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Your 1031 Exchange Is About to Fall Apart. Now What?

It is unfortunate but many 1031 Exchange investors know only too well how easily an exchange can fall apart, often leaving them with a hefty tax bill on the sale of their investment property. This can happen for many reasons, including:

  • Failure to identify a replacement property within 45 days of the close of the relinquished property
  • Failure to close on the replacement property within 180 days of the close of the relinquished property
  • Inability to find a suitable replacement property
  • Replacement property does not appraise at enough value to obtain a loan
  • Close on the sale of the replacement property falls through due to financing issues, inspection problems, seller reneging, or other issues
  • Failure to correctly follow 1031 exchange rules 
  • Taking possession of exchange funds

Regardless of the reason for a failed exchange, the tax-deferral benefits disappear and there is no recourse for investors. Fortunately, there is an action 1031 exchangers can take which provides a safety net that in many situations, can help prevent an exchange from failing. 

The Delaware Statutory Trust (DST) is a replacement property investment option that complies with 1031 exchange rules and may be used to help protect an investor’s 1031 exchange transaction that appears to be at risk. Properties structured as DSTs provide many of the benefits that a traditional 1031 exchange property affords plus some unique advantages like:

  • Professional management in a passive investment structure, enabling investors to reduce the potential headaches of managing a property
  • Portfolio diversification with the ability to own a fractional interest in different property types in different geographical locations
  • Estate planning benefits which enable heirs to inherit fractional shares and potentially eliminate any deferred tax obligations
DST as a Back-Up for Troubled Exchanges

Perhaps the most important advantage a DST provides – especially during this COVID-19 pandemic where it is increasingly difficult for investors to complete an exchange – is the ability to serve as a back-up if exchanges are likely to fail due to challenges in finding and/or closing on a suitable replacement property. 

DST properties include significant prior due diligence information that can streamline the process of selecting suitable replacement properties for time-constrained 1031 exchangers. A DST can be selected as one of an investor’s replacement property choices allowed by the 1031 rules and serve as a back-up investment which can then close in as few as 2-3 days if one or the other replacement property selections runs into trouble.  

It costs nothing to select a DST back-up property and this smart action can help provide an investor with the confidence their tax-deferral benefits will remain intact and their transaction successfully completed regardless of whatever challenges they may encounter with their other property selections. 

If you considering a 1031 Exchange or in the process of completing one currently, do not hesitate to give us a call at 866-398-1031 to discuss DST back-up options for you. You can also schedule some time directly on Paul's calendar, here.

We have a wide selection of institutional quality properties located throughout the U.S. and may be able to help you identify one or more properties which may meet your objectives should you other replacement property choices fall through.

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Disclosure: DSTs, like all real estate, have risks, including illiquidity, potential for loss of property value, costs and expenses that could offset the benefits associated with tax deferral, and reduction or elimination of monthly cash flow.

Disclaimer: There is no guarantee that any strategy will be successful or achieve investment objectives. All real estate investments have the potential to lose value during the life of the investments. This material does not constitute an offer to sell nor a solicitation of an offer to buy any security. Such offers can be made only by the confidential Private Placement Memorandum (the “Memorandum”). Please be aware that this material cannot and does not replace the Memorandum and is qualified in its entirety by the Memorandum.

This material is not intended as tax or legal advice so please do speak with your attorney and CPA prior to considering an investment. This material contains information that has been obtained from sources believed to be reliable. However, FGG1031, First Guardian Group, LightPath Capital, Inc., and their representatives do not guarantee the accuracy and validity of the information herein. Investors should perform their own investigations before considering any investment. There are material risks associated with investing in real estate, Delaware Statutory Trust (DST) and 1031 Exchange properties. These include, but are not limited to, tenant vacancies, declining market values, potential loss of entire investment principal.

Past performance is not a guarantee of future results: potential cash flow, potential returns, and potential appreciation are not guaranteed in any way and adverse tax consequences can take effect.  The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities. All financed real estate investments have a potential for foreclosure. Delaware Statutory Trust (DST) investments are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments. Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions. Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits.

IRC Section 1031, IRC Section 1033, and IRC Section 721 are complex tax codes; therefore, you should consult your tax and legal professional for details regarding your situation. 

Paul Getty

Paul Getty is a licensed real estate broker in the state of California and Texas and has been directly involved in commercial transactions totaling over $2 billion on assets throughout the United States. His experience spans all major asset classes including retail, office, multifamily, and student and senior housing. Paul Getty’s transaction experience includes buy and sell side representation, sourcing, and structuring of debt and equity, work-outs, and asset and property management. He has worked closely with nationally prominent real estate brokerage and investment organizations including Marcus Millichap, CB Richard Ellis, JP Morgan, and Morgan Stanley among others on the firm’s numerous transactions. Paul Getty also maintains a broad network of active buyers and sellers of commercial real estate including lenders, institutions, family office managers, and high net worth individuals.

Prior to founding First Guardian Group/FGG1031, Paul Getty was a founder and CEO of Venture Navigation, a boutique investment banking firm specializing in structuring equity investments made by institutions and high net worth individuals. He possesses over 25 years of comprehensive worldwide business management experience in environments ranging from early phase start-ups to multi-billion-dollar corporations. His track record includes participation in IPOs and successful M&A activity that has resulted in investor returns of over $700M.

Paul Getty holds an MBA in Finance from the University of Michigan, graduating with honors, and a Bachelor’s Degree in Chemistry from Wayne State University. He is a member of the Institute of Real Estate Management (IREM), a Certified Property Manager Candidate (CPM), and a member of the US Green Building Council. Paul Getty holds Series 22, 62, and 63 securities licenses and is a registered representative with LightPath Capital Inc, member FINRA /SIPC.

Paul Getty is a noted speaker, author, and actively lectures on investments and sales and management related topics. He is the author of The 12 Magic Slides, Regulation A+: How the JOBS Act Creates Opportunities for Entrepreneurs and Investors, and Tax Deferral Strategies Utilizing the Delaware Statutory Trust (DST), available on Amazon and other retail outlets.

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