The Challenge: Reinvesting Leftover 1031 Exchange Funds with Liquidity Needs
After selling a multi-million-dollar piece of raw land, RealtyMogul investor and professional hotel mogul successfully executed a 1031 exchange into a larger replacement asset but found himself with $350,000 in excess funds that also needed to be reinvested to avoid capital gains taxes. However, he faced a dilemma—while he wanted to defer taxes on the entire amount, he also wanted access to at least $100,000 in the near future.
To solve this, the hotel real estate mogul turned to RealtyMogul, leveraging its Delaware Statutory Trust (DST) offerings and a 721 UPREIT strategy to balance tax deferral, diversification, and liquidity.
The Solution: A Multi-Tiered DST and UPREIT Approach
1. Investing in Three Traditional DSTs
The hotelier allocated a portion of his $350,000 into three separate DSTs, spreading his investment across multiple properties, markets, and asset types to:
- Diversify his portfolio across different property types (multifamily, industrial, and essential retail).
- Mitigate risk by investing with multiple sponsors in different regions.
- Generate passive income while deferring capital gains taxes.
2. Using a 721 UPREIT for Future Liquidity
To meet his liquidity needs, the hotelier allocated a portion of his investment into a DST with a predetermined 721 UPREIT exit strategy. This positioned his investment for the following:
- In three years, his DST would be acquired by a REIT, allowing him to convert his real estate holdings into REIT shares—providing flexibility to sell shares and access his capital.
- He could unlock liquidity without triggering immediate capital gains taxes, as 721 UPREIT exchanges allow for continued tax deferral.
- He retained real estate exposure while gaining the flexibility to cash out when needed.
Why He Chose RealtyMogul
1. Expert Guidance & Customization
The hotelier needed a strategy that was tailored to his specific financial goals, and RealtyMogul provided:
- One-on-one education about the complexities of 1031 exchanges, DSTs, and 721 UPREITs.
- A customized investment plan that addressed his need for tax deferral, passive income, and future liquidity.
2. Due Diligence & Trust
- The hotelier felt confident in RealtyMogul’s rigorous underwriting process, ensuring that he was investing in high-quality DSTs with strong sponsors.
- He was particularly drawn to the strength of the REIT sponsor. It was a multibillion dollar sponsor with property all over the world.
3. Seamless Investment Management
With multiple DST investments, tracking returns and distributions could be complex. However, RealtyMogul’s investor portal allowed the hotelier to:
- Monitor all investments in one place instead of juggling multiple sponsor portals.
- Access financial reports, distributions, and tax documents seamlessly.
The Outcome: A Balanced Strategy for Growth and Liquidity
By utilizing RealtyMogul’s expertise and structured DST offerings, the hotelier successfully:
- Deferred capital gains taxes on his leftover $350,000.
- Created a diversified real estate portfolio spread across multiple properties and sponsors.
- Secured passive income through DST distributions.
- Gained liquidity access in three years through a 721 UPREIT conversion.
With this strategy, the hotelier not only optimized his 1031 exchange but also ensured financial flexibility for the future, giving him peace of mind that his investments were working for him while remaining tax-efficient.
Thinking About a 1031 Exchange?
If you have leftover 1031 exchange funds or need a strategy that balances tax deferral and liquidity, RealtyMogul can help you customize your investment plan. Explore your options today!
LEARN MORE ABOUT 1031 EXCHANGE
Disclosure - 1031 Exchange Risk
Internal Revenue Code Section 1031 (“Section 1031”) contains complex tax concepts, and certain tax consequences may vary depending on the individual circumstances of each investor. RM Securities and its affiliates make no representation or warranty of any kind with respect to the tax consequences of your investment or that the IRS will not challenge any such treatment. You should consult with and rely on your own tax advisor about the tax aspects with respect to your particular circumstances. Please note that RealtyMogul does not provide tax advice.
This article is for informational purposes only, and is not a recommendation or offer to buy or sell securities. Information herein may include forward looking statements and is for informational purposes only. Forward-looking statements, hypothetical information, or calculations, financial estimates and targeted returns are inherently uncertain. Past performance is never indicative of future performance. None of the opinions expressed are the opinions of RealtyMogul. Advice from a securities professional is strongly advised, and we recommend that you consult with a financial advisor, attorney, accountant, and any other professional that can help you to understand and assess the risks and tax consequences associated with any real estate investment. All real estate investments are speculative and involve substantial risk and there can be no assurance that any investor will not suffer significant losses. A loss of part or all of the principal value of a real estate investment may occur. All prospective investors should not invest unless such prospective investor can readily bear the consequences of such loss.
RealtyMogul and its affiliates are not registered as a crowdfunding portal. Unless stated otherwise in writing, RealtyMogul and its affiliates do not offer brokerage or investment advisory services to the Platform’s individual users. RM Adviser, LLC, a wholly owned subsidiary of RealtyMogul, is an SEC-registered investment adviser providing investment management services exclusively to certain REITs and single purpose funds. Past performance is not indicative of future results. Forward-looking statements, hypothetical information or calculations, financial estimates, projections and targeted returns are inherently uncertain. Such information should not be used as a primary basis for an investor’s decision to invest. Investments in real estate, including those offered by sponsors using the RealtyMogul platform, are speculative and involve substantial risk. You should not invest unless you can sustain the risk of loss of capital, including the risk of total loss of capital.