The Future of 1031 Exchanges? A 721 UPREIT may be the answer.

Just because an investment is fundamentally sound or offers a positive return, doesn’t necessarily make it a good one. There’s an element of “fit” that must be considered any time a potential investment is evaluated. From time horizon to risk tolerance, return expectations, and income requirements, every investor has different needs, and the key to finding a good investment is to find one that meets most or all of those needs. For a certain segment of the investing public, an investment in a Delaware Statutory Trust has the potential to be a good fit and is worthy of consideration. What is a DST? A Delaware Statutory Trust is a “legally recognized entity that is set up for the purpose of conducting business. They are formed using a private trust agreement under which real property is held, managed, invested, administered, and/or operated for the purpose of profit.” Translated casually, a DST is a corporate entity, set up for the purpose of acquiring a specific real estate asset. Potential investors purchase shares in the entity, which entitle them to a proportionate share of the potential cash flow and profits produced by the underlying asset. Pros and Cons of Investing in a DST Like any investment, there are pros and cons to consider when evaluating a DST opportunity. On the positive side, DSTs provide individual investors with a passive investment opportunity in institutional quality assets that they wouldn’t otherwise be able to invest in. It’s passive because the properties are managed by institutional-quality property management with significant experience and a favorable track record. Additionally, DSTs are available in all asset classes, including some of the most popular ones like multifamily, industrial, and office and they can be used as a useful estate planning tool. Lastly, and maybe most importantly, DSTs can provide significant tax benefits when purchased in conjunction with a 1031 exchange . While the DST benefits are impressive, there are some downsides to consider. To start, DSTs are illiquid. They require a holding period of 5-10 years and the market can change significantly over that time. In addition, DST’s can’t raise new capital once they’re closed, which means that: (1) the properties require higher than usual reserves; and (2) an unexpectedly large capital expenditure like a new roof can erode years of profits. Further, DST investors have no say in property management decisions. They’re passive investors only and will almost certainly come out on the losing side of a dispute with the property manager. As these are just some of the cons to consider, investors should ensure they are familiar with all risks before investing. Between the pros and cons, there’s a lot to consider, which brings us back to the idea of “fit.” What Types of Investors are DST s a Good Fit For? Generally speaking, an investment in a DST may be a good fit for an individual that falls into one or more of the following categories: 1. Individuals seeking to be passively involved with their investment 2. Individuals looking for exposure to institutional quality assets with professional management 3. Individuals who have experienced a recent gain on the sale of an asset and are looking to defer the gain from taxes 4. Income investors with a 5-10 year time horizon Who are these individuals? For the most part, they may be, but are not limited to, business owners, successful investors, executives, doctors, lawyers, and accountants who tend to be a little bit older and established in their careers. Do You Think a DST Might be a Good Fit for You? I specialize in helping my clients identify and select real estate investments, including DSTs, that are suitable for their risk tolerance and time horizon. I’d like to invite you to set an appointment or to attend our next seminar. You can do so by calling me at 650-282-0477 or by sending an email to amit@get1031properties.com I look forward to hearing from you. This is for informational purposed only and does not constitute an offer to buy or sell any securitized real estate investments. There are risks associated with investing in Delaware Statutory Trust (DST) and real estate investment properties including, but not limited to, loss of entire principal, declining market value, tenant vacancies and illiquidity. Diversification does not guarantee profits or guarantee protection against losses. Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated. 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. Because investors situations and objectives vary this information is not intended to indicate suitability for any particular investor. This information is not meant to be interpreted as tax or legal advice. Please speak with your legal and tax advisers for guidance regarding your particular situation. Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC.

Delaware Statutory Trusts: Who Should Invest? Just because an investment is fundamentally sound or offers a positive return, doesn’t necessarily make it a good one. There’s an element of “fit” that must be considered any time a potential investment is evaluated.

Many Bay Area real estate investors I speak with tell me, "Amit, I want to sell my investment property, but where would I exchange my proceeds into?" I've been working with real estate investors for many years, and I understand their dilemma. Where can Bay Area real estate investors find properties that provide more cash flow potential and aren't management-intensive within the dreaded 45-day identification period that goes by far too fast? To help navigate the identification process and understand which properties are eligible and meet your investment and lifestyle goals, real estate investors should keep their options open. Think broadly when considering a property for your 1031 exchange . Fortunately, the IRS doesn't consider "like-kind property" to be nearly as restrictive as it sounds. Investors can select from apartment buildings, industrial properties, office buildings, shopping centers, single-family home rentals, Delaware Statutory Trusts , and Single Tenant Net Leased Properties, for example. Each property type has its unique advantages and disadvantages. From an investment standpoint, they may seem like they're from different universes. When it comes to 1031 Exchanges, there's no requirement that a single-family rental property must be exchanged for another single-family home. Instead, an investor can trade a single-family home for an apartment building, raw land, or a Delaware Statutory Trust. Investors may have their sights set on a particular property type when commencing the sale of their investment property, but I believe this is an excellent opportunity to broaden your horizons and dig deeper into different types of property to diversify your portfolio. For 1031 exchange reinvestment, the IRS has laid out specific guidelines on which properties you can consider. First and foremost, your primary residence cannot be used for 1031 exchange reinvestment (unless you convert your property into a rental property - download 5-Steps to convert your primary home to a rental property for maximum tax benefits ). Only properties used for business or investment qualify as "like-kind" for 1031 exchange. There are four things to consider when identifying replacement property: Personal Time • Do investors want properties that provide more margin in their personal life, such as more time with family, traveling or other goals? • Are there parts of managing rental properties that owners enjoy or don't enjoy? Such as value-add projects, tenant relationships, routine maintenance, and/or management? Regulation • Where do property owners anticipate housing regulations to be in the next one or two years? • What is currently proposed in the state your property is located? And how do these new laws affect property owners' ability to effectively manage their property while meeting their income and lifestyle goals? Risk • What is the property owner's investment risk and how has it changed? • Is all the equity tied up in one property, geography, or asset-class? • How do rental property owners view liability risk (e.g. tenant risk, lawsuit risk, etc.) associated with our current rental property portfolio? • How do we mitigate the risk? Income • How much income is the property currently earning, and how much would the owner like to own in order to maintain their lifestyle? • Are there any anticipated changes for more income in the future? Key takeaways The 1031 exchange is a tool used by savvy real estate investors to take full advantage of the tax code, leverage, and potential cash flow benefits that investment real estate may provide. Because the execution and nuances of 1031 exchanges can get quite complex, investors new to real estate or the like-kind exchange process should contact qualified tax and real estate professionals to be sure an exchange is properly executed. Are you interested in learning more? I specialize in helping my clients identify and select DSTs suitable for their risk tolerance and time horizon. If you are interested in learning more about DST investment opportunities , I'd like to invite you to set an appointment or attend our next webinar. You can do so by calling me at 650-282-0477 or by sending an email to amit@get1031properties.com. This is for informational purposed only and does not constitute an offer to buy or sell any securitized real estate investments. There are material risks associated with investing in 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. Diversification does not guarantee profits or guarantee protection against losses. Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated. Because investors situations and objectives vary this information is not intended to indicate suitability for any particular investor. This information is not meant to be interpreted as tax or legal advice. Please speak with your legal and tax advisors for guidance regarding your particular situation. Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Get1031Properties is independent of CIS.

A 1031 Exchange is an IRS approved program that allows individual investors to defer taxes on the profitable sale of a property. The deferral can be one time or indefinite if the exchanges are completed over and over. The program is popular with investors and the potential benefits of utilizing it may be powerful. But, to achieve full tax deferral, there are a series of rules and restrictions that make swift identification of a suitable “replacement” property critically important. Time and Property Constraints The importance of identifying a replacement property (the property to be purchased) quickly is driven by two time and property constraints outlined in the IRS code that authorizes the 1031 Exchange: The Replacement Property must be formally “identified” within 45 days of the date that the Relinquished Property is sold. The Replacement Property must be “like-kind” to the Relinquished Property, meaning that it: must be in the US; must be “of the same nature or character;” must be “held for productive use in a trade or business or for investment;” and the market value must be greater than or equal to the Relinquished Property. Real Estate transactions tend to have long lead times and there can be significant competition for the best properties. As such, it can be more difficult to find a suitable Replacement Property - within the 45-day time window - than one may think. Four Tips to Finding a Suitable 1031 Exchange Replacement Property These four things can be done to help ensure that a suitable Replacement Property is found within the required time frame. Prepare - If it is known that a 1031 Exchange is the desired next step when listing a property, prepare ahead of time by starting the search for a suitable replacement early. Remember, the 45-day clock starts ticking when the property is sold so looking before the sale actually occurs buys additional time. Work with a Knowledgeable Broker - Many real estate brokers, myself included, focus specifically on helping their clients find suitable 1031 Replacement Properties. Over years, they’ve developed specific expertise and relationships that may make the process easier. A good broker can quickly identify suitable Replacement Property options and present them to their client in a short period of time. In addition, they may have access to deals that an individual investor doesn’t. Cast a Wide Net - 1031 Exchange rules do not place any restrictions on where a Replacement Property is located, as long as it is in the United States. If there is difficulty finding suitable replacement properties in a local market, it may be a good idea to broaden the search criteria to include NNN leased or other commercial properties in the entire state or country. Sometimes there are more opportunities in secondary or tertiary markets that may have the potential to be just as, if not more, profitable than the crowded primary markets. Get Creative - Finally, there is an alternative option for purchasing a property directly known as a Delaware Statutory Trust ( DST ). It is a tax-advantaged entity that has been identified by the IRS as a “like-kind” investment in a 1031 Exchange. In some ways, a DST offers several potential advantages over direct ownership because: they provide access to institutional quality replacement assets; have professional management, making them a truly passive investment; are available in all commercial asset classes; have low minimums, allowing owners to potentially diversify their investment; and can be a good estate planning tool because DST’s are easily divisible investments and tax rules allow heirs to inherit the holdings at a stepped-up cost basis. If considering a DST, it is also important to identify the risks of going this route. For example, the fees involved with a DST may affect the overall return and the required holding period can be 10 years or longer. Interested in Learning More? I specialize in helping rental property owners build tailored replacement property portfolios that seek to meet their investment and lifestyle goals, which include 1031 Exchange and DST options. If you are interested in learning more about 1031 Exchange and/or DST investment opportunities , I recommend downloading my latest eBook here or setting an appointment or to attend our next seminar . You can do so by calling me at 650-282-0477 or by sending an email to amit@Get1031Properties.com. This is for informational purposed only and does not constitute an offer to buy or sell any securitized real estate investments. There are risks associated with investing in Delaware Statutory Trust (DST) and real estate investment properties including, but not limited to, loss of entire principal, declining market value, tenant vacancies and illiquidity. Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated. Diversification does not guarantee profits or guarantee protection against losses. 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. Because investors situations and objectives vary this information is not intended to indicate suitability for any particular investor. This information is not meant to be interpreted as tax or legal advice. Please speak with your legal and tax advisors for guidance regarding your particular situation. Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Get 1031 Properties is independent of CIS.

Allocating capital to a real estate investment involves accepting some level of risk in the hope of achieving a positive return. The more risk an investor takes, typically the wider the potential variation in return. This concept introduces an interesting question… how does an investor identify and mitigate risk?

1031 Exchange Myths Explained and What You Need To know

Learn how A 1031 exchange can potentially improve your retirement lifestyle

From income to price appreciation, a real estate investment is chock full of potential benefits related to appreciation. However, one of the most commonly overlooked, but equally as powerful, benefits is the favorable tax treatment created through depreciation. What is Depreciation? Just like any tangible asset, real estate tends to degrade over time. What was once a gleaming new property will slowly wear out, succumbing to things like weather, changing tastes, and degradation of major systems like HVAC, Electrical, and Plumbing. To account for this, the accounting rules that govern real estate allow for a gradual reduction in the value of the property in a process known as depreciation. Officially, depreciation is defined as the accounting method of allocating the cost of a tangible asset over its life expectancy. It represents how much of an asset’s value has been used up and is found as a line item on the income statement. , (1,2) Why It Matters Depreciation is beneficial because it’s recorded as an expense line item on the income statement, even though it doesn’t represent cash out of the owner’s pocket. Expensing depreciation reduces the taxable income of the property, creating a smaller tax bill in the process. Consider the following example: Property #1 - No Depreciation Property #2 - Depreciation Income $100,000 Income $100,000 Taxes $20,000 Taxes $20,000 Insurance $8,000 Insurance $8,000 Utilities $12,000 Utilities $12,000 Depreciation $10,000 Total Expenses $40,000 Total Expenses $50,000 Net Operating Income $60,000 Net Operating Income $50,000 Both properties have the same amount of income, but property #2 lists $10K in depreciation on the income statement. As a result, the taxable income is reduced by $10K. Assuming a tax rate of 25%, expensing depreciation results in a tax savings of $2,500. Perhaps this is an oversimplified example, but the savings can be significant on a larger scale. Calculating Depreciation With the benefit of depreciation established, the question becomes, “how is the annual depreciation amount calculated?” To answer the question, three inputs are required: ➢ Cost Basis: The Cost Basis establishes the starting point for expensing depreciation. More often than not, it’s the purchase price of the asset. ➢ Useful Life: The Useful Life is an estimate of the property’s functional lifespan. Per IRS rules, there are some required standards, but a safe estimate is 27.5 years for residential property and 39 years for commercial. (3) ➢ Depreciation Method: Per IRS guidelines, there are multiple allowable methods to depreciate a property, but the most common is the “straight line” method, which divides the cost basis by the property’s useful life. (1) Let’s put these inputs to work in an example. Assume a property with a $1MM purchase price, 39-year useful life, and straight-line depreciation method. In this scenario, the annual allowable depreciation would be $25,641 ($1MM/39). So, for every year an investor owns the property, they’ll be allowed to record this amount in depreciation expense, thereby reducing their taxable income. While this is great, there’s a hidden cost to be aware of. Depreciation Recapture If an investor has owned a property for a significant amount of time before selling it, there’s a hidden tax known as “Depreciation Recapture,” which is the tax that must be paid on the difference between the property’s sales price and cost basis. Using the same example from above, let’s assume the same investor who purchased the property for $1MM is going to sell it after their 10-year holding period. If $1MM was starting point and $25,641 in depreciation was taken annually, then the property’s cost basis at the end of 10 years is $743,590 (($1,000,000) - ($25,641*10)). Let’s also assume that at the end of the 10-year holding period, the property was sold for $1.2MM. Upon sale, the investor must pay taxes on the difference between the cost basis of the property ($743,590) and the sales price ($1,200,000). Assuming a 25% tax rate, taxes on the sale are going to be $114M. This can be a surprise for investors if it isn’t planned for and slightly offsets the benefits of expensing depreciation. What to Do When Depreciation Runs Out If a property has been held long enough for its cost basis to be reduced to $0, there may be a uniquely large tax bill associated with its disposition. In addition, the owner will no longer be able to reap the tax benefits of additional depreciation. So, they’ll likely consider doing one of three things: ➢ Nothing: An investor may choose to do nothing, which is fine, but their return on the property would likely be reduced since they’re no longer reaping the benefits of the depreciation expense. ➢ Sell The Property: The investor can dispose of the asset, but would face a hefty depreciation recapture tax in doing so. ➢ Exchange the property: Using a 1031 Exchange , an investor may sell the property and use the proceeds to buy a new property in a process known as a 1031 exchange. This option has two major benefits: (1) Taxes are deferred on the sale as long as the proceeds are invested into a property of “like kind;” and (2) The owner can start the depreciation process on the new property all over again. Summary & Conclusions Because it isn’t associated with direct returns on an investment, depreciation is an often overlooked benefit to real estate investing due to potential tax savings. To take advantage of it, it’s important to know the basics and to work with a qualified CPA to ensure that all required taxes are paid and that all allowable depreciation is taken. But, if a property is held for a long period of time, it’s important to account for the depreciation recapture tax, which can often catch investors by surprise and unprepared to pay it when the property is sold. I specialize in helping my clients identify and select 1031 Exchange properties or DST properties that are suitable for their risk tolerance and time horizon. If you are interested in learning more about replacement options and/or DST investment opportunities , I’d like to invite you to set an appointment or to attend our next seminar. You can do so by calling me at 650-282-0477 or by sending an email at amit@Get1031Properties.com. ______________________________________________________________________________ (1) Accounting rules allow for depreciation on the structure and improvements only. Not land. (2) Not to be taken as accounting advice. Always consult a qualified CPA who can provide advice relevant to your unique situation. (3) Always consult a CPA This is informational purposes only and does not constitute an offer to purchase or sell securitized real estate investments. Hypothetical examples are for illustration purposes only and individual results will very. There are risks associated with investing in real estate and Delaware Statutory Trust (DST) properties including, but not limited to, loss of entire investment principal, declining market values, tenant vacancies and illiquidity. 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. Because investors situations and objectives vary this information is not intended to indicate suitability for any particular investor. This material is not to be interpreted as tax or legal advice. Please speak with your own tax and legal advisors for advice/guidance regarding your particular situation. Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Get 1031 Properties is independent of CIS.

Although a good portion of 1031 exchanges are completed by acquiring a replacement property which mirrors the relinquished property, this isn’t always the case. Currently, when it comes to real estate, Section 1031 tax law provides wide latitude when it comes to what sort of replacement properties qualify as “like-kind” to relinquished property. Taxpayers have exchanged all kinds of unusual properties. If you have a client preparing to conduct an exchange, they may be concerned about the eligibility of their prospective replacement property. Fortunately for taxpayers, the interpretation of the like-kind requirement is quite broad, and so taxpayers have a lot of leeway when it comes to selecting a potential replacement. In this post, we will discuss the potential risks involved with selecting unusual replacement properties in an exchange. For now, as long as the prospective property is considered “real property” under local law, then it will qualify as like-kind to relinquished property. The Like-Kind Requirement is Critical As we’ve mentioned in an earlier article, the like-kind requirement is one of the four basic elements of Section 1031 law. The other three elements are actual transfer, eligibility, and the holding requirement. Simply put, your client needs to satisfy the like-kind requirement in order to have a successful exchange. And there’s no way to bend or modify the requirement; either the replacement property qualifies as like-kind, or it doesn’t. Like the other three basic requirements of Section 1031, the like-kind requirement is rigid. The good news is that the like-kind requirement is interpreted broadly. This means that your relinquished property and your replacement property don’t have to be superficially similar to qualify as like-kind. If your client owns a residential rental property, they can choose raw land, a commercial building, an interest in a Delaware statutory trust , a 30 year leasehold interest in real estate, or another type of property and satisfy the like-kind requirement. Replacement Property Must Be Real Property Under Local Law The like-kind requirement is broad enough that it raises the question of where exactly the boundaries kick in. One useful guideline is that the like-kind requirement only refers to the nature of the property, rather than its quality or grade. So, as long as the property itself is classified as real estate, then it should be eligible as replacement property. The IRS has issued documents to clarify a number of edge cases which seemed to push the boundary of the like-kind requirement. For instance, the IRS has issued private letter rulings and revenue rulings in cases involving easements, which are temporary rights to real property. In PLR 9232030, for example, the IRS ruled that a perpetual agricultural conversation easement was like-kind to a fee interest in real property. The IRS has issued documents in cases which involve water rights, oil rights and other interests in valuable materials. The general guideline is that a royalty interest is like-kind to real property. As would be expected, clients will need to seek specialized counsel if they have a case involving one of these unusual properties. Thus far, however, Section 1031 tax law has upheld the principle that whatever is considered real property under local law (of the area housing the replacement property) will qualify as like-kind real property for purposes of Section 1031. This gives taxpayers wide latitude. If your clients want to expedite the process of determining the status of his or her target replacement property, he or she should check its status under the applicable state or local law. Unusual Replacement Properties Carry Some Risks As the existing body of Section 1031 case law and IRS statements show, not all rights or interests in property are eligible as replacement property. There have been numerous judicial opinions which denied like-kind qualification when an unusual property was selected. If your client selects an unusual replacement property, there may be some degree of risk, especially if the unusual property hasn’t been scrutinized by the IRS or the courts. This is true even if that unusual property appears to be classified as real property under local law. The reason for this is because there could always be a legal challenge by the IRS, and there is a possibility that the courts may narrow the interpretation of like-kind in a given situation. It’s always possible that a court may deny recognition of a given property as real property, even if local law holds otherwise, because the court things that the interpretation has become too broad in a given case. Given what is at stake, be sure that your client seeks out a competent tax attorney in this area so that he or she can be properly counseled on the risks and probability of collapse. The IRS will challenge a case if it thinks that it has a good chance of success. Moreover, a replacement property which stretches the common sense interpretation of like-kind may be successfully impugned.