While there have been many deferrals and deadline extensions the IRS has allowed due to the now multiple crises we are having, extensions on 1031 Exchanges that had a deadline after March 31st, have only been increased until July 15th.
While the extension may help some investors, it may still leave some hanging out to dry. Most of the delays are due to:
- The ability to view replacement properties. While most states have at least partially opened, some states such as NJ have increased their stay at home order for an additional 30 days.
- Inspecting properties has been difficult. Many inspectors who have been able to stay afloat have been denied access to view properties. We have also seen a record amount of small business permanently shut down, property inspectors and property inspection companies have not been an exception. Which is giving investors limited options and availability.
- Financing has slowed and is more difficult to obtain. The current crisis has made obtaining loans, specifically for investors more difficult and in many cases fluctuating and/or high interest rates. This is making it difficult for investors who had debt on their relinquished properties.
For those that may be experiencing this, a Delaware Statutory Trust (or DST) may be a viable option. Some of the key highlights and benefits of a DST are:
- Can be a contingency plan for any real estate sales that fall through
- Any excess profit or “boot” can be rolled into a DST
- You can use a highly leveraged DST to make a client a CASH BUYER
- Access to institutional-quality real estate
- Professional asset and property management
- Passive ownership
- Non-recourse institutional financing (Investors aren’t on the hook for any of the debt)
- Lower minimum investment
- Portfolio Diversification
- Ability to close quickly
While the above options may seem appealing, I do need to point out that if you purchase ownership in a DST, the biggest downside (in my opinion) is the lack of liquidity. While you generally do not have a high amount of liquidity in real estate, you become a passive investor in a DST. Which means you have no say in the liquidity. Normally the holding periods are 4-7 years, but that is not up to the passive investors and is strictly at the discretion of the holding company. You also will not be able to do a cash out refinance to create liquidity as you can do if you have a decent amount of equity in a property you hold the title for.
For investors that do not have debt, a Charitable Estate Replacement Plan (CERP) may be a viable option. This option allows you to eliminate up to 99% of capital gains. This is normally only an economically viable option for unleveraged properties with a value of $1,000,000 or more. You can read more about CERPs here.
If you’d like to learn more about 1031 Exchanges and utilizing DST’s in the process, you can read my earlier article/newsletter here.
If you have any questions, or would like to inquire about DSTs, 1031 Exchanges or CERPs, you can reach out to me at my contact information below, or you can reach out to my office here.
Dan Nuwash, MBA
Founder and Managing Partner
Finance For Thought