Available Investment Options
Investors interested in real estate and 1031 exchange options have many different solutions for their investment dollars. In addition to 1031 Exchanges, investors can participate in other direct real estate investments. We can help you determine the appropriate investment strategy for your portfolio.
Our team helps real estate investors exchange management-intensive properties for management-free income properties. DIS’s comprehensive team of tax advisors, attorneys, Real Estate Brokers and FINRA registered representatives represent clients participating in 1031 exchange investments. Clients interested in this type of investment are typically seeking:
See below for the options we offer which may be a powerful investment tool that allows investors to acquire passive ownership in larger, professionally managed income properties that may benefit from the following advantages; Prior to purchase full disclosure of comprehensive due diligence reports, pre-arranged non-recourse financing, high-net worth tenants, competently negotiated lease terms, as well as low minimum investment requirements that allow for better diversification into multiple markets and asset classes.
Delaware Statutory Trust
A properly structured 1031 DST legal trust allows an investor to sell an investment real estate asset, defer the taxation on the sale through Internal Revenue Code Section 1031, and buy a DST replacement property on a tax-deferred basis.
The DST investor will own a portion of the trust, called a Beneficial Ownership Interest, with the trust owning the underlying real estate. There will be multiple DST owners and each will own their own percentage of the trust. A DST investor is called a DST Beneficiary and will receive the potential economic benefits of the property held in the DST. For 1031 tax deferred exchange and income tax purposes, the investor is viewed by the IRS to own the real estate directly. For all other purposes the investor is seen as a passive participant.
Examples of DST real estate include office buildings, shopping centers, apartment buildings, industrial properties, and warehouses. In many cases, DSTs can offer opportunities for enhanced cash flow from rental income and tax benefits from depreciation of assets.
* The Many Advantages of a DST
1. No property management
2. Higher monthly "tax sheltered" cash flow potential than from original property:
3. The potential for greater capital investment appreciation on your present equity:
4. Tax Benefits
5. Short Holding period on property ownership
6. Investors seeking real estate diversification by spreading their equity amongst:
7. It is a great "back-up" replacement vehicle to use:
Please note: Investments such as a DST involve certain risks and tax ramifications. Please click here for risk and additional disclosures.
UP-REIT (721 Exchange)
REITs buy, sell and hold real estate portfolios consisting of a variety of different commercial properties ranging from shopping malls, apartments, office buildings, hotels, medical facilities and warehouses. Owning shares in a REIT is one way to own real estate. You cannot exchange directly into a REIT as that is not a like-kind exchange. However, if structured properly as an exchange, it can be exchanged into a DST fractural ownership investment and then be UPREITED after 18-24 months in exchange for shares in the REIT. Note: Not every REIT is available for a 1031 Exchange. After the DST property is UPREIT’d into the REIT, the investor enjoys full diversification as the investor now owns shares of multiple properties (can be hundreds or thousands). However, once they are in the REIT they can no longer complete another 1031 exchange as the investor now owns shares vs. real property. The advantage of this is that taxes can be paid a little at a time as the shares are sold (e.g. the investor sells as many shares as they want each year, and only pays taxes on the amount of shares sold). This is a popular tool for estate planners to use when dealing with tax consequences. A 721 UPREIT can also be used in conjunction with a DST, NNN or when an investor is buying another piece of direct ownership real estate (eg. Condo, sfr, apt. etc.).
UPREITs represent an exit strategy for property owners who rather than exchanging for another real property in a 1031 exchange, prefer the benefits of owning an interest in an UPREIT's operating partnership. These operating units benefit from the REITs capital appreciation and distributions of operating income. At a time determined by the taxpayer, the operating partnership units can be exchanged for shares in the associated REIT.
Investors wishing to own less labor intensive properties than apartments or store fronts, may look for replacement properties that provide consistent cash flow without the requirement to replace toilet seats, deal with trash and questionable tenants etc.
The NNN lease asset provides cash flow potential, class "A" tenants and most importantly, little if any labor requirements. Triple net leases require the tenant to be financially responsible for insurance, utilities, taxes, maintenance in addition to rent. The Landlord typically can enjoy high level of income while the building is maintained by the tenant. This type of ‘passive’ ownership may require a greater financial investment as its best if the investor gets a strong tenant such as a CVS or Walgreens. This type of ‘hands-off’ investment typically involves one single tenant, and typically calls for long-term (15-20 year) leases. Diversification does not guarantee profits or guarantee protection against loss.
Many well known retail companies such as drug stores, fast food restaurants and auto parts stores enter into NNN leases with options to renew up to 30 years providing consistent cash flow to the Landlord.
This type of investment has bond like attributes and the investor typically owns the property (no co-ownership) on their own, however a DST, 721 UPREIT can be utilized and enjoy some of the same benefits as NNN and DST while receiving potentially greater diversification.
Oil & Gas
Gas and Oil Royalties are attractive to investors looking to diversify out of real estate and invest in commodities we use every day. An investor doing a 1031 Exchange has many options including a royalty program for oil and gas. Assets such as oil and gas minerals particularly attract those who are anxious about the devaluation of the dollar, hyper-inflation and who are looking to diversify their 1031 exchange and receive a monthly royalty income. Even if your 1030 Exchange fails, there are oil and gas programs that can be used to offset capital gains.
Saltwater Disposal Wells
Investors who prefer to manage their own properties can simply purchase a replacement property directly. Other options besides a DST or 1031 Exchange are available for fractional ownership. Diversified Real Estate Advisors can help find a replacement property such as condo, single family residence, multi-family units or Triple NNN properties. Depending on the situation, it may make sense to diversify amongst other investment vehicles.
While it’s always good to have options, its best when options are fully understood and the best option can be selected with the current situation in mind. If you have questions regarding a 1031 exchange options, contact DIS’s comprehensive team of tax advisors, attorneys, Real Estate Brokers and FINRA registered representatives. Click here for a complimentary consultation or call 866-261-0104.
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