A 1031 Exchange allows an investor to sell a property, reinvest the proceeds in a new property, and potentially defer all taxes that would have been due on the sale. Every 1031 Exchange is different and needs to be navigated carefully and specifically based on the needs of the client.

I recently helped a family of three siblings navigate a 1031 Exchange. This particular exchange is a great example that not only is every exchange unique, but also how the DSTs (Delaware Statutory Trusts) can be  put to use in a variety of ways and allocations.

The Family Background

Three 50-ish adult siblings owned two relinquished investment properties, inherited from their parents many years ago.  Two of the three siblings have their own children and each of them has different goals, income, and estate planning needs.  The two relinquished properties sold for a total of nearly $8,500,000.  Each of the siblings had roughly $1,300,000 in proceeds from the sale and needed to buy about $2,800,000 worth of property. 

It is important to note here that, in order to complete an exchange without boot, all proceeds must be invested and an equal amount of property (less certain expenses) needs to be purchased. “Boot” refers to the fair market value of cash, benefits, or other non “like-kind” property that a taxpayer receives in an exchange, and which is subject to capital gains tax.

The Exchange Details

One of the siblings is very involved in investment real estate and he was really looking to build a business rather than a portfolio.  He wanted to stay active in real estate and his wife and kids were interested in being part of the business.  He decided it made the most sense for him to buy his own property directly.  During the exchange process he was able to locate a building that he wanted to purchase.  However, he was not able to close within the 45-day window.  Near the end of his 45-day window, he worked with our firm to identify DST investments that could serve as a backup replacement option if the purchase of the direct property he wanted to buy broke down and subsequently did not close. 

The other two siblings decided that building a diversified allocation of DST properties made the most sense for their goals.  They wanted to defer taxes, generate income potential, and, ideally, eventually pass these assets to their beneficiaries.  We spent a lot of time with our clients to understand their goals and financial situation, and worked with them to come up with a number of DST investments they felt comfortable with. 

Each of their allocations were slightly different, but they ended up with roughly 56% allocated to multi-family assets, 25% allocated to healthcare assets, 15% allocated toward hospitality, and 4% allocated toward office.

The Investment Outcome

All three of these investors were able to execute on a strategy that they were comfortable with and that aligned with their unique goals. Prior to the sale, it was difficult for all three siblings to try to accomplish their own goals with their equity tied in with their siblings.  Moving forward, they can now each make decisions based on their own family’s needs and objectives.

Our team here at Chicagoland 1031 Exchange enjoyed working with each of the siblings and getting to know their unique situation and considerations.  At some point in the future when the recently purchased DSTs are sold we look forward to helping these investors through another exchange.