The time between closing on your relinquished property and the mandatory identification deadline (45th day) can be a stressful period. You don’t want to end up paying the tax of a failed exchange, nor do you want to acquire a property just to acquire a property. This is an important decision and you want to feel comfortable with your property selection. Let us help. We augment the efforts of your real estate agent or financial adviser, assisting them in locating suitable replacement property.
It has been our experience that most exchangors are baby-boomers or older who seek passive income without the hassles or headaches associated with management intensive real estate. Their objective is secure monthly income without any ongoing active involvement. Here are three popular alternatives that meet this criteria.
Net-lease means the tenant pays the taxes, insurance, maintenance, repairs, and utilities. For simplicity and security, many exchangors prefer single tenant properties, with leases guaranteed by a regional or national tenant such as Walgreens, AutoZone, Tractor Supply, Dollar General, Goodyear, DaVita Kidney Care, Verizon Wireless, or O’Reilly Auto. Most net-leases have 10-15 year terms, with multiple renewal options.
Tenant-In-Common (TIC) Properties
A sponsored TIC is where multiple investors hold a prorated interest in a property as tenants-in-common owners. In a tenant-in-common arrangement, each owner has a deeded interest in the property based on their percentage of ownership. For example, if an individual had $200,000 in a 1031 exchange, they could acquire 10% ownership, 10% of the depreciation, and receive 10% of the rents of a $2,000,000 AutoZone. A tenant-in-common agreement governs the relationship between the unrelated parties, and co-owners can vote to determine when they want to sale of the property, or each co-owner can unilaterally sell their percentage ownership. The best TIC sponsors assemble projects that are top-quality, institutional-grade investments, such as the net-lease properties mentioned above. The IRS has endorsed the sponsored TIC as a legitimate vehicle to execute a tax-deferred 1031 exchange. . While a TIC investment is a form of shared ownership, the TIC interest is not the same as a partnership interest in its economic, tax or legal characteristics.
Delaware Statutory Trust (DST) Properties
Much like a TIC property, a Delaware Statutory Trust allows a 1031 investor to purchase a fractional interest in high-quality property, but with a couple significant differences. Instead of a deeded interest in real property, investors own interest in a trust, which in turns own the property or properties. Also, a DST allows you to own a prorated share of a portfolio of income producing properties. The ability to diversify your 1031 dollars can be a real advantage toward protecting your retirement income. For example, you might place $100,000 in a DST with four medical properties, $100,000 in one that has a 300-unit apartment complex, and $100,000 into another with a dozen single tenant net-lease properties.
Acquiring a DST property has several advantages over acting on your own. Instead of locating a property, making an offer and negotiating terms, shopping and qualifying for a loan, waiting and paying for an appraisal, providing the lender with your financials and tax returns, pay closing costs and origination fees, and putting up with the time and hassle of dealing with a lender; when investing in a leveraged DST, the financing is already in place. After filling out a subscription agreement for the purchase of a DST, your 1031 funds are wired to the DST sponsor and essentially your done. Typically, your monthly checks begin the following month. Also, DST financing is typically non-recourse, very seldom found at your local bank.
An advantage or disadvantage (depending how you look at it) of investing in a DST, is all decision-making is vested in the sponsor-affiliated trustee. If your big on control, a DST may not be right for you. If passive investing is what you’re seeking, you might consider DSTs are your primary or secondary choice for replacement property.
1031 Exchange Place can assist you in finding reputable TIC or DST sponsors.