional counsel.

    Securities offered through Great Point Capital, LLC, Member FINRA/SIPC, 200 W Jackson Blvd #1000, Chicago, IL 60606, telephone (312) 356-4872. IREXA® is not affiliated with Great Point Capital, LLC. 

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* IREXA® Financial Services / Wealth Strategies, Great Point Capital, LLC and Abacus Insurance Advisors, LLC do not provide legal or tax advice.

**Investing has risks; performance is not guaranteed.   Securities offered through Great Point Capital, LLC (GPC) (member FINRA/SIPC). Robert L. Boggess is an independent representative of Great Point Capital, LLC. IREXA®  Financial Services/Wealth Strategies is not an affiliated company with the Great Point Capital, LLC or CPAAcademy.org. No offer to buy or sell securities is being made. Such offers may only be to qualified accredited investors via private placement memorandum. Neither GPC nor IREXA® are tax advisors. Prospective strategies and products used in any tax advantaged investment planning should be reviewed independently with your tax and legal advisors. Investments are not guaranteed or FDIC insured and risks may include but are not limited to complete loss of principal investment. Risks detailed in a private placement memorandum should be carefully reviewed, understood and considered before investment. Changes in the tax code and other regulatory revisions could have a negative impact upon strategies developed and recommendations made.

Risk Disclosure: Alternative investment products, including real estate investments, notes & debentures, hedge funds and private equity, involve a high degree of risk, often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds, often charge high fees which may offset any trading profits, and in many cases the underlying investments are not transparent and are known only to the investment manager. Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor's interest in alternative investments, and none is expected to develop. There may be restrictions on transferring interests in any alternative investment. Alternative investment products often execute a substantial portion of their trades on non-U.S. exchanges. Investing in foreign markets may entail risks that differ from those associated with investments in U.S. markets. Additionally, alternative investments often entail commodity trading, which involves substantial risk of loss.

NO OFFER OR SOLICITATION: The contents of this website: (i) do not constitute an offer of securities or a solicitation of an offer to buy of securities, and (ii) may not be relied upon in making an investment decision related to any investment offering by IREXA®  Financial Services/Wealth Strategies, Great Point Capital, LLC, or any affiliate, or partner of (“Great Point Capital”). IREXA®  Financial Services/Wealth Strategies does not warrant the accuracy or completeness of the information contained herein. FINRA Broker Check: Check the background of this investment professional on FINRA BrokerCheck.