WHY DID INVESTORS SHIFT FROM TICS TO DSTS? With DSTs, the IRS allowed attributes that did not exist previously in passive §1031 strategies: • 100-300 investors in one program, rather than the limit of 35 under a TIC structure • Opportunity to invest in a larger portfolio of real estate than TICs • Only one borrower - the DST - rather than all investors being a party to the loan • Virtual real estate ownership without being on title • Ability of the DST manager to make decisions without a unanimous vote of investors, an often-problematic requirement for TIC programs
IN PASSIVE REPLACEMENT PROGRAMS, INVESTORS NO
LONGER SUFFER THE COMMON HASSLES OF BEING A LANDLORD.
10 KEY FUNCTIONS OFFERED BY PASSIVE REPLACEMENT PROGRAMS: #1. Tax Deferral and Potential Avoidance All of the above strategies are designed to qualify for a tax-deferred exchange of actively-owned rental property into a passive real estate investment. And with the exception of UPREITs, all of these options allow for subsequent §1031 exchanges. Unlike appreciated stocks 7 , which cannot be sold/replaced without recognizing a gain, real estate held for investment (including DSTs, TICs, mineral interests, etc.) can be exchanged multiple times over one’s life. Moreover, all deferred capital gains taxes and depreciation recapture taxes can potentially be avoided altogether when the cost basis is “stepped up” at death. #2. Truly Passive Ownership In passive replacement programs, investors no longer suffer the common hassles of being a landlord:
Advertising for new tenants
Bookkeeping costs
Listing agreements
Applicant screening
Tax or insurance bills
Notice requirements
Lease negotiations
Late-night emergencies
Threats of litigation
Tenant improvements
Calls with tenants/managers
Late rent/damages
Property maintenance
Loan payments
Evictions
Rather, owners in passive replacement programs may receive periodic electronic deposits (if applicable, not guaranteed), pay attention to quarterly property updates, and forward tax statements to their accountants for use in filing a Schedule E. With the exception of TIC interests, there are no voting requirements and no threats of capital calls.
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