Articles

    Delaware Statutory Trusts and 1031 Exchanges; an introduction for owners of farmland

    Daniel Wagner
    SVP Government Relations
    The Inland Real Estate Group, LLC
    Nate Kuhn
    President
    Chicagoland 1031 Exchange


    Dan Wagner, senior vice president, government relations, of the Inland Real Estate Group, LLC, was among the speakers at The Chicago Farmers inaugural webinar that was held on April 20th in lieu of a regular meeting due to the restrictions on large gatherings. He was joined by Nate Kuhn, financial adviser with Chicagoland 1031 Exchange. Inland is a Platinum Sponsor of The Chicago Farmers.

    Dan gave an overview of Inland, which was founded 52 years ago by four Chicago public school teachers who became involved in real estate ventures and formed Inland. Over the years, Inland has purchased $47 billion in commercial real estate. With its experience in real estate, Inland developed the Delaware Statutory Trust (DST) structure that is used in Section 1031 exchanges. Inland Private Capital Corporation’s counsel worked with the Internal Revenue Service to educate them on the DST structure and Revenue Ruling 2004-86 was issued as a result of the collaboration. Section 1031 of the Internal Revenue Code can provide a strategy for deferring capital gains tax that may arise from the sale of a business or investment real property.

    Nate said that Inland is one of the sponsors of DSTs that his firm works with. Chicagoland 1031 Exchange is independent from Inland. He said that DSTs could be a consideration at retirement or at other points in people’s lives when they may be thinking about changing their investments into something that is passive.

    A Section 1031 exchange allows people to sell property and defer the ensuing taxes by purchasing another property with the proceeds of the sale, said Nate. Additionally, the DST structure allows the investor to continue to exchange real properties until the investor’s death. Upon the death of the investor, the heirs may receive a step-up in basis to avoid completely the deferred capital gains tax.

    “With the DST, an investor has the ability to be a fractional owner of property that he would not be able to afford on his own, for instance a $100 million apartment complex,” said Nate. “The DST allows the investor to get the advantage of a potential cash flow-generally around 4.5 percent to 6.5 percent without the responsibilities that come with the ownership of property,” said Nate. Because this is a real estate investment, the investor could also realize appreciation when the DST is sold. At the same time, the DST owner also participates in the downside if a property sells for less than its original purchase price; additionally, cash flows can fluctuate and are not guaranteed.

    The fractional ownership also allows for diversification across different asset styles and geographically, added Nate. A person could go into three or four DSTs that are involved in asset classes other than multi-family dwellings, such as self-storage facilities or medical care. Dan added that the DST owner also is not responsible for loans on the properties.

    Nate also pointed out that the like-kind involved in the exchanges does not mean that an investor has to buy the same kind of property he or she sold; it just has to be an investment property.

    The men noted the minimum investment in a DST is $100,000, but if an investor has less than that to invest, there is some leniency. But the exchanges do tend to be large, in excess of $1 million, Nate said.

    Nate pointed out that with a DST, the investor gives up control to the sponsor of the DST. Additionally, DSTs are not liquid investments, but the investor should receive cash flow and potentially appreciation throughout its duration. The DST could sell within three to five years, but it is usually seven years. To invest in a DST a person must qualify as an accredited investor. An accredited investor must have a net worth over $1 million, alone or together with spouse (excluding the value of primary residences, or $200,000 of income individually ($300,000 with a spouse) in each of the prior two years with reasonable expectation to continue for the current year.  .

    Nate said that DSTs can be purchased in living trusts or irrevocable trusts. He has also worked with LLCs and corporations (irrevocable trusts and other entities have different accreditation standards that he is happy to discuss). Nate suggested that DSTs are good measuring sticks for people who are considering buying property directly. “Compare the property to a DST and determine if it is better than a DST,” he said. Nate went on to say that he has worked with quite a few farmers who decided to exchange into a DST.

    Dan commented, “Inland is the number one sponsor of DSTs. It’s a dynamic concept. People should consider working with a knowledgeable financial adviser such as Nate to learn if it works for them.”

    You can read more information about 1031 exchanges and DSTs at Chicagoland1031exchange.com. Nathan Kuhn can be reached at 847-607-4976, ext. 1, [email protected]

    (The information herein has been prepared for educational purposes only and does not constitute an offer to purchase or sell securitized real estate investments. Such offers are only made through the sponsors Private Placement Memorandum (PPM) which is solely available to accredited investors and accredited entities. DST 1031 properties are only available to accredited investors (typically have a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last two years, and reasonably expects the same for the current year) and accredited entities only. If you are unsure if you are an accredited investor and/or an accredited entity please verify with your CPA and Attorney. There are risks associated with investing in real estate and Delaware Statutory Trust (DST) properties including, but not limited to, loss of entire investment principal, declining market values, tenant vacancies and illiquidity. Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated. Because investor’s situations and objectives vary this information is not intended to indicate suitability for any particular investor. This material is not to be interpreted as tax or legal advice. Please speak with your own tax and legal advisors for advice/guidance regarding your particular situation.

    This site is published for residents of the United States only. Representatives may only conduct business with residents of the states and jurisdictions in which they are properly registered. Therefore, a response to a request for information may be delayed until appropriate registration is obtained or exemption from registration is determined. Not all services referenced on this site are available in every state and through every advisor listed. For additional information, please contact Nathan Kuhn at 224-427-3421.

    Chicagoland 1031 Exchange does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstances.

    Securities offered through DAI Securities, LLC, member FINRA / SIPC. Advisory services offered through Kuhn Wealth Management, Inc. (KWM), a state registered investment advisor. Insurance offered through DAI Securities, LLC. KWM dba Chicagoland 1031 Exchange is independent of DAI Securities, LLC.)