BY CHUCK WEST, CCIM AUTHOR AND EDITOR
Forever West DECEMBER 2021 DELAWARE STATUTORY TRUST Many investors have used IRC1031 for tax deferred (not free) exchanges over the years and often find themselves in a typical predicament as they become close to retirement age. As we age we tend to want more secure income streams, less management hassles a less debt especially the recourse kind that carries personal liability even if the mortgage is owed by a corporation or an LLC. Most mortgages are recourse in WY where some states like CA have statutes for many real estate loans that make them non-recourse e.g., for purchase money deeds of trust (like a mortgage). An investor who has used IRC1031 multiple times might find themselves in a difficult position by having a zero or low basis on a property making the tax consequences of a direct sale horrendous. This is especially true if they have refinanced and pulled cash out and live in a state that has a substantial income tax. It often puts an investor in position where they must hold onto a property until they die when under current tax law their estate gets a “stepped up basis” allowing their heirs to avoid most of the income tax consequences. The new Biden administration has promised to end this “rich persons” loophole. From a practical viewpoint you do not need to be rich to run into this issue. What is a low basis investor to do if they want to liquidate investment property without dying? As seasoned IRC1031 investors know to “exchange” property held for the productive use of business or income it must be real property not personal. Stock shares even if real estate is owned by a corporation cannot be exchanged via 1031. Enter the Delaware Statutory Trust or DST. A DST can be used if an investor cannot id a replacement property within the 45-day 1031 window or to utilize excess exchange proceeds when a replacement property is bought for less than the sale price of the relinquished property or simply just to acquire a total passive investment.
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LEGAL CORNER
Note 1: areas like Teton & CONVENTIONAL FHA Type Sheridan County are higher Single $647,200 $420,680 Note 2: FHA&VA require owner occupancy no LLCs/corps Duplex $828,700 $638,650 Note 3: FHFA for conventional Triplex $1,001,650 $651,050 conforming loans 4-plex $1,244,850 $809,150 Note 4: unit loans >4 Bank portfolio conventional loans
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DSTs are considered securities and are set up and sold by licensed securities brokers. As with a replacement property, the DST must be identified within the 45-day identification period to take advantage of the 1031 tax deferral. For Federal income tax purposes, the IRS considers an investor of an undivided fractional interest in a trust to own the trust assets attributable to that interest. When using a 1031 exchange, the investor is exchanging real property for an interest in the DST, and it is considered replacement property even though it looks like personal property. IRS Rev. Rul. 2004-8. Another type of DST called a Deferred Sales Trust which relies upon the installment sales method utilizing IRS rules per 26 USC 453b is also a good option for a failed 1031 if structured properly. Chuck West of #1 Properties was awarded the Certified Commercial Investment Member (CCIM) designation #897 in 1978 by the CCIM Institute, one of the leading commercial real estate associations in the world. More than 15,000 commercial real estate professionals have earned the CCIM designation requiring a rigorous combination of coursework and experience since the program was founded in 1969. Chuck is a licensed real estate attorney in CA since 1983 and broker in CA and WY, and has been involved in commercial real estate for over 30 years in private practice, as a corporate executive in charge of 10 million square feet of commercial properties on a national basis and as Director of Real Estate for two large counties handling 14 Million square feet of leased space and 50 million square feet of government owned space.
#1 Properties has closed 1,989 sales in 2021 YTD with a total volume of $731,733,166
11.29.21
MERRY CHRISTMAS & HAPPY NEW YEAR! “Giving to those in need what they could be gaining from their own initiative may well be the kindest way to destroy people.” Toxic Charity by Robert Lupton
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