Delaware Statutory Trust 1031 Exchanges & Opportunity Zone Funds
Examine our web site and three things stand out. The first is that we have an extensive educational blog through storytelling. The second is that we embrace high rate of return per unit of risk investing. The third is that we have an entire tab dedicated to real estate. That’s highly unusual. The question is why? Let us tell you a story.
A few years ago, a client decided it was time to sell one of their properties. It was part of a general estate plan designed to provide heirs with liquidity and to eliminate hard-to-sell or complicated holdings. But there was a problem. The property had been held for over 30 years and when sold, would have triggered an $800,000 tax. The proceeds from the $2.5 million sale would only leave $1.7 million.
Selling property is not uncommon but a tax of this magnitude was. Traditionally we would have advised our client to proceed with the sale and invest the remainder in a securitized portfolio of stocks, bonds, and cash instruments. This was not uncommon since we dealt with several clients that were primarily real estate investors and utilized our services as an adjunct. But as fate would have it, we were having a casual conversation with another client that indicated that we might want to explore an alternative solution.
The client indicated that a 1031 exchange might be appropriate and that there was a special situation where an investor could 1031 real estate into a securitized property without paying taxes currently and potentially avoiding taxes altogether. We had never heard of it and did some research. This securitized property is called a DST and stands for Delaware Statutory Trust.
The story has a happy ending. Our client was able to sell the property and avoid taxes by investing in a portfolio of institutional quality DSTs that provides a monthly income almost twice as much as had they gone the traditional “sell the real estate and give it to the advisor/bank to invest” route. Once we were witness to this success, it was only a matter of time before we wanted to replicate this solution.
Since then, we have developed a process that is true to our fiduciary roots. Our fee-only consulting practice in 1031 exchange properties emphasizes transparency and no conflict of interest. It’s important that a client understand that if we recommend one DST for real estate over another that we have no financial incentive. Because we’re fee-only fiduciaries, it’s our legal obligation to recommend the best investments – rather than steer clients toward deals with the highest commissions. If you’d like to know more about our unique billing structure, visit the contact us page to learn more about real estate investing and tax deferral strategies and we’ll be happy to get back to you.
Delaware Statutory Trusts
Delaware Statutory Trusts (DSTs) are a securitized unitized real estate investment available to accredited investors only via private placement that own a property or properties that can be used in a 1031 exchange. Translation – it’s a way to defer taxes on the sale of highly appreciated commercial or investment real estate. Please understand, DSTs aren’t for everyone. They’re really for investors who are looking to unwind their real estate holdings and responsibilities without paying a big tax bill. If you’re still looking to grow your real estate via leverage and looking for double-digit rate of return investments, please keep doing what you’re doing and we’ll be here in 20 years, waiting patiently for your real estate DST investment.
There are a few sites out there that talk about the 1031 exchange and in specific about DSTs or what some call the Delaware exchange. Please familiarize yourself with them and when it comes time to purchase, purchase from someone who’s a Registered Investment Advisor and investment fiduciary, like Sera Capital – who will waive 100% of all commissions and never steer you towards investments that could compromise your retirement. To learn more about 1031 Exchanges, please visit our 1031 Exchange Resource Center to learn more or contact us directly.
721 Exchanges
The IRS code section 721 allows an investor to transfer property held in a like-kind exchange for shares in a Real Estate Investment Trust (REIT) without triggering the need to pay capital gains taxes.
One of the many benefits of section 721 exceptions is that they allow investors to increase their investment liquidity and portfolio diversification while deferring the payment of capital gains and depreciation recapture taxes when relinquishing their properties.
Why is the 721 DST more appealing than the Traditional DST? We like to give 721 DST different names based on their function. We sometimes call them Hybrid DSTs; other times we call them Convertible DSTs, other times Shape-shifter DSTs and other times we call them Final Destination DSTs. Why four names? Because a 721 DST acts exactly like a Traditional DST for the first 2-year period until it shape-shifts or converts into ownership of operating partnership units in a Public Non-Listed REIT. This REIT becomes the investor’s final destination and so this hybrid is part Traditional DST and soon after purchase, it becomes a REIT.
Opportunity Zones
Opportunity Zones and their related funds are everywhere. It seems like every local developer is getting into the opportunity zone fund space based on the number of calls we get from developers wanting us to recommend their fund. There are roughly 8700 Opportunity Zones in the country, but in our opinion, most are not locations we would steer you to even examine. We have analyzed dozens of the top funds, funds that have raised more than $50 million, and certainly have our favorites.
If you’ve worked hard to grow your business or have highly appreciated stock, art, or anything that’s eligible for an opportunity zone, you’re going to want to partner with the largest, most reputable developers in the country and we can help with that. Under no circumstances do we recommend that anyone roll 100% of the proceeds from the sale of their business, etc., into an Opportunity Zone – this isn’t investment advice, it’s common sense. If you are looking for further information on opportunity zones and opportunity zone funds, please contact us and we will be happy to get back to you personally.
A Brief History
To give you a brief history of Sera Capital, we’re Maryland Registered Investment Advisors. As RIAs, we only came to discover DSTs out of necessity because one client had a real problem that needed solving – DSTs were the solution. As RIA’s and investment fiduciaries, we believe it’s important to always act in the client’s best interest.
Unlike Broker/Dealers that may steer their clients towards DSTs with higher payouts, with Sera Capital there is no conflict of interest. We like to sit on the same side of the table as our clients. As a result of charging an upfront consultation fee, our clients receive a larger beneficial interest and a higher monthly distribution.
From our point of view, we only want to provide clients with the best deals available and review each DST on a case-by-case basis as well as utilizing third party research. We are not swayed by higher commissions and payouts, and we do not reach for yield. We believe that the people who invest in DSTs have achieved their wealth goals and are looking for predictability and peace of mind. That’s what we look to achieve for our investment management clients and what we aim to achieve for our DST clients.
Interested? Contact us now to find about Delaware Statutory Trust fees!
