Considering Real Estate? Know the ABCs of DSTs, TICs and 1031s

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Having commercial and multifamily real estate in your investment portfolio provides diversification, and can potentially generate income and help you build wealth. Before diving in, consider the range of ownership structures and the potential tax advantages of real estate investing.

By Dwight Kay, CEO & Founder, Kay Properties & Investments, LLC 

Investment real estate is the largest asset class in the U.S. behind the equity and bond markets. Millions of investors allocate some portion of their investment portfolio to income properties, including commercial and multifamily real estate, to diversify their assets and as part of a potential wealth-building strategy.

Before you invest in real estate — or add to your portfolio if you already own investment property — you should know about two increasingly popular passive investment vehicles, and one of the most attractive real estate tax benefits.

Two Ways to Passively Invest in Real Estate 

#1: Delaware Statutory Trusts

A Delaware Statutory Trust (DST) is an entity used to hold title to investments such as income-producing real estate. Most types of real estate can be owned in a DST, including industrial, multifamily, office and retail properties. Often, the properties are institutional quality similar to those owned by an insurance company or pension fund such as a 500-unit Class A multifamily apartment community or a 50,000 square foot industrial distribution facility subject to a 10 to 20 year lease with a Fortune 500 logistics and shipping company.

There can be up to 499 individual investors in a DST. Each investor holds an undivided fractional interest in the property or properties (if the DST holds multiple assets), making the investor an owner. That said, decision-making authority typically rests with a trustee who is the asset manager designated by the sponsor of the DST offering. The asset manager takes care of the property day to day and handles all investor reporting and monthly distributions.

A DST is considered a security and is governed by securities laws. The typical minimum investment in a DST is $100,000. Owners of a DST receive an operating statement at the end of the year showing their pro-rata portion of property income and expenses, which investors input onto Schedule E of their tax return, in the same way that you would any other commercial or rental properties that you may own directly.

#2: Tenants-in-Common 

A tenants-in-common (TIC) structure is another way to co-invest in real estate. With a TIC, the number of allowable investors is limited to 35.  As a result of the lower investor limit, the minimum investment requirement to purchase a property through a TIC may be substantially higher than a DST. We often see minimums for TIC investments between $250,000 and $1 million.

Although TIC investments and DSTs have their nuances and differences, they often will hold title to the same types of property. While the DST is generally considered the more passive investment vehicle, there are some circumstances in which a TIC is desirable, including if the investors wish to utilize a cash-out refinance after owning the TIC investment for a few years in order to get some of their equity back, which can be invested in other assets.   

Real Estate Tax Benefit that Helps Build Wealth

Whether you’re invested in DSTs or TICs, you are eligible to take advantage of one of the most attractive real estate tax benefits on the books in the U.S.: the 1031, or “like kind,” exchange.

1031 exchanges are so called because they are governed by Section 1031 of the Internal Revenue Code. About one-third of all commercial and multifamily property sales involve a like-kind exchange, which is available to investors of all income levels. (You don’t have to be a high net worth investor to take advantage of the tax benefit.)

A like-kind exchange allows an investor to defer capital gains, depreciation recapture and other taxes at the time an investment property is sold if the net equity from the sale is reinvested into a property of the same or greater value. With a 1031 exchange, an apartment building can be exchanged for a warehouse, a warehouse for a medical office building, a medical office building for a drugstore, etc.

The net effect of 1031 exchange investing: the initial invested capital and the gain can continue to potentially grow tax deferred. With a 1031 exchange, no tax consequences are triggered after a property sale. Then, if and when the new investment is sold without the equity reinvested in another exchange property at some later date, the prior gain would be recognized.

Not all properties qualify as like-kind exchange replacement properties under the Internal Revenue Code. But DSTs and TICs do. A person can invest into a DST property to qualify for the tax treatment when they sell their investment property, or invest out of a DST into another DST or another property of like-kind (Internal Revenue Code Ruling 2004-86) to maintain the tax benefit.

If you already own real estate and are contemplating a sale, this could potentially be a great time to exchange into another property. Some national policymakers are considering changing the rules that govern 1031s. The tax benefit could work differently in the future.

About Kay Properties and www.kpi1031.com 

Kay Properties is a national Delaware Statutory Trust (DST) investment firm. The www.kpi1031.com platform provides access to the marketplace of DSTs from over 25 different sponsor companies, custom DSTs only available to Kay clients, independent advice on DST sponsor companies, full due diligence and vetting on each DST (typically 20-40 DSTs) and a DST secondary market.  Kay Properties team members collectively have over 115 years of real estate experience, are licensed in all 50 states, and have participated in over 15 Billion of DST 1031 investments.

This material does not constitute an offer to sell nor a solicitation of an offer to buy any security. Such offers can be made only by the confidential Private Placement Memorandum (the “Memorandum”). Please read the entire Memorandum paying special attention to the risk section prior investing.  IRC Section 1031, IRC Section 1033 and IRC Section 721 are complex tax codes therefore you should consult your tax or legal professional for details regarding your situation.  There are material risks associated with investing in real estate securities including illiquidity, vacancies, general market conditions and competition, lack of operating history, interest rate risks, general risks of owning/operating commercial and multifamily properties, financing risks, potential adverse tax consequences, general economic risks, development risks and long hold periods. There is a risk of loss of the entire investment principal. Past performance is not a guarantee of future results. Potential cash flow, potential returns and potential appreciation are not guaranteed.

Nothing contained on this website constitutes tax, legal, insurance or investment advice, nor does it constitute a solicitation or an offer to buy or sell any security or other financial instrument. If you are not the intended recipient of this message, any use, dissemination, distribution or copying of this communication is strictly prohibited. If you have received this communication in error, please immediately notify the sender and permanently delete all copies that you may have. Securities offered through Growth Capital Services, member FINRASIPC, Office of Supervisory Jurisdiction located at 582 Market Street, Suite 300, San Francisco, CA 94104.

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