Case Study 1
Transitioning Agricultural Land into Diversified DST Cash Flows
Our client received a favorable offer on a highly appreciated family property in agricultural production. Desiring to transition into a smaller property and use the balance of his equity to produce predictable cash flow, the client sought to protect his capital and defer taxes but was unfamiliar with 1031 exchanges. The client preferred potential income over capital growth opportunities and was comfortable with risk from experience in agribusiness.
Objectives & Needs:
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Create diversified cash flows and protect capital.
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Defer significant capital gains taxes on highly appreciated property.
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Secure immediate monthly cash flow for operations.
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Transition to a smaller-scale cattle operation.
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No need to access portfolio capital for liquidity.
Solution:
Based on the client’s risk tolerance and objectives, Trusted Capital Partners recommended a 1031 exchange split between a smaller ranch property to be acquired and a portfolio of DSTs and energy mineral rights acreage under production suitable for the client. Additionally, DSTs were also identified for backup options to additional acreage identified for possible acquisition during the exchange period.
Portfolio Goals:
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Capital Gains Tax Deferral: Defer capital gains taxes and depreciation recapture through 1031 exchange, potentially into perpetuity based on current tax code by using one portion of the proceeds to acquire DSTs and a separate ranch property for the balance.
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Diversified Portfolio: Provide a select mix of DST real estate and energy acreage suitable for the client balanced across different sectors to reduce concentration risk while increasing sustainability of potential income and capital returns.
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Potential for Increased Annual Income: In this client’s case the diversified cash streams offer the potential for an increase in immediate stabilized income over previous investment structure.
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Focused Operations: Enable client concentration on cattle operations by replacing the larger property with smaller ranch and augment with stabilized income.
Trusted Capital Partners is not a certified or legal tax advisor and works collaboratively with clients’ CPAs and legal counsel for strategic planning purposes. Current IRS Sect 1031 and other elements of the tax code are always subject to change.
Securities Disclaimer: Investments in DSTs and energy mineral rights involve risks, including the loss of principal. These investments are not suitable for all investors. Past performance is not indicative of future results. This case study is for illustrative purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any securities. Prospective investors must be accredited and should consult with their tax and financial advisors before making any investment decisions.
Case Study 2
Building a Passive DST Portfolio from Multiple Rental Properties
Clients owned several rental properties with varying degrees of finance, maintenance requirements, and increasing expenses such as property taxes and insurance. Based on age of the property, increases in taxes, maintenance and time demands, they desired to liquidate their properties individually and over time build a passive investment portfolio of DST commercial real estate properties that would enable more time for personal objectives. They still desired cash flow while their main priority was to protect their capital and were conservative regarding risk.
Objectives & Needs:
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Protect and incorporate capital into total wealth portfolio.
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Liquidate rental properties gradually as tenant leases and market factors allowed.
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Build a passive investment portfolio maximizing use of all available equity and replace current debt.
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Defer and reduce taxes as much as possible including offsetting ordinary income tax on income streams.
Solution:
Based on the client’s risk tolerance and objectives, Trusted Capital Partners recommended a phased approach utilizing 1031 exchanges at each property sale and reinvesting the proceeds into individual DST commercial real estate properties. Progressive diversification of the portfolio occurred over time and included replacement debt suitable for the client as part of the exchanges. (Note the typical minimum for investing in a single DST through a 1031 exchange is $100,000 and replacement debt becomes non-recourse in a DST).
Portfolio Goals:
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Reduced Management: Replace rental property ownership and management requirements with passive ownership of DST properties suitable for the client.
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Diversified Portfolio: Provide a progressively diversified DST portfolio suitable for the client across different sectors to reduce concentration risk while enhancing stability and return of capital.
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Potential for Passive Income: Provide multiple DST investments with the potential for steady, passive income diversified over several sectors.
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Overall Tax Efficiency: Defer capital gains and depreciation recapture taxes using 1031 exchanges, potentially in perpetuity based on state of residence and current estate and tax laws. Additionally maximize the tax advantage on ordinary distribution income with continued depreciation and interest expense deductions.
Trusted Capital Partners is not a certified or legal tax advisor and works collaboratively with clients’ CPAs and legal counsel for strategic planning purposes. Current IRS Sect 1031 and other elements of the tax code are always subject to change.
Securities Disclaimer: Investments in DSTs and energy mineral rights involve risks, including the loss of principal. These investments are not suitable for all investors. Past performance is not indicative of future results. This case study is for illustrative purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any securities. Prospective investors must be accredited and should consult with their tax and financial advisors before making any investment decisions.
Case Study 3
Property in the Path of Progress
A client with a small property in the path of local development that had appreciated significantly received an offer to sell but was concerned about the high tax burden in capital gains. Our client did not desire to own additional investment property and had an investment goal of augmenting income while growing capital and giving to charities. The client preferred a balance of income to capital growth opportunity with a relatively low risk threshold.
Objectives & Needs:
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Protect capital while generating additional monthly income.
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Optimally sell the property.
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Mitigate the high capital gains tax burden.
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Avoid owning additional investment property.
Solution:
Based on the client’s risk tolerance and objectives, Trusted Capital Partners recommended selling the property and reinvesting the proceeds into a diversified portfolio of DSTs through a 1031 exchange. Suitability of the DSTs included the client’s conservative risk position and with the liquidity of monthly distributions being complementary to her living income and enabling philanthropic giving.
Portfolio Goals:
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Capital Gains Tax Deferral: Defer significant capital gains taxes, depreciation recapture, potentially in perpetuity through 1031 exchanges.
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Diversified Portfolio: Provide a diversified DST portfolio across different sectors to reduce concentration risk while providing potential income for giving and capital growth.
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Reduced Management: Replace property ownership and management requirements with passive ownership of DST properties suitable for the client.
Trusted Capital Partners is not a certified or legal tax advisor and works collaboratively with clients’ CPAs and legal counsel for strategic planning purposes. Current IRS Sect 1031 and other elements of the tax code are always subject to change.
Securities Disclaimer: Investments in DSTs and energy mineral rights involve risks, including the loss of principal. These investments are not suitable for all investors. Past performance is not indicative of future results. This case study is for illustrative purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any securities. Prospective investors must be accredited and should consult with their tax and financial advisors before making any investment decisions.
Case Study 4
Transitioning from Active Property Management to Estate Planning
A couple was ready to move away from active management of an investment rental property and had no family members interested in assuming responsibility. The property’s current cash flow was positive but it required constant attention including repairs and was degraded by increasing tax and insurance costs. The couple desired to incorporate the appreciated capital of the property into their estate plan and eventually divide it among heirs, while retaining cash flow in the interim. They also desired to have access to partially liquidate capital in the investment if desired at some point in the future or upon estate passage. They preferred income to growth opportunities with moderate risk that included interest in energy-producing mineral acres.
Objectives & Needs:
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Incorporate property into long-term planning.
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Transition from active management and reduce their physical and time commitments for improved lifestyle opportunities.
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Retain cash flow and protect capital.
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Enable access to capital liquidity in the future if desired or at estate passage.
Solution:
Based on the clients’ risk tolerance, income requirements, and objectives, Trusted Capital Partners recommended selling the investment property through a 1031 exchange into a diversified portfolio of DSTs including options to conduct future 721 exchanges, and incorporated sellable interests in energy mineral rights based on the clients’ risk-return profile and income requirements.
Portfolio Goals:
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Reduce Management: Replace property ownership and management requirements with passive ownership of DST properties and energy mineral acreage properties suitable for the client.
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Potential for Passive Income: Provide multiple DST investments with the potential for steady, passive income diversified over several sectors.
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Provide Potential Capital Liquidation Options: Incorporate future liquidity options through diversified DST portfolio with discretionary 721 exchanges and sellable mineral rights.
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Long-Term Estate Planning: Incorporate DST investments in clients' estate plan to simplify potential transfer of assets to heirs.
Trusted Capital Partners is not a certified or legal tax advisor and works collaboratively with clients’ CPAs and legal counsel for strategic planning purposes. Current IRS Sect 1031 and other elements of the tax code are always subject to change.
Securities Disclaimer: Investments in DSTs and energy mineral rights involve risks, including the loss of principal. These investments are not suitable for all investors. Past performance is not indicative of future results. This case study is for illustrative purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any securities. Prospective investors must be accredited and should consult with their tax and financial advisors before making any investment decisions.