Successful real estate investors

Successful real estate investors do not rely on luck

Successful real estate investors do not rely on luck. Instead, their success is a product of their knowledge and experience. Not only do these investors understand markets and have the ability to identify good properties and negotiate fair prices for them, but they also have command over a set of tools that helps them effectively manage their tax liability. One of the most powerful tools at their disposal is the IRC Section 1031 Exchange.

As you may be aware, a 1031, or like-kind exchange, alloo's investors to defer ordinary income and/ or capital gains tax on the sale of one investment property by using the proceeds to invest directly in another property. Using like- kind exchanges, an investor can swap properties indefinitely, maximizing profit by paying taxes on the transactions only once-and ideally at the favorable long-term capital gains rate-when they liquidate the real estate and cash in on their investment.

Powerful as the 1031 exchange can be, executing one properly can be complicated. The rules governing like-kind exchanges can be strict, from identifying a replacement property of the appropriate value to closing on it within a relatively short time frame. And penalties for running afoul of these rules can more than offset the potential benefits.

Fortunately, a securitized real estate strategy called the Delaware Statutory Trust (DST) can make that process easier and less stressful. A DST enables investors to purchase ownership in fractional shares of real estate assets, rather than finding and investing in those properties on their own.

In many ways, the benefit of using an IRS Rule 1031 Exchange is similar to that of a tax-advantaged investment account. By retaining and reinvesting gains on the sale of property rather than paying taxes on those gains, investors are able to keep more of their money working for them. And in doing so, they can generate more cash flow and increase the value of a real estate portfolio.

For example, an investor who owns appreciated property could use a 1031 exchange to sell that holding and purchase one or more similarly-priced properties that perhaps offer more potential for growth. Untaxed gains on the sale of the original property become equity the investor can use to purchase a more valuable investment than if they had to pay taxes on the sale.

A 1031 exchange offers a clear advantage for investors seeking to boost cash flow or build the value of their portfolio. Consider the tax implications of a property transaction without a 1031 exchange:

●Between state and federal capital gains, an investor could be taxed up to 30 percent on the sale of a property.

●If an investor claimed depreciation on the property while they owned it to help offset income tax, they would typically be required to reimburse the IRS for that deduction. Depreciation recapture is taxed as ordinary income at a rate of up to 25 percent.

● If an investor's adjusted gross income is over $200,000. they are subject to net investment income tax of nearly 4 percent.

Without the use of a 1031 exchange, more than half of the gain on a sale of an investment property could go directly to taxes. The advantage of exchanging like-kind properties is clear, but a number of conditions must be met in order for the IRS to recognize that exchange.

First, the asset being acquired to replace the one being sold must be like kind property of equal or greater value. Like-kind property refers to business or investment real estate, which can include apartments and single family homes, raw land, industrial or retail properties, and securitized real estate. One investment property must be swapped for another, so an investor cannot use a 1031 exchange to defer taxes on the sale of their primary residence.

Eligibility for an exchange is incumbent on finding the right kind of replacement property quickly. The owner must identify a potential qualifying replacement property, or properties, within 45 days of selling the property they owned. The owner must then close on the purchase of the new property. within 180 days. This tight timeframe can pose challenges for investors.

For one, it can be hard to find a suitable replacement property-one that meets the requirements of a 1031 exchange and is. also an appropriate investment-in less than two months. Investors are also responsible for performing due diligence before closing. including title search, land surveying. and environmental assessments. These obligations, coupled with the short timeframe during which they must be performed, is an obvious barrier for many real estate investors. That is why many investors considering a 1031 exchange prefer using the Delaware Statutory Trust structure (which also satisfies the IRS like-kind requirement).

The DST is a securitized real estate investment which can simplify the process of acquiring a replacement property. DST investments are offered through a sponsoring firm that manages the research, due diligence, and administrative tasks that can prove difficult for many investors.

In a DST, investors pool their money to buy shares in a trust, which in turn owns a property or set of properties. That structure provides investors executing a 1031 exchange with some valuable flexibility. Rather than searching for a property of equal value to the one they are relinquishing. the investor has the ability to purchase a specific amount of interest in the trust.

A DST also eases the responsibility typically required of an investor making a 1031 exchange. A sponsoring firm does all the initial legwork necessary to create a pre-packaged real estate investment including finding properties.

Securing financing, and purchasing and retaining management to oversee the property. Once that work is completed, interest in the trust is extended to potential investors. Investors own shares in the trust and receive a share of the income generated by the property that the trust owns at a rate proportionate to that ownership stake.

A DST can provide investors with more than a simplified replacement process and recurring Income steam:

●The firm sponsoring the trust is responsible for the management of the property and its operations, so owners are not responsible for landlord duties.

●DST beneficiaries pool equity with the co owners of the trust. giving them access to institutional quality properties.

● Investors also have the flexibility to use multiple DSTs as replacement property in a 1031 exchange, allowing them to diversify their real estate portfolio with multiple kinds of property in cities across the country.

 ●Owning assets through the trust also protects investors, shielding them from liability beyond their initial investment.

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Despite these advantages, DST ownership does have some limitations that should be considered. Once the trust is closed, no additional capital can be contributed, nor debt undertaken on the property. Also, investors have no voting rights in decisions made over the management of the property.

Used strategically through 1031 exchanges, a Delaware Statutory Trust can help investors build wealth while enhancing and diversifying their real estate portfolios. Financial advisors can be en invaluable resource for investors navigating the 1031 exchange process, vetting sponsoring firms and ensuring that the opportunities those firms present are in line with the needs and objectives of their clients.

By leveraging an advisor's expertise and knowledge of their personal and financial circumstances, investors can feel more confident in the decisions they are making for themselves and their families.

NOTE 1 :

This is for informational purposes only. There are material risks associated with investing In DST properties and real estate securities including liquidity, tenant vacancies, general market conditions and competition, lack of operating history, Interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/ operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire Investment principal. Past performance is not a guarantee of future results. Potential cash flow, returns and appreciation are not guaranteed. IRC Section 1031 is a complex tax concept; consult your legal or tax professional regarding the specifics of your particular situation. This is not a solicitation or an offer to sell any securities. DST 1031 properties are only available to accredited Investors (typically have a $1 million net worth excluding primary residence or $200,000 Income Individually/$300,000 Jointly of the last three years) and accredited entities only. If you are unsure if you are an accredited Investor and/or an accredited entity please verify with your CPA and Attorney.

Investment advisory services offered through Bangerter Financial Services, Inc. A state Registered Investment Advisor. Registered Representative and securities offered through Concorde Investment Services, Inc. (CIS), member FINRA/SIPC. Bangerter Financial Services, Inc. is Independent of CIS.


There is no guarantee that cash flow will be achieved. RISKS: There are substantial risks in these Investment program Investment of this nature are speculative, illiquid, and carries a high degree of risk-including the potential loss of the antire investment. There is no guarantee that monthly cash flow will be achieved. Investors should read the "risk factors of any Private Placement Memorandum for a complete discussion of the risks relevant to any offering, Please see the last page of this material for more important investor disclosures.