Financial Planning - December 2012

CLIENT

estate, taking the tax hit to create some
negative correlation may be appropri-
ate.”
If a client is older or in bad health,
deferring a gain via an exchange may
make sense in order to pass along to
heirs the higher basis value, according to
Studin. If that Las Vegas investor has a
short life expectancy, he might defer the
gain via an exchange to a Texas prop-
erty. At his death, assuming current tax
law still applies, he can leave the Texas
property to his children, who’ll get the
property’s date-of-death value as their
basis, avoiding deferred income tax.
(Estate tax will still apply.)

FOCUS ON ECONOMICS
But ultimately, Studin says, the most
important issue is whether the deals
ics are favorable, I might suggest it. So
far, though, I haven’t found anything
that works, so I may recommend that
she pay the tax.”
One other issue can be a problem for
1031 exchanges: timing. To qualify for tax
deferral, a seller must identify replace-
ment properties, in writing, within 45
days of the sale. Up to three possible
replacements can be named; more than
three can be named if the total value
is no more than twice the value of the
sold property. Perhaps more difficult,
the new property generally must be
acquired within 180 days.

‘Does the client have sufficient liquidity? Because real estate is almost
always a long-term investment.’

actually make financial sense. “If the economics are good, then it makes even more sense if I have extra dollars to invest, because I don’t have to pay taxes now. ... The tax deferral is a great bonus.” Taxes shouldn’t be that much of a consideration, however, if clients don’t find the right reinvestment property.

Studin tells of one client, age 83, who
recently had an office building seized by
her state under eminent domain. “She
received $2 million for it,” he says, “of
which $1.4 million to $1.5 million will be
taxable, because she had some basis in
the property. The tax will be a significant
amount so she’d like to defer it. At her
age, there’s a good chance her heirs will
be able to inherit with a basis step-up.”
On the downside, the amount is a sig-
nificant portion of her net worth, which
Studin is reluctant to tie up in a single
property. “If we could get diversification
and find properties where the econom-

possible, the seller can defer the tax by buying into the multiowner deal.”

TEAMING UP

Such co-ownership ventures, actually
private placement securities, are not just
for deadline desperation. “Co-ownership
offerings are especially attractive for real
estate owners who have held the prop-
erty for quite a while and no longer want
to deal with the so-called Three T’s — ten-
ants and trash and toilets,” Ju says. “The
owners may be relocating, so they don’t
want to manage their old properties long
distance, but they also don’t want to be
hands-on managers in their new area.”
These deals typically involve one
or more high-value, institutional grade
parcels, such as retail space leased to a
chain. The deal’s sponsor is responsible
for property management, and the deals
are usually structured so multiple own-
ers are involved; often they’re designed
sive management. However, as Ju points
out, a DST investor has less control over
the properties than in a TIC. “The trustee
decides when to sell a property, for
example,” he says. With the TIC struc-
ture, investors have the right to vote on
sales and refinancings.