Delaware Statutory Trust Case Studies
Carl E. Sera, CMT
January 14, 2020
Case Study #1 - A local CPA explains how their client was selling a property and would have to pay both a substantial capital gains tax and depreciation recapture. Was there any way other than a direct property to property 1031 exchange that could save the client taxes. The capital gains and depreciation recapture taxes would be substantial since the property had appreciated significantly and the client had taken every opportunity to fully depreciate.
The CPA further indicated the client had another property in mind that might serve as a good 1031 opportunity but they weren’t sure if they would be able to close on the new property in time to meet the 1031 guidelines. In fact, they weren’t even sure if they would be able to close the deal at all. The CPA had heard that there was a way to hedge against the possibility of a substantial tax by identifying a qualifying DST at the time of settlement and up to 45 days after settlement. If there was a way to reduce this tax uncertainty, they wanted to present this to their client. The DST would serve as a backup property in case the replacement property deal fell through which of course would give their client an alternative tax savings strategy.
Case Study #2 – A local estate planning attorney asks us if there was a way to sell real estate and roll the proceeds into something other than another real property while still deferring taxes? The attorney represented an older couple that had built a substantial fortune in commercial real estate properties. The couple wanted to start liquidating the properties because they no longer wanted to deal with the issues associated with being a landlord and because they wanted to leave a simplified, securitized and unitized asset portfolio for their children and their other beneficiaries. The attorney had heard about DSTs, but wasn’t sure how they worked and what the benefit would be. He thought that perhaps it would be better to sell the real estate, pay the taxes and invest elsewhere as he had recommended in the past, but if DSTs were a better solution, he would explore them with his client.
Once again, the impetus was that his client had reached a point in life where they no longer wanted the responsibility of dealing with the four T’s-Tenants, Trash, Toilets and Termites. They simply wanted a check to arrive on a monthly basis and secondly, they did not want their children to have to deal with real estate issues after their death since their children had neither interest or expertise. The couple understood that real property would present real headaches to their children and might be a source of contention. They wanted to avoid potential disharmony and allow each of their children to do what they wanted with their share of their inheritance. By selling the real property and rolling the proceeds over to a DST, they would essentially transform a tangible, illiquid, “hands-on” real property into a passive, “unitized” security that would give them more flexibility for gifting and estate planning.
The sale of the property and the 1031 exchange into a DST was a solution they explored. They particularly liked the fact that it would be invested in institutional quality real estate under professional management and that it would receive the stepped-up cost basis upon their death just like the original properties would have received. This while paying no current taxes.
Case Study #3 - A local farmer and developer couldn’t agree on a price for the farmer’s property. The farmer’s children had moved and so handing down the family farm to the next generation was not an option. Furthermore, the farm was worth considerably more as a potential development than as farmland. There was an opportunity for the farmer to unlock income and for the developer to purchase a valuable property. Unfortunately, they were at an impasse. The farmer wanted more than the developer would pay because the taxes on the sale would have been considerable. As soon as they understood the farmer would be able to defer taxes, unlock income and eliminate all estate taxes, the impasse lifted. It was a win-win scenario.
Case Study #4 - An urgent call comes in from a commercial real estate agent because one of his clients is closing in on the 45-day window and the identified replacement property doesn’t look like it is going to become a reality. Is there anything that can be done? The answer is yes. We identify two DSTs as replacement properties. At the last hour as is often the case in these matters, the deal goes through but there is still a problem. If the deal had not worked out, 100% of the money could go into the DST solution and taxes would be avoided, but in this case, the replacement property was eventually purchased for less than the relinquished property. There was still a good chunk of taxes that would be due. Fortunately, the difference in price can be invested in a DST or series of DSTs in order to avoid current taxes. This particular commercial real estate agent has made it a habit to always include or identify a backup DST every time they look to do a 1031 exchange. It’s tax insurance and attracts more clients.
Case Study #5 – A business broker that specializes in succession planning has a client selling a business. A substantial portion of the value of the business is associated with appreciated real estate and the real estate is owned outside of the business. Her client insists on selling the real estate along with the business because they do not want to assume tenant risk. Furthermore, her client recognizes that they can structure the transaction to their tax benefit if they have some flexibility in terms of the allocation of the sales price between the real estate and the remaining value of the business. The DST provides this flexibility.
Case Study #6 – A residential real estate agent has a client selling a resort vacation home since their client no longer uses it and wants to know if a DST makes sense? Once they do the math, they realize the DST provides them with substantially more income.
Sera Capital Management - we are registered investment advisors and as such we do not accept commissions. Because DSTs are securities and only available to accredited investors, the selling agent must have a securities license. Our firm has developed a consulting practice in the DST arena and our fees are up front, transparent and we only get paid if the transaction successfully goes through. When the transaction closes, we waive 100% of the commission that would normally go to the selling agent. This means that our clients can save substantial fees and own a higher beneficial interest. As fiduciaries we have no incentive to steer our clients into a higher commission vehicle. Because we are transparent and only work with the top DST sponsors in the country, we believe our value proposition is attractive to our clients. They see everything up front and recognize we sit on the same side of the table with them.
We will work closely with you as we do with any of our clients to determine the best solution for your 1031 Exchange. Contact us today.