We work in a broker capacity and represent the various investment companies we choose to work with. We are not contractually obliged to work with any specific sponsor, the only reason we would recommend them to an investor is because we believe they are very good at what they do and have proven to us to be effective over the years working with them.
An investor will never have to deal with a bank at any point in time. The sponsor will structure the debt before a deal is available to investors and typically get much better rates than an individual investor due to the size of the offering. The debt to investors is defined as non-recourse, meaning that you are not personally responsible for the debt, the DST is. The investor assumes whatever debt the DST has already put in place. For example, if the DST has a 50% LTV and an investor allocates $100k, they will also receive another $100k in debt for an overall position of $200k.
A typical DST will structure the debt for 10 years with an initial 5-year interest only period, followed by another 5-year amortization period. The reasoning behind this is to attempt to maximize the cash flow and sell the property close to the 5-year mark.
A sponsor is the company that purchases the property, structures the debt, is responsible for management of every facet of the property from A to Z, then seeks to sell it within a certain period of time. Most will specialize within a given asset class (i.e. Multi-Family, Commercial, Industrial, etc.) and have similar offerings available on a regular basis.
While the trust owns the property, each investor is treated as a beneficial owner by the IRS. For instance, if a property is worth $100M (assuming no debt) and an investor allocates $1M, they would beneficially own 1% of the property. They are entitled to 1% of any income, appreciation and depreciation. It doesn’t matter whether they are the first or last investor, or the amount they invested, everyone is treated the same.
The sponsor is required to provide a tax statement to each investor every year. It will state how much income they received and how much depreciation they can use to offset said income. If an investor is working with a CPA, they can simply turn over this form to them.
The IRS allows individuals to bypass the capital gains tax on the sale of real estate if they invest the proceeds into a “like kind” investment, effectively creating an exit strategy for assets that are highly appreciated. However, actually pulling this off is no easy feat and requires a considerable amount of timing and knowledge.
Affluent families have been using this tactic for generations as a means to avoid capital gains and minimize the tax impact of their real estate holdings to their heirs. Like our hypothetical outcome as expressed in the link below, we strive to help you take advantage of this rule, and provide turnkey 1031 exchange solutions that take away the complexity typically associated with this type of transaction.
For investors considering selling a real estate investment and deferring tax payments on their capital gains, a 1031 exchange could be an option for reinvestment. Understanding the complex guidelines for the 1031 exchange process can be challenging. However, with the right professional services, the process can be more convenient and accessible for any Accredited Investor.
Our 1031 Exchange experts answer the most common questions on the subject, including: “What is The History of Tax Deferred Exchanging?” and “What Is The Definition of Like Kind Property?”
The tax deferred exchange of your property completed pursuant to IRS Code Section 1031 doesn’t have to be difficult. However, when dealing with the transfer of multiple properties and their associated transactional logistics understanding the 1031 process is the best strategy for a painless and successful exchange.
Breakwater Capital is an Independent Firm and Josh is an investment expert with a wide range of experience. This helps enable Breakwater to find attractive investment opportunities and tax strategies that other firms may overlook.
With real estate investing becoming more mainstream, some people are left wondering about the differences between the many options before them. Should they invest in a real estate investment trust (REIT), a real estate fund, as a tenant-in-common (TIC), through a Delaware Statutory Trust (DST), or through a real estate crowdfunding platform like Fundrise? All offer co-investment opportunities, but each has its own nuances that may influence how any investor decides to proceed.
What is a Delaware Statutory Trust (DST)? A Delaware Statutory Trust, or DST, is a commonly used structure for those accredited investors looking to fractionally invest in real estate. The primary draw to investing in a DST is that it is 1031 Exchange eligible, meaning that investors who are selling a property can defer paying capital gains tax by investing those proceeds into a DST, which the IRS has ruled qualifies as a “like kind” investment.
Breakwater Capital is an industry leader in offering replacement properties, typically through a Delaware Statutory Trust (DST), for Section 1031 exchange transactions, as well as quality, multiple-owner real estate solutions. Here are 10 reasons to consider DSTs.
One of the reasons that investors often like to invest in real estate is because they like the idea of passive cash flow potential. But what many investors quickly come to realize is that almost all real estate investing is not truly passive.
When you set out to find the right Delaware Statutory Trust (DST) broker for your 1031 exchange, the decision can make or break your investment success. Investors face decisions that require sophisticated evaluations all the time but knowing with whom to invest and trust is vital.
Delaware Statutory Trusts are an investment vehicle worth considering for those accredited investors doing a 1031 exchange, but what some investors don’t realize, is that you can also invest in DSTs on a cash basis.
The tax deferred exchange of your property completed pursuant to Internal Revenue Code Section 1031 doesn’t have to be difficult. However, when dealing with the transfer of multiple properties and their associated transactional logistics, understanding the 1031 process is one of the best ways to a painless and successful exchange.
Most of our clients are either in or nearing retirement and looking for ways to diversify their investments. Alternative investments can potentially add value to an investor’s portfolio as they have historically proven to have the potential to help reduce volatility, mitigate risk, and increase passive income.
Opportunity Zones differ from 1031 Exchanges and DSTs in a number of facets but still provide significant investment and tax advantages.
Alternative assets, once thought of as too risky for individual investors to pursue, are now becoming more mainstream. Investors looking to diversify their portfolios will certainly want to consider their options, including real estate. Investing with a real estate sponsor or fund that has a track record of performance is a way to seek to mitigate the risk otherwise associated with alternative investing.
Start making more informed choices for your financial future with Breakwater Capital. Schedule a free in-person or virtual consultation so we can get to know each other. During our meeting we will discuss your finances at length to determine if Breakwater Capital is right for you.
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9940 Research Dr. Suite 200 Irvine, CA 92618
(310) 940-9430
Josh@Breakwater1031.com
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All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future performance. There can be no guarantee that any investment or strategy will achieve its stated objectives. Speak to your tax and/or financial professional prior to investing. Securities and advisory services through Emerson Equity LLC, member FINRA and SIPC and a registered investment adviser. Emerson is not affiliated with any other entity identified herein.
There is no guarantee that any strategy will be successful or achieve investment objectives; Potential for property value loss – All real estate investments have the potential to lose value during the life of the investments; Change of tax status – The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities; Potential for foreclosure – All fnanced real estate investments have potential for foreclosure; Illiquidity –These assets are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments;Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions; Impact of fees/expenses – Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefts. Stated tax benefts – Any stated tax benefts are not guaranteed and are subject to changes in the tax code. Speak to your tax professional prior to investing.
Investing in opportunity zones is speculative. Opportunity zones are newly formed entities with no operating history. There is no assurance of investment return, property appreciation, or profits. The ability to resell the fund’s underlying investment properties or businesses is not guaranteed. Investing in opportunity zone funds may involve a higher level of risk than investing in other established real estate offerings. Long-term investment. Opportunity zone funds have illiquid underlying investments that may not be easy to sell and the return of capital and realization of gains, if any, from an investment will generally occur only upon the partial or complete disposition or refinancing of such investments. Limited secondary market for redemption. Although secondary markets may provide a liquidity option in limited circumstances, the amount you will receive typically is discounted to current valuations. Difficult valuation assessment. The portfolio holdings in opportunity zone funds may be difficult to value because financial markets or exchanges do not usually quote or trade the holdings. As such, market prices for most of a fund’s holdings will not be readily available. Capital call default consequences. Meeting capital calls to provide managers with the pledged capital is a contractual obligation of each investor. Failure to meet this requirement in a timely manner could elicit significant adverse consequences, including, without limitation, the forfeiture of your interest in the fund. Leverage. Opportunity zone funds may use leverage in connection with certain investments or participate in investments with highly leveraged capital structures. Leverage involves a high degree of financial risk and may increase the exposure of such investments to factors such as rising interest rates, downturns in the economy or deterioration in the condition of the assets underlying such investments. Unregistered investment. As with other unregistered investments, the regulatory protections of the Investment Company Act of 1940 are not available with unregistered securities. Regulation. It is possible, due to tax, regulatory, or investment decisions, that a fund, or its investors, are unable realize any tax benefits. You should evaluate the merits of the underlying investment and not solely invest in an opportunity zone fund for any potential tax advantage.
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