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Passive real estate investments may be an attention-grabber for investors who believe that the real estate market can be a lucrative investment platform, especially those who do not wish to be actively involved in the day-to-day running activities associated with managing real estate properties. This is not surprising because, although investing in real estate may provide potential benefits and gains, it requires a lot of effort and management.
Many investors are interested in passive real estate investments, however, very few people understand exactly what it entails and if this form of investment works perfectly for them. Here’s what you need to know about passive real estate investments.
The term passive investing refers to a less active form of investing that involves a long-term hold on diversified assets in a portfolio. A common approach to this investment strategy is buying and holding Exchange Traded Funds (ETFs) with diverse assets for long-term periods. Investors who utilize passive investing are not generally looking to game the market but benefit from potential long-term earnings.
Borrowing from this strategy, passive real estate investments involve a more ‘hands-off’ approach to investing in the real estate market. While this does not necessarily mean putting money into an asset or fund and not bothering about its performance, it definitely requires less effort than what would be needed in active real estate investments.
A good example of an active real estate investment is buying a property and actively managing the rentals, maintenance and day-to-day activities that are necessary to keep the property investments afloat.
Passive real estate investments vary from types, levels of engagement and possible returns. They could include direct passive investing or indirect passive investing. Direct passive investing can involve directly purchasing a real estate property such as a rental apartment and outsourcing the entire management to a real estate management company. The real estate company would be in charge of seeking rental clients, processing the rental requirements and maintaining the property.
Indirect passive real estate investing would generally require investors to invest in properties that are jointly held by a large pool of investors such that, no one investor has direct rights to a specific property.
In comparison, direct forms of passive real estate investments may require larger financial commitments but give the investor more control over the decisions made as regards the investment properties. Indirect forms of passive real estate investments on the other hand can provide access to high-end real estate properties for less, however, they come at a price of less control and management.
Common types of passive real estate investments include: real estate investment trusts, also known as REITs, rental units, Delaware Statutory Trusts (DSTs), crowdfunded investments and Opportunity Zone Funds amongst others.
If you are looking to diversify through passive real estate investments and wondering what type of properties would make a best fit, the good news is that a wide range of property types qualify for passive real estate investments. You can buy into commercial properties, residential buildings, or even industrial real estate assets. There are also funds or pooled investment types that give you the opportunity to invest in various institutional grade properties for a fraction of the cost.
Some real estate properties do not qualify for certain passive real estate investments such as primary residences, vacation home, properties not utilized for the purposes of business or investments etc.
It is important to verify with any investment partner on compliance requirements before committing cash to any form of investment.
Passive real estate investments provide various vehicles and platforms through which investors can put in funds and potentially gain returns in the short or long term. There are opportunities to invest in real estate assets through the public financial markets. One of such passive real estate investments is the real estate investment trust which can be bought and traded publicly. Through REIT investments, you do not have to actively buy or manage real estate properties, but you may be entitled to any potential gains earned by virtue of your shares and interest in such passive real estate investments platforms.
You also need to consider other forms of passive real estate investments that are privately operated and what they require. Non-public investment vehicles are usually exclusive to accredited investors who not only meet the required net worth and income requirements, but also have the knowledge base of complex alternative investments.
As discussed above, a passive real estate investment could be as direct as a rental property such as single-family units, apartments,
Different passive real estate investments require varying levels of engagement. As a real estate investor looking to be passively involved in the real estate market, it is recommended to compare the available investment opportunities and identify which platform works best for you.
Some passive real estate investments may require you to attend periodic stakeholder meetings, cast shareholder votes or be involved in property selection. On the other hand, some passive real estate investments are operated through vehicles that require little to no external input from investors. The managers are fully responsible for the daily operations and management of funds, property management and maintenance.
Weigh out your options and choose whatever strategy fits into your risk appetite and overall investment goals and strategy.
Investment partners and sponsors play a key role in indirect passive real estate investments. You may be better off working with investment partners that are registered, under compliance surveillance, knowledgeable and experts in their field.
When selecting certain passive real estate investments, a key consideration is the potential for returns and profit. However, when making this decision, it is important to note that past performance of investment vehicles or assets do not guarantee future performance and possible gains. Passive real estate investments may offer promises of returns and profits but in reality, any possibility of returns depends on many factors such as property selection, property location, economic factors, fund manager expertise, market cycle, amongst others.
Speaking of fund management expertise, a noteworthy aspect of passive real estate investments is one that requires paying fees and other associated costs that in turn reduce any potential earnings from your investments. This is kind of a compromise situation, one in which you are willing to forfeit a percentage of your potential earnings for the active expertise of a fund or trust manager.
Potential benefits associated with passive investments may not necessarily be in terms of potential capital gains or profits, they could also be based on tax benefits associated with these types of investments. For example, passive investments through qualified opportunity zone funds may provide tax benefits for investors to defer taxes on capital gains or even eliminate these taxes in certain circumstances.
Ensure to ask questions around these factors before you make the decision to select an investment option.
A common underlying aspect of investing is that the higher the risks, the higher the return. Well, certain passive real estate investments may provide potential higher gains, but the complexities and risks associated with them could also be higher than the average traditional investment assets.
Most passive real estate investments require huge financial commitments, so you need to do your due diligence to ensure that the risks associated with these types of investments can be borne. Some notable risks include: the markets are generally illiquid, there is no guarantee on principal or profits, investment funds may be locked up for long-term periods.
Although not a risk, in most passive real estate investments, you may have limited control on the type of properties or location of properties invested in.
It’s not uncommon to want an investment opportunity that provides the luxury of a hands-off approach but with possible earnings potentials. In reality, there is no perfect hundred percent passive form of investing. This is so because, not only would it require the efforts of external parties to manage the investments, you would also need to be aware and involved to some extent.
Passive real estate investments are generally alternative forms of investments through which investors aim to build and preserve wealth over the long term. As it usually involves large amounts of money, it is important to consider the intricacies, costs, risks, management strategies and potential benefits before taking the plunge into the world of passive real estate investments.
No matter how passive your investments may seem, it is advisable to get legal advice to ensure there is not oversight on responsibilities, obligations and any other legal implications associated with your investments. Also, tax professionals and financial advisors are a must-have to avoid any unwarranted tax obligations and ensure that you are privy to any tax advantages available.
The team at Stax Capital is available to provide answers on various forms of passive real estate investment platforms that may be beneficial to you as an investor. Contact us for further inquiries.
Real estate investors often have questions about the 1031 exchange process and how they can partake of any potential tax benefits associated with it. The answers to a few of the frequently asked questions on 1031 exchanges can be found below.
The 1031 Exchange is a tax advantage process that enables investors to defer taxes on capital gains from sale of a disposed property if the sale proceeds are reinvested into another property that is like-kind in nature. This exchange originated from the Internal Revenue Code (IRC), section 1031, which refers to the exchange of property held for productive use or investment.
When an investor eventually sells the reinvestment property, the deferred capital gain from the disposed property plus any additional gain from the replacement property would be subject to tax.
The 1031 exchange process may seem daunting but with the right investment partners and financial advisors as well as tax experts, reinvesting your proceeds from a property sale into a like-kind property to qualify as a 1031 exchange can be straightforward. Taking advantage of possible tax benefits associated with the 1031 exchange involves key rules that must be met, for this reason, most people consider it to be a complex process.
There are rules that have to be followed for a sale and purchase transaction to qualify as a 1031 exchange. These rules are centered around:
Timing:
When you sell a property and have handed over the proceeds to a 1031 exchange facilitator, you would need to identify a reinvestment property within 45 days from the sale or transfer of the existing property. Additionally, the replacement property would need to be received within 180 days from the sale and transfer of the relinquished property or by the date the investor’s tax return for the taxable year is due.
Third party facilitator:
A third party, usually a qualified intermediary is needed to facilitate a 1031 exchange. The sales proceeds are usually put in an escrow account managed by the facilitator who is also responsible to transfer this money to the seller of the reinvestment property.
Like-Kind Property:
For an exchange to be considered a 1031 exchange, the properties sold and purchased should be like-kind. If this requirement is not met, you may not qualify for any tax deferral benefit. This does not translate to the properties being the same in terms of quality or grade but rather, in terms of nature and character.
Value of Property:
The value of the replacement property should be of equal or greater value to that of the relinquished property for the transaction to qualify for tax deferral. Proceeds that are not considered to be like-kind property exchange would be subject to tax.
Generally, most commercial, retail and even residential properties that are used for business and investment purposes qualify as 1031 replacement property. Primary residences generally do not qualify for 1031 investment property, however, there may be some exceptions. Also properties that are held with the intention to sell such as fixer-upper properties or moving business inventory generally are not eligible for like-kind exchanges. You may be able to exchange multiple properties and qualify for tax deferral provided the reinvested property or properties have a higher value than properties sold.
Other types of properties not considered as eligible for 1031 exchanges include stocks, bonds and securities. An important part to take note of is that foreign properties do not qualify for like-kind transactions. All properties exchanged should be located in the United States.
The common setbacks that can be faced with a 1031 exchange are:
1.Identifying qualifying like-kind property within 45 after the sale or transfer of an existing property.
2.A delay in getting all the required documents and buy-ins needed to close and finalize the 1031 exchange within the 180 days window.
3.Getting a qualified and trustworthy intermediary to manage the sale proceeds and facilitate the reinvestment property purchase.
4.Possibilities of the exchange resulting in a boot. This usually occurs when the value of the replacement property is deemed lower than the value of the sold property or other payments in kind that do not qualify for 1031 exchanges. This may result in gains that can be taxed.
There may be other setbacks involved but these may be prevented if you work with experts and well experienced subject matters to execute the required transactions.
The various forms through which a 1031 exchange process can be executed include:
Delayed Exchange:
This type of exchange is most commonly used amongst real estate investors. It usually involves selling off existing property first before identifying a replacement property within the 45 days window and closing on the exchange process in 180 days from when the relinquished property was disposed. This may be the most preferred option if you are having a difficult time locating a property that qualifies for 1031 exchange. However, these delayed exchanges stand the risk of failing to meet the timing deadlines.
Reversed Exchange:
Unlike the delayed exchange, the reversed exchange would generally involve an investor identifying and purchasing a replacement property before the relinquished property is sold. The timing rules would usually also apply for this type of exchange such that the relinquished property has to be identified and sold in a timely manner in compliance to the 45 days and 180 days requirements respectively. This method for 1031 exchanges is usually suitable for investors with available cash to purchase the new property before selling off the existing property.
Simultaneous Exchange:
Sometimes, investors already have all that is needed for the 1031 exchange process and so they opt to simultaneously sell off the existing property and purchase the replacement property simultaneously through the services of the facilitator. This is usually a same day transaction hence the derived name, a simultaneous exchange.
Improvement Exchange:
In this type of exchange, an investor usually identifies a replacement property that requires some construction or improvement. The same timing rules apply to this type of exchange and in addition, after the improvements, the value of the replacement property should not be lower than the disposed property as this may result in taxable income.
An average 1031 exchange process would incur costs for professional and subject matter experts such as financial advisors, lawyers, tax experts, qualified intermediaries etc.
These costs can include document fees, property taxes, insurance fees, inspection fees, transfer and escrow fees etc. You should also expect to pay investment fees to alternative investment providers who provide access to qualifying properties for 1013 exchanges.
A qualified intermediary or facilitator is required to facilitate the 1031 exchange process. Without a third party intermediary holding and transferring the sale proceeds and property, the process may not qualify for 1031 exchanges and capital income may be subject to tax.
In order to find a qualified intermediary, you need to carry out adequate research to ensure that the qualified intermediary is professional, trustworthy, competent and reliable to facilitate your exchange process. Most investment companies have existing networks of qualified intermediaries that can successfully facilitate the 1031 like kind exchange. However, the facilitator can not be one who has acted or is acting in the capacity of an agent to the investor such as a lawyer, financial advisor or tax expert.
Yes, generally, you should be able to complete a 1031 exchange if you find a replacement property before you sell your existing property. As in the reversed 1031 exchange method, you may be able to not only identity but also purchase the new property before the relinquished property is sold. Most times, investors utilize a conditional clause for the property purchase to be contingent on the sale of the relinquished property.
While there is no compulsory law indicating that you must hire a tax expert for a 1031 exchange process, it is recommended to employ the services of a tax expert that can provide financial and tax implications of your investments both in the short run and long run. Likewise, you may need to contact a financial advisor to help analyse how your investment may fit into your ultimate financial strategy.
To qualify as a 1031 exchange, the entire proceeds from the relinquished property sale has to be reinvested into the new replacement property and not only the capital gains. This should not be confused with the rules guiding a qualified opportunity fund investment that requires a reinvestment of only the capital gains.
You may be able to cancel a 1031 exchange however, the ease of doing this would depend on the timing and progress of the exchange. The proceeds from a property sale should be in the custody of a facilitator in an escrow account. As an investor, if you have actual or constructive receipt of the proceeds, the eligibility of the transaction being a 1031 exchange would be in question. It is advisable to seek clarifications from your facilitator, lawyer, tax experts and investment partners before you begin the exchange process or at any point you are considering a cancellation.
Alternative investments are often used as a means for portfolio diversification. Individual investors can invest directly in alternative investments or through mutual funds that include alternative assets in their portfolio mix.
While there are different types of alternative investments, there are some investments that are specific to the real estate industry. You will need to understand how an alternative investment fits into your overall financial plan and investment goals before you decide on which option is best for you.
Alternative investments are typically investments in assets that are not considered to be conventional. Conventional investment assets include, stocks, bonds, government bills, money market assets, amongst others. On the other hand, most non-traditional investments such as investments in commodities, real estate, venture capital, hedge funds, etc. involve complex procedures and processes that need high levels of professional knowledge and competence. These types of investments are called alternative investments.
Generally, most alternative investments are only accessible to accredited investors with high net worth. According to the Security Exchange Commissions (SEC), individuals can be classified as accredited investors based on their annual income, net worth and professional experience or knowledge. This would generally include individual Investors with income more than $200,000 for two most recent years and expected to at least remain in this income band for the current year. For organizations, they would need to own assets with total value greater than $5,000,000. This is alongside other requirements that need to be met to qualify as accredited investors than can invest in alternative assets.
Also, due to the complexity of alternative investments and lesser regulations, alternative investments are often held by investors who are knowledgeable about the market dynamics peculiar to their non-conventional nature. For individuals who do not have adequate knowledge on alternative investments, they employ the services of professionals such as financial advisors, investments specialists, accountants and tax experts.
Majority of alternative investments are not registered with the Securities Exchange Commission (SEC) and as such, are not publicly traded on the financial market. This provides a good explanation for why most alternative investments are highly illiquid in nature.
Alternative investments provide different options for investors who want to explore possible returns from non-conventional assets. Some of these options include:
Commodity investments involve buying commodities such as metals –gold, copper, agricultural products or natural gas and oils etc. Most investors invest in commodities directly and/or through commodity Exchange Traded Funds (ETFs) or mutual funds.
Investors through private equity funds can invest in privately held companies for equity in these companies. This is usually with the aim to sell their shares in the company for profit at a later time. Most private equity investments transactions are carried out by investment firms.
These are complex investment vehicles that usually function by pooling cash resources from accredited investors. Hedge funds are managed by registered financial and investment advisors. Hedge fund managers employ calculated investment strategies with the aim to make high returns from the market.
Alternative investments in the real estate market are of different forms and types. The most commonly explored options include real estate investment trusts (REITs), tenancy in common (TICs), Delaware Statutory Trusts (DSTs). Direct purchase investments such as buying properties to flip and sell also qualify as real estate alternative investments.
Other forms of alternative investments include cryptocurrency, foreign exchange (FOREX), private debt funds and financial derivates —such as futures, options and forwards, amongst others.
Commonly known as REITs, Real estate investment trusts can either be publicly traded through the stock exchange market or privately. Publicly listed REITs are usually registered with the Security Exchange Commission.
When you invest in REITs, you generally would purchase shares in a real estate company that owns several properties. These properties can either be retail, commercial or residential. Investments in REITs are done through equity REITs, Mortgage REITs or a combination of equity and mortgage REITs, also known as, hybrid REITs.
Using the REITs vehicle, investors can earn rental income through dividends from their interests in the REIT companies.
Qualified Opportunity Funds (QOFs) are investment vehicles set up for the purpose of investing in Qualified Opportunity Zones. Investments in Qualified Opportunity Funds provides possibilities for real estate investors to become eligible for tax benefits. These potential benefits generally come in three forms:
Capital gain deferral: Eligible capital gains such as gains from property sale can be deferred if reinvested in a Qualified Opportunity Fund.
Capital gain reduction: The step-up basis for investment in Qualified Opportunity Fund allows investors to reduce capital gain recognized on your interest in the QOF when sold or exchanged after at least five years of holding it.
Capital gain elimination: Capital gains from qualified investments in a Qualified Opportunity Fund may be eligible for total tax elimination when held for at least 10 years.
Accredited investors can buy fractional units in institutional quality properties through Delaware Statutory Trusts. A great advantage this potentially provides for investors is that they can defer tax gains on property sale when they make eligible investments in DSTs. This is possible because DST investments qualify as 1031 exchange subject to other requirements being met.
Delaware Statutory Trusts work through the management of the sponsors and trustees or managers who oversee the property investment activities under the trust. You can become a beneficial owner in the trust by purchasing investment interest. These ownership interests in the DST would provide you with distributed income from the trust based on the fraction of your investment in the trust.
There are other forms of real estate alternative investments such as crowdfunding investments. This involves pooling money from many investors to invest in highly valued properties. There is also the tenancy in common (TIC) form of real estate investment that involves the ownership of real estate property by two or more people.
Portfolio diversification: One of the most attractive attributes of alternative investments is the outlet it provides for investors to put their money into assets that are not directly correlated with the common financial markets.
Stock markets and bond markets are inversely related. When the stock prices go up, bond yields decline and vice versa, when the bond market performs outstandingly, the stock market tends to dip. Due to this, investors look for other investment vehicles that do not go through the frequent booms and dooms of conventional financial assets. This is where alternative investments may provide value.
It is important to note that while investment diversification may reduce the impact of potential losses in some assets, even the best diversification strategy does not guarantee a hundred percent protection against total investment losses.
Possible returns: When you invest in alternative investments, you do so to take advantage of potential returns. Like every other form of investment, alternative investments can provide possible returns for investors. However, returns are not guaranteed.
Lack of volatility: Alternative investment options may not be as volatile as traditional investments. The prices and values of alternative assets typically do not fluctuate easily as other conventional asset prices.
Tax Benefits: Some alternative forms of investing provide investors with the possibility of deferring tax and other tax benefits. One of such alternative investment vehicles in the Delaware Statutory Trust which allows investors to defer capital gains for transactions that qualify as 1031 like-kind exchange.
Alternative investments are not all rosy, they have associated downsides to them. The cons of investing through alternative investments should be considered carefully before delving into the complex world of this non-traditional space of seeking possible returns.
Accessibility: Most people are not aware of the fact that a significant aspect of alternative investments is that they are not easily accessible to the large public. There are often restrictions on eligibility for alternative investments. This is partly due to the complexity of these investments and the widely unregulated market for these assets.
Also, most alternative investments require significantly higher financial commitments, usually in the minimums of $25,000 to $100,000. This automatically limits access to only investors who possess such amounts of money to invest.
Illiquidity: When investors want to buy conventional assets such as stocks or bonds, they can easily purchase them from the public financial markets through brokers or other investment platforms. This is not the case for alternative investments. Investing in alternative assets generally involve private dealings and contracts. Most alternative investments are not publicly listed, making them highly illiquid investments. When purchased, these assets may not be easily sold or disposed of as quickly as conventional assets.
High Risk: Alternative investments are relatively riskier forms of investments. This is due to many reasons. One of such reasons is as a result of the unregulated nature of alternative investments. The SEC does not regulate most alternative investments and as such, this can lead to inadequate disclosure practises and asymmetric Information about many aspects of these investments.
Also, although there may be less frequent swings in alternative markets, occasional swings may be larger. Returns on alternative assets may be relatively higher, but also, any losses may have significantly more financial impact.
Stax Capital offers different real estate alternative investment options. Contact the team to discuss which available investment options are best suitable for your needs.
This article does not constitute any tax advice. Individuals are encouraged to seek professional advice from independent tax advisors regarding tax consequences of investments. Also note that in assessing investment returns, past performances are not indicative of future performance.
There is no doubt that investing in real estate can be complex, but there are many misconceptions about real estate investments. Whether you are a new or potential real estate investor, or you have been in the game for quite a while, you probably have heard or come across certain misconceptions about investing in the real estate market.
Some of these misconceptions have been on for so long and unfortunately, many people believe them without carrying out adequate research to get the right information about property and real estate investments.
This article would review some of the misconceptions about investing in real estate and provide some information on what you need to know.
Firstly, expensive is relative and while there are real estate investments that require significantly huge sums of cash, there are also affordable means through which investors can partake of the potential benefits of real estate investments for a fraction of the cost. Secondly, the costs involved in real estate investments depend largely on the investment strategy and platform you use.
Also, there may be sources of funding such as bank loans through which individuals can get cash to invest in real estate. A simple example is, as a real estate investor who wants to purchase property directly in the market, you can do so by obtaining a loan from financial institutions.
Well, this may be true to an extent, depending on the type of investment. The reality is real estate investments are never really passive as there needs to be some sort of continuous management and maintenance of investment properties. A real estate investment may be considered a source of passive income when the burden of managing the properties or any tenant relationship is passed across to a third party.
For example, when you invest in alternative real estate investments such as Delaware Statutory Trusts (DSTs) or Real Estate Investment Trusts (REITs), although you may be at the passive end of things, managers of these investment vehicles are very active in the backend to ensure quality property investments are made and maintained.
A basic concept behind any form of investing, whether in conventional financial instruments such as stocks or bonds, or alternative assets, is the possibility of returns. However, investing to make returns is also accompanied with underlying risks. Some of these risks include market risks — losing asset value due to fluctuations in market prices, economic risks — such as the real value of returns being eroded due to inflation.
The real estate market is not excluded from these possible risks. Property assets are relatively illiquid, meaning they may be more difficult to sell off to another party as quickly as you may want.
Most real estate investments are considered alternative forms of investments, they are generally not regulated and therefore considered to be risky. However, as it is with other types of investments, you need to be well informed about the different options of investing in real estate. Make sure to engage subject matters and experts such as accountants and financial advisors before taking any calculated risks with real estate investments.
With real estate investments, cheaper doesn't always mean better. While getting good deals is something to look forward to, cheaper properties may lead to even more expenses in the long run. One of the possible ways to make returns from real estate investments is through the sale of property at an appreciated value leading to capital gains. Cheaper properties in certain locations may not appreciate, especially at the pace that you would expect and prefer.
Likewise, when investing in real estate, a more expensive property does not automatically lead to higher gains and profit. A more affluent region may appreciate even slower than a suburban property location in the long run. Investing in real estate is not always black and white. Asides purchase price and location, a lot of other factors impact the overall performance of real estate investments.
Most real estate investments are illiquid, but you can also hold some real estate investments for short-term periods. One of the things you need to consider before you choose a specific real estate investment method is your investment objective. Some investors are in it for long term periods of up to ten years. Others may want to hold their investments for only about three to five years. Determining what your investment expectations and objectives are ahead of time would help you choose the best strategies.
Are there possibilities of making returns in real estate investments? Yes. However, there is no guarantee. For real estate investments that perform relatively well, a lot of work goes into research, due diligence, property selection and management.
When real estate investments involve pooling resources to partake in institutional quality properties for fraction of the costs, the sponsors and managers of such investment vehicles engage a lot of expertise and professionalism to ensure that they employ top-notch management practises to make good property selections as well as tenant selections.
Investing in real estate can lead to potential profit but it requires a lot of work and effort. This is why investment partners charge investment fees, to support the ongoing background work that has been passed on to them. Also, an important aspect to note is that past performances of investment vehicles do not guarantee future performances.
Capital gains and dividends as well as rental income are ways in which you can make returns from investing in real estate. However, there are other benefits that you can access through certain real estate investments. For example, through investing in Delaware Statutory Trusts as replacement property, you can qualify for the 1031 exchange tax deferral benefits, provided all requirements are met.
As a real estate investor, when you invest in Qualified Opportunity Zone Funds, you may be eligible for a capital gain deferral, a capital gain reduction or even an entire capital gain elimination when eligible investments in a Qualified Opportunity Fund are held for at least 10 years.
There is also the benefit of diversifying your portfolio through investing in real estate. Generally, real estate investments are not directly impacted by the market swings in stock markets and bond markets. This may provide a good means for investment diversification to serve as a cushion for potential losses in other investment assets. However, it is important to note that while investment diversification may reduce the impact of potential losses in some assets, even the best diversification strategy does not guarantee a hundred percent protection against total investment losses.
Carry out extensive research to ensure that you have the adequate information you need about the different types and kinds of real estate investments. When you are more informed, you are likely to make better investment decisions. Research can be in the form of using the internet to get reviews and ratings, you can also obtain information about investing in real estate from potential investment partners. Information about publicly listed real estate assets can also be very useful.
Investing in real estate requires huge capital and financial commitment, as such, it is recommended to make research an important part of the process. Plan properly and ensure you get objective insights.
Investing in real estate can be complex. There are usually many aspects to the whole investing process. For example, real estate investments require that you sign off on contracts, a lawyer may need to be engaged to the review terms and conditions of any purchase or investment agreements. Also, there may be some tax implications involved in purchasing or selling a real estate property. In this case, an accountant would be in the best position to provide expert advice on how this would impact current and future tax situations. Tax experts can also help you analyze your investment transactions to identify areas for potential tax benefits and advantages.
To a very large extent, the investment partners you engage would determine your experience in the entire process when investing in real estate. While the investment partners cannot guarantee the returns you would get from your investments, their expertise and professionalism can impact the investment process. Real estate investment partners with more experience and professional knowledge can provide better insight, carry out better due diligence and invest in higher quality real estate properties on your behalf.
Stax Capital is a trusted investment partner. We are an experienced team that engages professional due diligence and expertise in making sure your investment goals are achieved. Contact the team for any questions on investments through real estate vehicles such as Delaware Statutory Trusts, Qualified Opportunity Funds and Direct Participation Programs.
This article does not constitute any tax advice. Individuals are encouraged to seek professional advice from independent tax advisors regarding tax consequences of investments.
Searching for the right investment property isn’t the only challenging task for a real estate investor. Every property investor needs to identify the right opportunities in order to take advantage of any possible advantages. Accredited property investors looking for ways to reinvest their sale proceeds can explore programs like the Delaware Statutory Trust. For these types of investments that qualify as 1031 exchanges, the services of a qualified intermediary is required. There are a couple of factors to consider when choosing a qualified intermediary for your 1031 like kind exchange investment transactions.
Before going further into what a qualified intermediary is and how to choose one to facilitate your property sale or purchase, here’s a little background on what the 1031 exchange is.
Suppose you own an investment or business property, and you decide to sell it. If this sale results in a capital gain, the gain would be subject to tax. However, with the provision of the IRC Section 1031, there is an exception to this capital gain tax that allows you to defer the tax on any capital gains. This deferral is effective if you reinvest the proceeds from the sale in a like-kind property. This is generally referred to as a like-kind exchange. There are specific rules that guide the 1031 property exchange transactions.
To qualify as a like-kind exchange, a sale and purchase transaction needs to meet certain requirements. These include:
Timing Rules: The investor needs to identify the replacement property, also known as the reinvestment property within 45 days of the sale of the relinquished property.
Additionally, the investor needs to receive the replacement property by the earlier of 180 days after the original property has been sold and transferred or the due date of the investor’s tax return for the taxable year in which the relinquished property is transferred.
Like-Kind Property Rules: The like-kind exchange gets its name from the rule that requires the exchange of the properties to be of like-kind in terms of nature and character. This also translates to the values of properties being exchanged as any perceived gain from the difference in values of exchanged properties may lead to taxes.
Qualified Intermediary Rules: A facilitator is required to make the exchange of property and sale proceeds as this cannot be done directly by the investor who intends to sell off a business or investment property. This requirement is an important aspect of the like-kind exchange and here’s what you need to know about using a qualified intermediary.
Real estate investors looking to diversify or expand their portfolio have the opportunity to invest through 1031 like-kind exchanges. This type of property investment provides tax advantages for investors who re-invest sale proceeds from a property sale into another property that qualifies as like-kind in nature.
A qualified intermediary is an independent party to a 1031 exchange transaction, they usually have no formal relationship with the seller of the investment property or the owner of the new property to be invested in. Qualified intermediaries are sometimes called facilitators or accommodators. They are independent parties in a 1031 exchange transaction —possessing no affiliations or personal relationship with the parties involved in a 1031 exchange.
A qualified intermediary is generally not the taxpayer or termed a disqualified person. The capacity of a qualified intermediary requires a written agreement with the investor, called the exchange agreement. This agreement specifies certain guidelines and restrictions on the investor’s rights to receive, pledge, borrow or obtain the benefits of the money or property held by the intermediary before the exchange of properties is completed.
The exchange agreement between the tax paying investor and the qualified intermediary also specifies the rights assigned to the qualified intermediary. All parties involved in the exchange agreement would be notified of the assignment in writing on or before the date of the transfer of the relinquished property.
An agent of the tax paying investor is not allowed to act in the capacity of a qualified intermediary for a like-kind property sale transaction. The capacity of an agent includes responsibilities and services on behalf of the taxpayer. This translates to roles such as an investment banker, employee, attorney, accountant, broker, or real estate agent within a 2-year period to the date of the transfer of the first of the relinquished property or properties.
This limitation excludes agent related services as regards exchanges of property intended to qualify for non-recognition of gain or loss under section 1031 and routine financial, title insurance, escrow, or trust services for the taxpayer by a financial institution, title insurance company, or escrow company.
Without the use of a qualified intermediary, property sale and purchase may not qualify as a 1031 like kind exchange. This is so because, if the investor actually or constructively receives sale proceeds in the form of cash or other property before receiving the replacement property, any gains realized may become subject to tax. The proceeds from the sale of the relinquished property are secured in a qualified escrow or qualified trust to ensure that the investor does not receive any payments that may disqualify the transaction.
The qualified intermediary acts in a capacity to prevent this from occurring. The qualified intermediary facilitates the sale by receiving the proceeds from the 1031 exchange and transferring it to the seller of the replacement property.
Here are a few services a qualified intermediary may perform:
Purchases the replacement property from the seller and transfers the replacement property to the investor.
Partners with other professionals such as accountants and lawyers to make sure that the exchange agreement meets all requirements and that the rights for all parties are clearly stated.
Ensures that the 1031 exchange is executed in the time frame that makes it qualify for deferred tax gains. Effectively communicates on important deadlines and expectations.
Prepares documentations such as trust or escrow agreements, reports, notice of assignments and other exchange agreements.
In addition to the above, the qualified intermediary will facilitate the exchange and receive the relinquished property from the investor before transferring the relinquished property to the buyer.
The qualified intermediary also secures the proceeds from the sale on behalf of the taxpayer until it is required to use as payment for the replacement property.
There are important factors to consider when choosing to engage a qualified intermediary. Careful selection in this process would prevent any errors or complications in the 1031 property exchange transaction. Some of these factors are as follows:
Expertise and Professionalism: 1031 exchanges are complex transactions with equally complex tax and accounting implications. You need a qualified intermediary with adequate level of experience to facilitate all kinds of like kind exchanges within the specific requirements that enable a transaction to qualify for tax deferment advantages. A good, qualified intermediary should keep all parties abreast of any important timelines or changes that may affect the property exchange.
Compliance: There are no widely known licenses or regulations for someone or an entity to act in the capacity of a qualified intermediary. As an investor, you need to carry out due diligence to ensure all legal requirements and procedures are met appropriately. You have the responsibility to ensure the qualified intermediary you engage for your property exchange agreement acts within the confines of any compliance and legal requirements.
Trust and transparency: You should be informed about the details involved in your 1031 exchange process. Use a qualified intermediary that is transparent and trust worthy. Also, due to the highly complex nature of 1031 like-kind exchange transactions, it is recommended to employ the services of a financial advisor and an accountant to provide advice on tax implications or any part of the transaction that may disqualify your capital gains from being deferred.
Funds Security: As an investor, you need to make sure that the proceeds from the property sale as well as the replacement property deed and title are safe. Sometimes it may be necessary to obtain insurance to cover for any losses due to fraud or theft. The proceeds involved in 1031 exchanges are usually of high value thus security should be an important aspect of the transaction.
Stax Capital provides property investment opportunities such as Delaware State Trusts (DSTs) that qualify for capital gain tax deferral under the 1031 like-kind exchange. We engage professional and independent third parties who provide guidance on legal and tax implications for 1031 exchange transactions. With extensive years or experience and expertise, the team partners with you to make sure your financial and investment goals are achieved.
Investing in real estate can be a rewarding venture, yet it may be complex and tasking. The real estate market offers opportunities for investment diversification with the possibility of potential gains — through rental income, dividends or capital gains. Various types of real estate investments exist in the market with different forms of operations.
You could decide to go the common route of acquiring property directly, either as a primary residence or for rental income. Alternatively, you could explore non-conventional investment opportunities such as alternative investments in properties through different vehicles and programs. Most alternative investments give you access to pooled ownership in institutional properties that would not ordinarily be affordable on an individual level. Investing in real estate through alternative investments is often considered a passive form of investment.
There are many determining factors at play that impact how well investments in real estate perform. Whether you are looking to make your first property investment or you’re making a decision to increase your property portfolio through real estate investments, there are certain factors to consider in order to make your investments worthwhile. Investing in real estate requires careful consideration and some of the important things to look out for are:
Location is an important aspect when considering investing in real estate. It is recommended to do your due diligence to ensure that the preferred location for property purchase fits your investment goals and objectives. Some real estate investment locations may have a direct or indirect impact on property value appreciation. On the other hand, investing in certain locations may drive down the value of your real estate property.
Also, investing in real estate in certain locations may attract tax benefits. An example is investing through the Qualified Opportunity Zone programs. Purchasing real estate property through Qualified Opportunity Funds (QOFs) enables you to invest in Qualified Opportunity Zones. This investment opportunity gives you access to tax benefits such as tax deferral, capital gain reduction or even possible total tax elimination when investment property is held in an eligible region for up to ten years.
If you are looking to take advantage of these tax advantages, your choice of investment location would be limited to the eligible economically distressed communities.
As an investor, your investment objectives are important in deciding which real estate property to purchase or invest in. Your objectives could range from short term goals — to take advantage of any capital returns, or long term goals — to capitalize on wealth building, property capital appreciation or available tax advantages. These investment objectives would determine which investment vehicle or type is best suitable for your financial situation and status.
Your risk appetite also impacts your investment decisions. Investing in real estate can be risky, some forms of property investments may be deemed riskier than others. It is advisable to partner with real estate sponsors that outline the associated risks that accompany different investment types. This allows you to make well informed investment decisions.
Purchasing real estate property can be expensive, especially if you want to invest in a high end location. Some forms of real estate opportunities can be assessed by an average investor. However, there are investment types that are only available to accredited investors due to the nature and cost of these investments.
A couple of property investment options like REITs provide a means to invest in high quality investment properties for a fraction of the cost. So, if you have a low budget, you can buy share units through a REIT for low amounts. On the other hand, accredited investors with high net worth can purchase higher value fractional units in institutional quality properties through investment vehicles like Delaware Statutory Trust (DSTs).
Investing in real estate comes with certain costs that can also be viewed in terms of the risks involved. You need to consider the cons of investing in real estate through certain programs or vehicles. Some of the downsides of alternative investments through real estate may include non-guaranteed gains —the possibility of not making profits, capital investment loss and illiquid markets —funds may be tied down in investment units for the possible long term.
The next key factor to consider is how profitable your real estate investment could potentially become. Usually, the major goal for property investment is to make returns. However, like other forms of investments, real estate investments may offer benefits, but they also have inherent risks. Generally, the different forms of property investment can be complex in nature. It is important to weigh the possible benefits against the risks and also consider the cons involved when investing in real estate.
Most forms of property investments offer returns in the form of rental income and capital gains when eventually sold — that is, if the property appreciates and market value is higher than original cost of purchase.
Returns and gains through investing in real estate are not guaranteed. Some real estate investment vehicles are volatile like the stock market such as the publicly traded REITs. The risks associated with these types of real estate investments are usually correlated to the market. The value of investment may fluctuate. Other possible risks include economic, legal and political risks. These may impact any potential returns in the form of rental income, dividends or capital gains.
Consider choosing an investment partner and vehicle that shows proof of satisfactory historical performance and returns. It is important to note that this does not guarantee future performances.
When investing in real estate, one key factor to consider is the form of investment you want to explore. This is somewhat connected to your investment objectives. Real estate investments can be in residential properties, commercial properties or retail properties. There are various forms of real estate investments.
Direct Investments: This form of investment would require you to be directly involved with the management and maintenance of the real estate property you choose to invest in. Investing in real estate through direct investments can be tasking and time-consuming. This form of investment is suitable for investors that are hands on and have the time needed to directly oversee the day-to-day operations of their property investments.
Indirect Investments: This type of property investments provide a passive form of real estate investment. The responsibility of managing the investment property is transferred to a property manager or an investment partner. If you do not want to deal with the hassles of renting out property to tenants or maintaining buildings, this would be a considerable form of real estate investment for you.
Common vehicles for investing in real estate include:
Tenants In Common (TIC): Investing in real estate through a tenancy in common means you can own a shared title in real estate property. This type of real estate investment is governed by an agreement that outlines the rights, liabilities and responsibilities of each party that owns shares in the TIC. This could include items such as property taxes, maintenance, mortgage payments, etc. The tenancy in common legal implications may vary across jurisdictions, therefore check with legal practitioners and real estate professionals on what applies to your investment location.
Real Estate Investment Trust (REITs): Investors have the opportunity to passively invest in real estate through REITs. This works in a similar way to buying stocks in a company. REITs can be publicly traded in the stock market or owned as non-exchange traded REITs. The form of REIT ownership determines how liquid it is, that is how easily it can be sold. Most Direct Participation Programs (DPP) offer investors the opportunity to invest in REITs.
Delaware Statutory Trust (DSTs): This investment vehicle gives investors the opportunity to diversify their investment portfolio through institutional quality investments for a fraction of the cost. DSTs operate as separate legal entities giving investors — also known as the beneficial owners of interest in the trust — limited liability in the operations and assets of the trust. DSTs qualify as 1031 like-kind exchanges for tax deferral benefits. Investors can reinvest their capital gains from property sale into like kind replacement property and take advantage of deferring tax to a later period when the replacement property is eventually sold. A DST is a highly illiquid form of real estate investment and should be explored by investors looking to invest for the long term.
Investing in real estate sure has its pros and cons. Make sure to carry out extensive research and use professional advisors when weighing out your options. Different real estate investment types may have varying tax and legal implications for you as an investor. As discussed above, consider the potential investment locations, possible returns and risks associated with each real estate investment option, your investment objectives and the budget set aside for property investment. These considerations can help you make the optimal investment decisions that are suitable for your short term and long-term goals.
Investing in real estate can offer a means for portfolio diversification which in turn may cushion any impact of losses on your entire portfolio. Similar to other forms of investment, there is no hundred percent guarantee on returns or total protection against investment losses.
Stax Capital offers real estate investments through Delaware Statutory Trusts, Qualified Opportunity Funds and Direct Participation Programs. We carry out adequate due diligence processes to ensure that we provide credible property investments that maybe beneficial for your portfolio. Contact the team to discuss which investment option is best suitable for you.
If you are searching for alternative channels for real estate investing, Direct Participation Programs (DPPs) may be an effective approach to investment diversification. DPPs for property investors are often in institutional quality investments and provide a means to explore possible benefits of a market that is not directly correlated to traditional investment assets.
Direct Participation Programs for real estate investors are usually operated in a structured manner and may entail complex requirements. There are inherent possible benefits as well as risks associated with DPPs. Interested in Direct Participation Programs and how they may be beneficial for your portfolio? Here’s what you need to know.
A Direct Participation Program, sometimes referred to as a direct participation plan, is an entity that operates with a pooled structure, offering investors access to possible business cash flow and tax benefits. The pooled nature of direct participation programs affords investors access to institutional quality properties when they purchase fractional units in a typical program.
The different types of DPPs could include: investment or asset focus, investment entities or registered vs. unregistered DPPs such as in private placements.
Direct Participation Programs are alternative investments that are not directly impacted by the market volatility of traditional investments in the stock market or bond market. They therefore offer an option for investment diversification.
DPP entities are generally operations in oil and gas assets, equipment leasing projects, energy, commodities, business development companies (BDCs) and real estate. The most common types of DPPs are real estate businesses which offer investors the opportunity to own real estate ownership interest in a passive form.
Real estate DPPs are more commonly operated as non-traded Real Estate Investment Trusts (non-traded REITs). The real estate direct participation programs could include investment in affordable housing, development properties, operating properties, land development or mortgage programs.
DPPs generally operate as pass entities in the form of limited partnership, a subchapter S corporation, Limited Liability Corporation (LCC) or a general partnership. Real estate DPPs widely operate in the limited partnership form or Limited liability corporations. What this means for investors is that they have limited liability as regards the operations of the DPP. This limits their losses and liabilities to only their ownership interest in the direct participation program.
As limited partners, investors are not involved in the general management and operations of the DPP. The management of a direct participation program is handled by the general partner or sponsor who oversees the operations and business investments of the program. In some forms of operations, limited liability partners are able to vote in favour of the general partners or vote them out of management.
DPPs usually have no tax liability on a corporate level. A direct participation program’s operational structure enables it to transfer income, losses or capital gains to participation partners and investors on a pre-tax basis.
A binding document such as an investment agreement directs the responsibilities of all parties involved in the direct participation program. The investment agreement generally outlines items such as contribution obligations, allocation of income, loss or capital gain, cash distribution, rights and obligations of sponsors, general partners and limited partners. Some DPP agreements may allow for transfer of ownership interest.
DPPs are relatively illiquid, they do not have a direct market and thus cannot be traded publicly. The pricing of units in a DPP are usually not as transparent as publicly traded financial instruments such as equities. Operational requirements may differ across DPP entities but usually, this type of investment is only accessible to investors who meet certain income and net worth status. Also, due to its illiquid structure, as an investor with interest in a DPP, you would expect to receive possible income in a relatively long term period, from about five to ten years.
Here are the potential benefits you can tap into as a real estate investor with a Direct Participation Program.
Portfolio Diversification: Direct participation programs can be utilized for portfolio diversification strategies. Investors looking to buy into alternative investments asides their holdings in stocks, bonds, Exchange Traded Funds (ETFs) or mutual funds can diversify with DPP investments.Property DPPs allow for diversification in the real estate market.
Potential Income: Asides diversifying your investment portfolio, investments in a DPP is also driven by the potential income and profits that can be earned through the real estate market and possible property capital gains. Investment properties have the potential for appreciation especially in development properties or land development.
Passive cash flow: The business structure of direct participation programs allows the investors who are limited liability partners to earn passive income. They are usually not involved with the management of the business. The general partner (s) are in charge of running the business operations.
Possible Tax Advantage: An investment in a DPP may provide opportunities for tax deductions and credits especially in the case of losses passed through to the limited liability investor. This tax deduction can be claimed on the taxable income for the year in which you file your taxes. There could also be possibilities of partial deferred cash flow for investments in DPPs.
Institutional Quality Investment: If you have always wanted to participate in real estate investment for high end, institutional quality properties but haven’t been able to do so due to the substantial high costs, DPPs provide a solution for you. With fractional investment value as low as $25,000, you can own interest in institutional quality investments through a direct participation program. The pooled investment form of operations provides access to high valued properties that would have been out of reach.
Limited Liability: Investors in DPPs have limited liability legal status. The losses incurred is capped at their investment principal amount.
Direct Participation Programs come with certain cons and risks. Given its mode of operations these are the possible setbacks of real estate investments through DPPs.
Illiquidity: The illiquid nature of direct participation programs is perhaps the most common downside to some investors. Investments in DPPs need to be held for the long term. If you are looking for investments that can be readily sold off within a short period or one to three years, in a public or private market, a DPP may not be the best option.
Accessibility: Due to its complex structure and operations, DPPs are usually only made accessible to accredited investors. Asin alternative investments like a Delaware Statutory Trust (DST), accredited investors are classified based on their annual income, net worth, asset value and/or professional investment knowledge.
Economic Risks: Although real estate DPPs are not directly impacted by the traditional stock or mutual funds market, it can experience losses due to changes in economic factors that negatively affect the real estate market.
Performance risk: As it is with any other investment type, there is no guarantee of consistent income or gains from an investment in direct participation programs. Real estate properties may experience vacancy issues or even devaluations in extreme cases.
Complexity: As an investor, if you decide to include DPPs as part of your investment portfolio, you would need the expertise of financial advisors to simplify the complex nature and implications such alternative investments
Transparency: Due to its structure of operations, non-traded DPPs are not listed on the public stock market and hence there is no much public information about price and performance except what is provided by the general managers of the DPP. This risk of non-disclosure can be managed by carrying out thorough research on a DPP’s historical performance, management practices, mode of operation and quality of real estate properties.
Investment in real estate through a direct participation program may provide you with investment diversification benefits and the ability to invest is a different class of asset that is not correlated to the traditional financial markets.
However, you need to ensure that this type of investment suits your overall investment strategies and that the associated risks are considered before delving into DPPs. Partnerships in DPPs run for the long term and thus investors can not readily pull out any gained income in the short run. Also, considering the illiquidity of direct participation programs, you should determine if the possibility of not readily finding a means to sell off your interest in a DPP is an acceptable risk for your portfolio management.
Financial advisors and tax experts are best suitable to provide you with advice on how to incorporate DPP investments into your portfolio as they can provide clarity on tax implications as well as the possible related benefits and risks.
Looking to diversify your investment portfolio and want to consider investment units in a Direct Participation Program that provides you access to institutional quality properties while effectively managing your investments? Please contact the Stax Capital team for more information.
We are a team of highly professional experts and are always available to guide you through the process of investing through a real estate direct participation program.
Capital gains in the United States are subject to tax when realized. As a real estate investor, this includes capital gains realized on property sold or exchanged. If you have sold or exchanged property resulting in any capital gains, you would be expected to report such gains in your tax return. However, you may be able to elect for a capital gains tax deferral if you opt to reinvest in like kind property or designated opportunity zone communities.
Two popular property investment vehicles that encourage long-term real estate capital investments are the 1031 Exchange and the Qualified Opportunity Fund (QOF). They spur up investments by providing capital gains tax incentives on the sale or exchange of property investments. The underlying concept behind 1031 exchanges and QOFs is the opportunity to defer taxes when capital gains from property sale are reinvested in property using either of these vehicles.
Qualified Opportunity Funds and 1031 exchanges operate with different requirements. While they arguably serve diverse purposes, the tax advantage associated with these two investments vehicles spur up real estate investments. Here's what investments in QOFs and 1031 exchanges entail.
The 1031 exchange gets its name from the Internal Revenue Code (Section 1031) which introduced a tax incentive for property capital gains when reinvested in a like kind property. This type of investment is sometimes referred to as a 1031 like kind exchange. When considering real estate investments through 1031 exchanges, it is important to be aware of the underlying rules that make your transaction qualify for capital gains tax deferral. Any mistakes may disqualify your property exchange transaction from being considered as a 1031 like kind exchange.
When you make a property sale, you’ll need to identify the reinvestment property within 45 days from the sale or exchange of your relinquished property. The new property or properties would need to be of like kind nature with the relinquished property. You will also be expected to make this reinvestment within 180 days from the sale of your relinquished property.
An important part of the 1031 exchange is using an intermediary to facilitate the exchange of properties as this cannot be done directly.
An important factor in a like kind exchange is the value of properties being exchanged. If the sale proceeds of the disposed property exceed the fair market value of the new property or if there is any exchange that is not considered like kind in nature, this can result in capital gains being realized. These capital gains would be subject to tax.
The tax incentive through investments in a Qualified Opportunity Zone was introduced by the Tax Cuts and Job Act (TCJA) in 2017. Real estate investors can contribute to economic development by investing in Qualified Opportunity Zones (QOZs). In return, investors get tax advantages on eligible capital gains invested in these distressed communities.
When you invest capital gains in a Qualified Opportunity Fund, you may be eligible for tax deferral subject to all requirements being met. One key requirement is that the investment of capital gains must be made within 45 days from the date which the property is disposed and gains are realized. Also, it is important to note that the ownership interest in QOFs should be equity and not debt. For qualified investments in a QOF, capital gains tax can be deferred until the earliest of when sold or by December 31, 2026.
Asides a capital gains deferral, you may be able to reduce taxes on capital gains by 10% if you hold an investment in a QOF for at least 5 years. If your holding in a QOF is held longer for at least 7 years, your capital gains tax may be reduced by 15%.
The great part about property investments in a QOF is that investors may be eligible for a total tax elimination on capital gains realized from the disposal of your qualified investment in a QOF.
While the best capital gain reinvestment decision would depend on specific situations and the best optimal wealth management strategies, here’s what to consider when exploring capital gains reinvestments in either a 1031 like kind exchange or a Qualified Opportunity Fund.
Flexibility:
The flexibility of investing in either a Qualified Opportunity Fund or a 1031 exchange varies and may suit different investment goals. Investments in Qualified Opportunity Funds have to be in communities designated as QOZs while for 1031 exchanges, properties exchanged need to be of like kind in class and nature. As an investor, whatever option you decide to invest through would be limited based on these restrictions.
Also, Investments in QOFs are more flexible and can be done directly without the need for an intermediary. 1031 exchange investments on the other hand require the use of an intermediary. A property reinvestment is only deemed a qualified transaction for a 1031 exchange when property exchanged is carried out through a third party called a facilitator or an intermediary. The facilitator is responsible for collecting and transferring the sale proceeds as well as the reinvestment property.
Tax deferral:
While capital gains investments in 1031 exchanges and Qualified Opportunity Funds provide incentives for tax deferral, tax deferrals for QOFs are time sensitive. Tax deferrals from reinvestments in QOFs are on the earlier of a sale or exchange of a qualified investment or December 31, 2026. There are therefore uncertainties around this benefit for investors who need to hold their investments for longer.
In comparison, an eligible tax deferral on 1031 exchange investments comes into effect at any time of disposal of the reinvested property.
Tax elimination:
There is the possibility of tax elimination with investments in Qualified Opportunity Funds. This elimination may only be applicable after 10 years of holding qualified investments in a QOF and it is applied on the capital gains from sale of the interest in a QOF. An investment in property through a 1031 like kind exchange would usually not allow for tax elimination of gains after property sale or exchange.
Timeline:
One of the key rules for a capital gain reinvestment in property to qualify as a 1031 like kind exchange is that the new property has to be identified within 45 days after the sale or exchange of the disposed property. In addition to this rule, the sale or exchange of properties needs to be done within 180 days from the sale or exchange of the disposed property.
The requirements for investments in Qualified Opportunity Funds does not include a property identification timeline , however, the Internal Revenue Service (IRS) requires that reinvestment of capital gains are done within 180 days from when they are realized.
Reinvestment value:
The basic rule for capital gains reinvestments to qualify as a 1031 exchange is the reinvestment in like kind property. Any reinvestments in property that does not qualify as like kind or property with market value below the relinquished property may result in gains that are subject to tax. In this case, the entire principal and capital gains from a property sale may need to be fully reinvested to benefit the full tax deferral advantage.
For Qualified Opportunity Funds, there is no requirement to reinvest the principal from property sale. You can benefit from the tax deferral incentive that comes with investing in a Qualified Opportunity Zone by only reinvesting the capital gain from your disposed investment.
Capital gains:
Capital gains deferral through a DST are realized through property sale or exchange, while capital gains deferred through a QOF can be gotten through other forms of investment like stocks or bonds. This provides more opportunities for investors looking to manage their capital gains tax from a broader range of investment portfolios.
Qualified Opportunity Funds and 1031 exchanges provide means for managing capital gains tax. Both vehicles have tax advantages when certain rules and requirements are met. A 1031 like kind exchange may qualify for tax deferral and a holding in a QOF can lead to capital gains tax deferral, reduction or even elimination.
The decision to use either a 1031 exchange or a QOF is dependent on specific investment goals as well as preference. You can choose one vehicle over the other based on the flexibility of your investment transactions or the location of investment property that suits your preference.
Also this decision may be made based on the need to take advantage of possible tax reduction or elimination on property capital gains. Both investment vehicles are available to accredited investors who are deemed financially sophisticated to invest in non-publicly traded investments. The nature of investments in QOFs and 1031 exchanges make them complicated alternative investments and thus require assessment and advise from tax experts or investment advisors .
Finding the best investment partner as a real estate investor is very important. The best investment partner is one that works with you to understand the different investment options you have and provide effective investment strategies to help you reach your goals. Stax Capital provides years of experience and professionalism in alternative real estate investments. You can explore property investments through a 1031 exchange with Stax Capital. The Delaware Statutory Trusts vehicle offered by Stax Capital qualifies as 1031 like kind exchange through which you can reinvest your capital gains from property sale. We also offer real estate opportunities through Qualified Opportunity Funds that may be eligible for capital gains deferral, provided all requirements are met.
As an investor looking to diversify into real estate or expand your investments in properties, you may be wondering what the benefits of Delaware Statutory Trusts might be.
Investing in real estate involves active responsibilities to ensure properties are well maintained and managed. It also requires direct involvement to ensure that expected rental returns are monitored and realized.
Delaware Statutory Trusts as an investment vehicle may provide ways to gain possible benefits of alternative real estate investments while being less involved in time consuming management. Here’s what you need to know about DSTs and how beneficial it may be to you as a property investor.
A Delaware Statutory Trust (DST) is a legal entity usually formed for business investment purposes and is used as an instrument through which property is purchased and managed for the beneficial interest of owners.
It is considered a separate legal entity from its beneficial owners, under the Delaware law. This offers a limited liability status to the investors who own beneficial interest in the trust, one of the notable benefits of Delaware Statutory Trusts.
The operations of a DST would generally involve individual duties in the capacity of a sponsor, lender, trustee(s), managers, interest owners etc. A DST is usually bound by a governing instrument such as a trust agreement which would categorically specify any rights, obligations, liabilities or management responsibilities for all parties involved, as well as the general business conduct and underlying governance of affairs of the trust.
As an investor and beneficial owner in a DST, you would have undivided beneficial interest in the property or properties of the statutory trust. Except otherwise stated by a trust agreement, you become entitled to receive income and distribution from the DST. The profits and losses you would share from the statutory trust would be proportionate to your total undivided beneficial interest in the DST.
DSTs are often managed by a trustee or trustees on behalf of the beneficial owners who have interest in the trust property or properties. Usually, the trustee is responsible for distributing cash less any reserves to you as an investor based on your interest in the DST.
For federal tax purposes, the classification of a DST as a business or a trust is dependent on the power awarded to trustees to carry out activities such as acquiring and disposing of property, making structural modifications to the property, renegotiating leases or debt, investing cash for profit or collecting and distributing income.
One of the most popular benefits of Delaware Statutory Trusts is that investments through interests in the trust may qualify for a tax-deferred like-kind exchange (subject to all other conditions and requirements being met).
In order to access possible benefits of Delaware Statutory Trusts, you have to be an accredited investor. As an accredited investor, you can purchase interest in the DST directly or by depositing your 1031 exchange proceeds into this investment vehicle.
An accredited investor may be an individual or entity identified to be financially sophisticated and authorized to invest in unregistered securities or private capital markets that are usually deemed to carry more risks than traditional investments. Classification of an accredited investor is based on annual income, net worth, asset value and/or professional investment knowledge.
The Security Exchange Commissions (SEC) considers accredited investors as individuals with income exceeding $200,000 for two most recent years and expected to at least remain in this income band for the current year; for couples with joint income, this amount is $300,000.
Also, individuals with single or joint net worth (for couples) exceeding $1,000,000 can be classified as accredited investors. Your net worth is considered as the fair market value of all assets excluding primary residence minus total liabilities excluding primary residence mortgage up to its estimated fair market value.
For entities, an accredited investor status may be awarded to certain organizations with total assets in excess of $5,000,000. Such organizations may include but are not limited to banks or any savings and loan association, a registered broker or dealer, an insurance or investment company or a business development company. It could also be an entity owned completely by accredited investors.
In 2020, the SEC modified its classification of accredited investors to include individuals who have defined measures of sufficient experience and professional knowledge or possess certain recognized qualifications and certifications. This increases the pool of investors who may qualify to invest in unregistered assets and have access to the benefits of Delaware Statutory Trusts.
There are potential benefits of Delaware Statutory Trusts. If you are an accredited investor, here’s how investing through DSTs may be beneficial for you.
The 1031 exchange: One of the major benefits of Delaware Statutory Trusts is that they qualify as 1031 like kind exchanges for property investment. The 1031 exchange allows investors to defer capital gains if they invest in like kind properties.
With DSTs, there is the potential to locate properties that are like kind within the given 45 days rule, also, it may be easier to exchange and transfer ownership of a DST property investment within 180 days from the sale of your replaced property.
Freedom from property management: Properties purchased for real estate investments usually require periodic maintenance and management. Taping into the benefits of Delaware Statutory Trusts can take away the pressures and hassles of dealing with property management issues directly.
A trust agreement would normally delegate the property management responsibility to trustees or an assigned manager who oversees that the trust’s properties are professionally managed and maintained.
Institutional quality investments: Investors are allowed to purchase fractional units of a much larger scale investment property through DST investments. This offers access to institutional quality property investments that would ordinarily not have been accessible due to cost and other complexities. When considering the benefits of Delaware Statutory Trusts, being able to invest in institutional properties at low minimums – usually $25,000, is a huge plus.
Potential passive income: DSTs can be effective for wealth management when utilized correctly. With this investment vehicle, you may have the opportunity to build wealth through real estate properties. DSTs could potentially provide passive income for investors who need to take a step down from active involvement in real estate investments. Also, the possibilities for wealth generation make up one of the important benefits of Delaware Statutory Trusts.
Portfolio diversification: One of the benefits of Delaware Statutory Trusts is, it offers an opportunity for portfolio diversification. When you meet the accredited investor requirements, DSTs could be your introduction into real estate investing, giving you a wider range of investment possibilities in a different asset class.
As an experienced property investor who also meets the requirements of an accredited investor, through DSTs you could have access to multiple property types and ranges.
Flexibility: Except if the governing instrument of a statutory trust specifies otherwise, the beneficial interest you purchase in a DST can be easily transferable. You can freely transfer your ownership to a different party after all requirements have been met and fulfilled.
Lenders who provide financing for the properties under the trust deal directly with the trust and not with investors, therefore, you do not need to qualify for a loan under a DST. This makes it relatively easier to access funding and financing.
Also, when you become entitled to receive income distribution from a DST, you would be entitled to all remedies that a creditor of the DST has in terms of the distribution.
Limited Liability: Given its separate legal identity status, owners and trustees have limited liability as regards properties invested. What this means for investors is that they do not have interest in any specific property and creditors are not able to seek remedies on DST properties.
As an investor, the potential benefits of Delaware Statutory Trusts may include being protected under a limited personal liability similar to that of private corporations’ stockholders.
The potential benefits of Delaware Statutory Trusts are usually accompanied with possible risks. Similar to any other investment platform or asset, there may be risks involved in DST investments. The major downsides to DST investments include having minimal or no control in investment or management decisions, fewer opportunities to sell off investment ownership interest due to an illiquid market, and no guarantee of investment principal or returns.
It is recommended that investors who want to explore the potential benefits of Delaware Statutory Trusts utilize the expertise of professionals such as financial advisors and tax experts.
DSTs can be leveraged as alternative investments that diversify investment portfolio. While this investment platform may provide a huge potential for benefits, you need to also consider the risks and complexities that come with DST investments. The benefits of Delaware Statutory Trusts include the opportunity to invest in like kind exchange properties, flexibility of property investment and limited liabilities associated with the trust.
Stax Capital specializes in alternative investments through Delaware Statutory Trusts, providing you opportunities to manage your wealth and explore capital gains tax deferral options available via the 1031 like kind exchange vehicle. The team at Stax Capital partners with you to explore potential benefits of Delaware Statutory Trusts.
The 1031 exchange is a term that comes up often in the real estate world of investing. For property investors, the 1031 exchange can be used as an important tool to manage capital gains taxes on property sale.
The process of a 1031 exchange requires professional expertise to execute properly. While it may be considered an advantageous route in property investment, the 1031 exchange does not make capital gains from property sale tax free but rather, tax deferred.
Here’s what you should know about investing in properties using the 1031 exchange.
The 1031 Exchange originated from the Internal Revenue Code (IRC), section 1031, which refers to the exchange of property held for productive use or investment.
Whenever you make a gain from the sale of an investment or business property and reinvest the sale proceeds in a like-kind property, the 1031 exchange allows you to defer taxes on the capital gain.
However, when you eventually sell the reinvestment property, the deferred capital gain from the disposed property plus any additional gain from the replacement property would be subject to tax.These property investment transactions are of a complex nature and thus require the collaboration of various parties such as the investor, who is usually a taxpayer, a facilitator, a tax expert, an investment company, amongst others.
For an investment property sale and purchase transaction to qualify as a 1031 exchange, it has to meet various requirements and follow some laid out rules.
If the possibility of not paying taxes on capital gained from a property sale sounds too good to be true, it is because it comes with a number of rules that have to be adhered to.
One major rule is this, the replacement property, also known as the reinvestment property, has to be identified within 45 days of the sale or transfer of the relinquished property (the property to be sold).
Also, importantly, the replacement property has to be received by the earlier of 180 days after the relinquished property has been sold and transferred or the due date of the investor’s tax return for the taxable year in which the relinquished property is transferred.
To qualify as a 1031 exchange, the sale proceeds of the relinquished (disposed) property investment cannot go directly to the owner of the property. The sale proceeds for a 1031 exchange has to go through a qualified intermediary or an exchange facilitator.
Qualified intermediaries are third parties to a 1031 exchange transaction, they usually have no formal relationship with the seller of the investment property or the owner of the new property to be invested in.
The qualified intermediary facilitates the sale by receiving the proceeds from the 1031 exchange and transferring it to the seller of the replacement property (reinvestment property).
As an investor, you have to sell and reinvest in like-kind properties for the 1031 exchange advantages to come into effect. The disposed property and the new property to be acquired have to be like-kind, meaning, the properties have to be alike in terms of nature and character and not necessarily by quality or grade.
Also, the value of the replacement property should be of greater or equal value to that of the relinquished property for the transaction to qualify for tax deferral.
If the value of the replacement property is higher than the value of the disposed property, this may result in a boot. When this occurs, the boot becomes taxable. Proceeds that are not considered to be like-kind property exchange would be subject to tax.
Properties involved in a 1031 exchange have to be located within the United States.
1031 exchanges can be carried out using a simultaneous swap, delayed or deferred exchange, a reversed exchange or an improvement property exchange.
Using a simultaneous 1031 exchange, real properties are exchanged simultaneously, no delays or deferrals.
With the deferred 1031 exchange, the relinquished property which the investor wants to sell is transferred first and the reinvestment property to be acquired is then identified within 45 days after the transfer. The exchange should be completed within the 180-days time limit.
In order to qualify as a 1031 exchange, this type of like-kind exchange needs to be differentiated from a transaction that’s basically just using the sale proceeds of a property sold to buy another property.
The reversed 1031 exchange involves an investor acquiring the replacement property first before selling the relinquished property. This type of exchange would be possible if the investor has cash or a facility to acquire the new investment property.
The replacement property is usually acquired through an exchange accommodation titleholder. This exchange also needs to meet the 180-days rule to qualify as a 1031 exchange.
An improvement property exchange involves using the proceeds from a relinquished property to improve the replacement property of choice. However, the 180-days rule from the sale of the disposed property still applies. Properties exchange also still need to be of the same fair market value.
For a 1031 exchange, you may need to prove that the transaction is indeed an exchange of property. You have to show that the sale of the relinquished property and the purchase of the replacement property are integrated and mutually dependent on each other.
The major advantage of real estate investments using the 1031 exchange tool is the ability to defer capital gain taxes on proceeds from real estate property sale.
As an investor, you may be able to carry over any gain from sale proceeds that have been reinvested in a like-kind property for years with no tax implication until you finally decide to sell the newly acquired property.
When you invest in new properties using the 1031 exchange, you may have more purchasing power and more retained cash because there is no immediate cash outflow that would have occurred as a result of taxes on capital gains.
Only real properties qualify for tax benefits through a 1031 exchange. The property purpose rule is one that has to be met. The exchanged properties in the 1031 exchange should be for trade, investment or business purposes and not for personal uses such as a vacation home or property used as a primary residence or second home.
Properties held primarily for resale do not qualify for 1031 exchanges, this may include properties sold immediately after they are acquired, or properties improved for the sole purpose of resale such as a fixer upper.
Examples of properties that can be leveraged for the 1031 exchange include: retail properties, commercial properties or buildings, rental properties, industrial properties, apartment buildings, etc.
The real properties that qualify as like-kind can either be improved or unimproved.
Corporations and partnerships, trusts, limited liability companies (LLCs) and other entities that pay tax may be able to set up a 1031 like-kind property exchange.
The Delaware Statutory Trusts (DSTs) is a vehicle that can be used to take advantage of any tax deferral that may result due to reinvestment in like-kind property. In other words, DSTs qualify as 1031 like-kind property exchanges.
To identify DSTs to reinvest in through the 1031 exchange within 45 days after the sale of the relinquished property, you can use the three-property rule, the 200 percent rule and the 95 percent rule.
Using the three-property rule, you can identify up to three prospective replacement properties irrespective of their fair market value.
With the 200 percent rule, you can identify any number of prospective replacement properties given that the total market value of these properties does not exceed 200 percent of the fair market value of the disposed property by the transfer date.
A 1031 exchange may still be in effect if the accredited investor identifies unlimited prospective replacement properties as long as 95 percent of the total value of all identified properties is purchased.
While DSTs may possess liquidity risk, they may provide a faster route for you to identify and close on property investments that qualify as 1031 exchange under the 45-days and 180-days like-kind property exchange requirements.
For over 12 years, Stax Capital has offered real estate investments that qualify as 1031 like-kind exchanges. With investment properties under Stax Capital DSTs, you gain access to top notch management that relieves you of the complexities and time-consuming nature of managing investment properties.
If you need to diversify your investment portfolio through the real estate market, the highly experienced team at Stax would work with you to provide solutions and opportunities that may potentially expand your portfolio and help towards your wealth generation goals and objectives.
For when you need to invest in a property that qualifies as a 1031 like-kind exchange but want to stay away from the hassles of property management with the potential to earn passive income, Stax capital is just a reach away.
Delaware Statutory Trust vehicles are only available to accredited investors. Property investments using the Delaware Statutory Trust vehicle as a 1031 exchange can be a complex process, therefore, it is advisable to get professional advice from tax and investment advisors.
The main goal of investing is to earn returns. No investor really looks forward to investments that yield losses and even if such an investor exists, that would not be the norm. However, in reality, losses occur; economies experience downturns and stock prices dip.
How then can you protect yourself from making losses on your investments? While you cannot control the direction of the financial markets or investment prices and returns, you can mitigate against investment risks by diversifying your investment portfolio. One of such ways is through real estate investment.
Even the best diversification strategy does not guarantee a hundred percent protection against total investment losses, however, investment diversification may reduce losses and cushion the impact of any loss experienced by some assets in your portfolio.
Financial markets are volatile and dependent on a lot of factors such as government policies, politics, interest rates, inflation rates, economic cycles and much more. While there are expectations of profits and returns, the uncertainty in investment performance still remains.
Investment diversification is the risk management strategy geared towards mitigating and reducing losses due to market uncertainties and fluctuations by having a diversified portfolio of assets.
For example, if you put all your investments into just one company’s stock, you stand a chance of losing some or all of your money if the company makes losses or goes bankrupt.
Investment diversification in this scenario would mean you making the decision to invest in multiple company stocks so that if one company’s stock value falls and causes you to lose money, your investment in the other companies may not lose value and even yield returns.
Your investment diversification strategy may even include investing in different financial markets and across different industries.
If you want to diversify your investments and broaden your portfolio you may begin by investing in multiple company stocks, exploring alternative assets like real estate, including fixed income assets like bonds or government bills into your asset allocation or buying into commodities.
Diversifying your portfolio doesn’t just mean buying into any and every available stock, fund, bond, property or investment vehicle, it should involve careful consideration of what your financial expectations are, and it should also depend on your investment objectives.
The asset allocation you choose should reflect your risk appetite, expected returns, length or period of investment and your financial status.
If you have little to no knowledge about how these investment assets work, it is recommended to use the services of experienced professionals who advise you on how best to spread your assets in your investment portfolio according to your risk appetite and return expectations.
When you diversify your investment portfolio, you may limit the exposure to losses and the risk of eroding your entire investment principal or any returns you may have made and re-invested.
If you spread your investments across different company stocks or even across different classes of assets such as bonds, commodities or real estate, the chances of you losing all your money across all investment platforms are low. Also, high returns in certain investment assets can offset the losses made in other assets.
Here are a few reasons why you may choose investment diversification:
You want to manage your exposure to investment risks and losses
You want to take advantage of different investment return opportunities
You want investments with different levels of liquidity or maturity
You want to participate across different financial markets and assets
Diversification may indeed help you make the best out of your investments. It is a strategy that may help manage your portfolio and cushion effects of market fluctuations or potential losses.
You can diversify your investments across different asset types and classes. Investment diversification may also be across different countries, terms to maturity, liquidity etc.
Investing in some assets may prove an aggressive growth strategy, they may yield higher returns but in turn have greater risks, on the other hand, some investment assets are more conservative in terms of returns but may be less risky.
Depending on your risk appetite, you can either have a mix of growth and conservative investment assets. An investor with higher risk appetite would most likely invest in more aggressive assets that are expected to yield higher returns even though risky.
You may choose to diversify and invest within or across different financial markets such as: money market, stock market, fixed income market, commodity markets, real estate market.
You can choose to invest across local and international financial markets to diversify and prevent country specific risks. Your portfolio may include a mix of short-term to long-term investments or a mix of fixed income and variable returns investment assets.
Your diversified portfolio can also be spread across different types of funds such as mutual funds, exchange traded funds (ETFs) or real estate funds and trusts. There are a lot of investment diversification options to explore.
The real estate market provides an alternative investment path other than a conventional equity investment or bond investment. Similar to other financial markets, returns are not guaranteed and there could be risks involved.
However, investing in real estate may be a good way to diversify your investment portfolio. The real estate market offers opportunities to invest in either residential or commercial properties or through real estate trusts, funds and programs.
Real estate investments paired with other asset classes can provide an avenue to have a balanced portfolio that mitigates against extreme losses while pursuing returns and capital gains.
If you choose to diversify your investment portfolio through the real estate market, you can do so by: buying properties directly, investing in a real estate trust or fund such as a Real Estate Investment Trust (REIT), the Delaware Statutory Trusts or buying into a real estate program.
Including real estate in your asset allocation is definitely an option to diversify your investment portfolio but you need to be aware of the fact that it is not as liquid as other conventional assets such as stocks and bonds.
In real estate investing, as with other investments, you need to be knowledgeable about the possibilities, risks, opportunities and returns as well as the methodology involved.
Investing in properties requires a high level of expertise or professionalism in order to take advantage of opportunities or maximize returns where applicable.
When choosing a real estate investment company to partner with, it is advisable to consider the following:
A reputable real estate investment company has the required expertise to explain property investment options, carry out adequate due diligence and efficiently manage any properties under their portfolio.
The Stax Capital team is made up of highly experienced professionals who are committed to assisting you achieve financial freedom through your real estate investment portfolio.
Stax capital provides opportunities in real estate investment through the following investment vehicles:
If you want to take advantage of the 1031 exchange and effectively manage your real estate investment returns, Stax capital offers investment opportunities through Delaware Statutory Trusts (DSTs).
DSTs are an attractive channel for real estate investment, they can provide an advantage for deferring capital tax gains through the 1031 exchange for like-kind investments.
Real estate investing through DSTs, while promising, involves complexities and intricacies that can best be managed by professionals such as the Stax Capital team.
If you are looking to make real estate investment into a like-kind property or own fractional ownership in real estate properties, you can explore the Delaware Statutory Trusts managed by Stax Capital. As an investor looking to diversify your investment portfolio, get access to the possibilities and flexibility offered by the real estate market.
Another avenue to take advantage of tax incentives through real estate investment is through Qualified Opportunity Funds (QOFs).
Partner with Stax Capital to help you strategize on real estate investment channels through QOFs based on real estate in Qualified Opportunity Zones (QOZs). As professionals, we help you explore and plug into the advantages of deferring, reducing or even eliminating property capital gains tax.
With over a decade of being involved with Direct Participation Programs (DPPs), The Stax Capital team operates with due diligence and best management practices to provide various effective real estate investment platforms.
Alternative investments in real estate vehicles such as Delaware Statutory Trusts, Qualified Opportunity Funds and Direct Participation Programs provide a means for portfolio diversification.
These investment opportunities may provide potential tax advantages and/or higher investment returns, however, there are associated risks. Some of these risks include liquidity risk, dependence on professionals for decision making, and other market risks.
It is important to work with an investment partner like Stax Capital to help you understand any associated risks while helping you to take advantage of possible benefits in the real estate market.
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