 Nicely, but the life of the land is in its real estate. I am a real estate agent with Keller Williams in Honolulu. And this week we have Troy Wada with Impact Wealth Solutions here to tell us about a Delaware statutory trust. Some of you landlords who don't wanna be landlords anymore might really find this interesting. Hi Troy, thanks for joining us. Hey Kiana, thanks for having me today. Hey, yes, I'm so glad you're here. So can you tell us a little bit about yourself first? Definitely, so I get my name is Troy Wada and I'm the principal founder and founder of Impact Wealth Solutions here on Oahu as well as we have offices on every island across the state. We started the company back in 2013. Fast forward today, we have over 1,000 clients statewide and we work with companies such as Hawaii Electric, Hawaii Financial Federal Credit Union, Kauai Government Employees Federal Credit Union and Hawaii Electric Employees Federal Credit Union. I'm working with their membership as well as those employees on overall holistic financial planning and wealth management. As a part of that, Kiana, as you know, the Delaware statutory trust and 1031 exchanges has been a, I guess, a growing topic that we've been working with realtors, great realtors like yourself and their clients in educating them a little bit on the 1031 exchange process, but more importantly, how to make the most of their real estate and investment property. Wow, okay, so I know there's people out there and they're thinking Delaware statutory trust, that must be only good in Delaware. So what exactly is a Delaware statutory trust? A Delaware statutory trust is basically, it will look and feel like a real estate investment trust, but it's very different. And the biggest difference with a Delaware statutory trust in comparison to a real estate investment trust is number one, it allows the investor to 1031 exchange proceeds from their investment property into this particular investment vehicle. And number two, you know, by doing that, it allows them to defer the taxes whereas if they were working with a traditional real estate investment trust, that tax benefit is not allowed by doing that. But some similarities in regards to a real estate investment trust and a Delaware statutory trust is that it consists of institutional great real estate, which people pool their money together up to 500 different investors and therefore by 500 different investors pooling their money together to buy a particular property. For example, it might be ESPN's US National Headquarters. We're able to buy much better quality institutional real estate. And for, as you mentioned, for those people tired of managing their real estate, it gives them a way to be active in the real estate investment market or to take what they've built here in Hawaii but get out of the management duties and the management headaches. We like to call those the terrible tease with the toilets, tenants and trash. They can basically enjoy the good tease, the tenants, the traveling or just talking story with friends and not having to deal with any other management headaches. Okay, so let's back up a little bit and what exactly is a 1031 exchange? So if you don't mind, Eric, if you could put that up on the screen there for us starting with maybe slide number two. Basically what a 1031 exchange is is that it allows real estate investors the ability to defer capital gains tax as well as the 25% depreciation recapture. And in some cases the 3.8 Medicare surtax but there are some rules that follow the Delaware statutory trust. The 1031 exchange, I'm sorry. And if we look at slide number three, basically with those provisions, there's timelines. And what that means is that first of all, when we sell a real estate investment property in order for us to take advantage of these tax benefits, we need to buy equal to or greater than the value of the property we originally sold. But there is a timeline and that timeline that we need to follow that was listed there is from day number one, we need to identify replacement property within 45 days. If we fail to do that, basically what happens is that it would be considered a fail 1031 exchange and then force your investor to pay all of those taxes that come across with selling property that has gains in them. But not only that, there's another hurdle that we need to pass. And that's basically not only do we need to find we're qualified replacement property or what we call like kind property within 45 days, we actually need to close on that property or one of the properties within 180, which Tina, as you can imagine, you're the expert in this, finding qualified replacement property in today's real estate environment with everything that's going on, let alone tightening of lending practices, it might be pretty challenging out there to do that. Yes, yes, we are seeing with the guidelines tightening up, they're taking longer, much lower inventory, harder to find what you're looking for, competitive, competing offers, multiple offers. So yeah, it could be challenging. So what exactly are the capital gains? What percentage are they avoiding by doing a 1031 exchange or a DST, the Delaware Statutory Trust? So what kind of money? So in regards, sure. In regards to capital gains tax, a couple of changes actually happened this year, whereas many people in the past experienced paying a 10% a long-term capital gains rate tax on any capital gains, which basically means anything, any dollar above what they originally paid for the property and what they sell it for was normally subject to a 10% capital gains tax rate. Now in 2020, that gains rate has changed. It is now, depending on how much money you make, you could pay 0% capital gains tax, which will apply to very few people because that income threshold is about $40,000. But if you make more than that, your long-term capital gains tax rate this year in 2020 has increased to 15 or 20%. Now, of course, we're gonna invite all the investors out there that before you go ahead and sell your property and you want to figure out what the taxes are, please consult with your tax professional. This would be your CPA or someone of that magnitude to make sure that you know and fully understand what tax rate that you're in based on the capital gains that you're looking at. But beyond long-term capital gains, when it comes to selling investment property, there's several other taxes that would apply. Number one would be what we call a depreciation recapture. So since you've originally bought the property, you have the ability to recognize depreciation on your investment property. And if that was a residential property, that depreciation is divided by 27 and a half years. And if it was commercial property, your depreciation would be divided by 39 years. What depreciation allows you to do is basically depreciate the value of the physical building, which then gives you tax benefits on some of the rental income in which you're collecting today. That rental income, a portion of that based on your depreciation is tax deferred, right? And again, it's tax deferred, not tax-free. And if you sell your property without doing a 1031 exchange, 25% of that depreciation will be recaptured and then taxes will be owed on that amount. And then lastly, depending on your income, you could be subject to a 3.8 Medicare surtax. And that would be in addition to your long-term capital gains tax rate as well as the depreciation recapture. So, Keena, as we talked about many times before, it makes sense for most investors, of course, your situation would, everyone's situation varies, but to look at a 1031 exchange because you could be saving a lot of money on taxes. So, this 1031 exchange and a DST or the Delaware Statutory Trust is only for investment properties, correct? It's not for your personal residence. It's investment properties only? Absolutely. 1031 exchanges only apply to investment property. And actually, if it's your primary residence that you're planning to sell, many of you know we have what we call section 121, homeowner's exemption, where it's $250,000 if you're a single person above whatever you paid for it, you get to take out of the property tax-free and it's $500,000 for a married couple. Okay, and is there a certain time that you have to own your investment property before you can say, okay, I wanna put these into a DST? What if someone buys a rental and they're just like, if being a landlord is just not for me. Is there a certain time they have to keep the investment property before they can roll it into a 1031 exchange or the DST? Usually the timeline or the recommended timeline is about two years. Now, of course, you'd wanna confer with your CPA because we've seen some cases where the property was held less than two years, but it's still classified as investment property because it was not their primary residence and the client was still able to do a 1031 exchange. Okay, so say I bought the property. I don't really like being a landlord. I'm ready to, and I've kept it for two years and I'm ready to do a DST. So what would I need to do and what are the benefits of doing it? Well, the first thing you probably wanna do is contact you, Kena, to see what the property is worth, because what we wanna find out is, based on what your property is worth, what it would sell for, what your mortgage balance is, what you would wanna move or what the equity will be moving towards the Delaware statutory trust. Now, on average, most Delaware statutory trusts pay about a 5% cash on cash return. So for example, a million dollar property with a $500,000 mortgage, when you sell the property, the first person that gets paid off is your bank, which leaves you with 500,000 in equity. If you were to 1031 exchange that $500,000 in equity into something like a Delaware statutory trust, you could probably expect about 25,000 a year net rental income, and which many people find attractive, because Kena, as you know, many of our rate of returns or cash on cash returns here in Hawaii is usually lower than 5%. I mean, what would you say our average net rental rate is here in Hawaii? Oh, you caught me up on that one. So I know a lot of people are looking for seven. We're averaging three or four. I know I am. Yeah, and that's pretty common. You know, what we see a lot is about one to 3%, you know, four would be great, you know, but getting a five is nice, you know, and that's kind of what a DSA does. Yeah, investors are looking for seven. They're always wanting that rate of seven, and it is tough to find in Hawaii. Very tough, very tough to find. So yeah, so I'm ready to get my DST. What do I have to do after they get done with me? They let me know they want to sell the property. So once they get done with Kena and we figure out what we're gonna sell the property for and we run the numbers, what we need to do is we need to identify what we call or who we call a qualified intermediary. Now this could be someone like Julie Bratton over at Old Republic or Tiffany Davies over at IPX 1031. And what we need to do is we need to ensure that we get a qualified intermediary in place because anytime we have what we call constructive receipt of any funds, meaning that if you decided to sell your property with Kena and we skipped the qualified intermediary part and your money went to a title or SRA company like Fidelity, what would happen is that if we did not set up the qualified intermediary account, the minute the money hits your account and we close, that will be taxable. So we wanna make sure that we daughterize, cross our keys and basically set up a meeting with our qualified intermediary, set up that account to notify them we will be doing a 1031 exchange as well as working with a title and SRA company to notify them, we'll be doing a 1031 exchange. And then basically what happens is we close on the property, the funds get sent to Fidelity which then gets forwarded to our qualified intermediary. And at that point the 45 day window starts ticking where we have two ways we can identify property whether it's a three property rule or a 200% rule which means that we can identify up to three properties or twice the value that we sold for that we need to replace. Okay, so can someone take their funds from the investment property and roll them into a owner occupant? No, or can they? There are rules for that and of course you're gonna wanna work with your tax professional as well. But we have heard of instances where people get an investment property, rent it out for a period of time and then later on move into it. Okay, so say they've inherited an investment property and they wanna sell it and use the funds to purchase their own home. Is that something you can do without paying the capital gains taxes? The factors to consider, number one would be a date of death appraisal. So based on real estate and non-retirement stocks have great tax benefits to them. And the biggest one is what we call a step up in cost basis. And what that means is that the date or the value in which the property was sold out at the time of inheriting it will become the new cost basis. So an example for that is let's say we had a property purchased in 1950 for $20,000. And fast forward today, that property is worth a million bucks. If our owner or our investor inherited that property and at the time it's cost basis was $900,000 or even a million bucks and they decided to sell it the next day. They would pay little to no capital gains tax because their cost basis is a million. They sell it for a million, zero gains. At that point, they could take whatever proceeds they have and then buy another property which they could live in, no problem. Okay, okay. So let's go back to, we wanna do our DST. So I've come in and I don't wanna buy any more properties. I don't wanna be a landlord anymore. How can you help me? So Eric, if you pull up slide number three, these are some benefits of why people look at a Delaware statutory trust as a way to either get out of the management or create a better estate plan. And because the DST is usually pre-existing, it doesn't require the investor to manage it. The best benefit that we get a lot is that it removes them out of the management responsibilities. Number two, it allows investors to get access to institutional grade real estate, which normally as a single investor, they can't really do on their own. But by pooling the money with $500 people, it allows them the ability to buy bigger and better property, limited personal liability. There are loans that are associated with some of these Delaware statutory trusts. And the reason why that is, is because if you remember, as I mentioned earlier, successful 1031 exchange requires you to buy equal to or greater than in real estate in terms of the value of the property that you just sold. Not everyone owns their property debt-free. In that example of that million dollar property with a $500,000 mortgage, in order for them to avoid or defer taxes, what they need to do is they need to buy a million dollars worth of property, but they only have 500,000 in equity. The Delaware statutory trust allows the investor to participate in the loan that's already put on this Delaware statutory trust, but never have to qualify for it. And because they never have to qualify for it, legally they can't be liable for it, which is why we call it a non-recourse loan. This is very big for many investors because it's a great way for them to basically be hands-off in the management, get a stable or steady rental income coming in on a monthly basis, but ultimately become debt-free. Paying off those mortgages on those investment properties and not having those liabilities. The minimum investment for the Delaware statutory trust is $100,000. Another benefit of the allows our investor to be diversified not only geographically because a lot of these DSTs do not reside in Hawaii, but it also allows our investor to be diversified by asset class. We can choose to invest in things like healthcare related properties, like senior living centers. The radiology department at NYU, student housing, multi-family, or even office buildings like the ESPN property I mentioned. It's a great insurance policy as well because these properties are usually readily available and that 45 day window of that identification period won't really apply to us because we'll know what we have available and we can usually identify the day that we close our property. As I mentioned, the one benefit of using the DST is that when designed correctly, we can basically minimize or eliminate all taxes associated with the exchange or with the sale of that property. But more importantly, the DST creates a great estate planning vehicle which allows you to hold on to the estate. Whether it's aging property that is in need of repairs coming up and you don't wanna repair it, owning this type of physical real estate allows you to take advantage of this step-up in cost basis and basically do what we call a swap into your drop. Keep 1031 exchanging into properties in which you don't have to maintain, keep getting that income to basically leave it to your beneficiaries so that they would have that step-up in cost basis and basically sell it with little to no taxes associated with that. So you mentioned the income. So what kind of income could a person expect from the DST? So on average, as I mentioned earlier, it's about 5% cash and cash return or just what we can expect. Is that coming monthly? Is it like a monthly income they can try to live on? Does it come yearly? It's a 5% annual cash and cash return which is paid out one 12th every month, which is another benefit of the DST. In past when we worked with clients, even your clients, where they're selling their investment property, we're usually able to close, identify and have them getting rental checks within less than a month, within a couple of weeks, which is a good benefit for some people because it kind of minimizes the interruption of rental income coming in because they sold their investment property. So say they're in this DST for nine months and something comes up and they need their money out. Is that something they can do? Can they get the money out or can they take like an equity loan like they would on a property? They're not allowed to take an equity loan because they're not on title of the property. This is what we call fractional ownership. Now, however, if they decided they needed to get their money out, there would be a process that we would need to follow. Now, historically what has happened in the past is the investor will notify our DST or sponsor company that they need to get funds out of the property. And what would happen is because you need to be an accredited investor for this, which means that you have a $250,000 annual income or a million dollar net worth exclusive of primary residents, we need to find another accredited investor to buy that person's interest. So the sponsor company will go out there and help us find that accredited investor to replace the proceeds that we would want purchased. And at that point, it's no different than selling any other real estate where we need a willing buyer because we have a willing seller and we will have an agreed upon price. The timeline of this usually happening has been on average anywhere from 60 to 90 days to complete the transaction. Okay, so you talk about being an accredited investor to be able to take part in a Delaware statutory trust. So if someone has not been accredited, they cannot do a Delaware statutory trust? No, they cannot. Now, what we would encourage you is, before doing this or wanting to know more information, please reach out to us because being an accredited investor, usually if you own investment property, that investment property comes towards your net worth. So many times what we find is that people that own investment property usually are, by nature, an accredited investor. But we'll help you figure that out. We'll help you figure that out. Yeah, and so, okay, so what were the, what did you have to meet to be an accredited investor again, just so people can kind of keep those in mind? $250,000 in annual income for the last two years or a million dollars in net worth exclusive of your primary residence. All right, so where did this Delaware statutory trust come from, just a quick little history? Because I heard it was interesting. So, yeah, so a DSP evolved back in 2004 previous to the Delaware statutory trust, a vehicle that was similar to it was what we call a TIC or a tenants in common. And the tenants in common structure was designed where 35 people could pool their money together in expectation to buy bigger and better properties. Now, the drawback to a tenants in common was number one, every single person associated with a tenants in common had the number one qualifier for financing. In today's day and age, that might be very difficult to do but not only that privacy of information and all these things. Number two, a tenants in common is an unregulated business entity which means that business was done on a handshake. So, in fast forward 2004, I always like to say necessity is the mother of invention. People realized that they needed to be a better vehicle for people to pool their money together to buy bigger and better properties. And in 2004, the Delaware statutory trust was born. For those of you watching this today, you could easily Google internal revenue code or IRC 2004-86. And what that means is that there's an internal revenue code built around the Delaware statutory trust which allows it to qualify as like kind property. So, what happened was that the DST allows for up to 500 investors which meant that we could probably buy bigger and better quality institutional real estate. But number two, none of the investors have to qualify for financing because trying to qualify 500 investors for financing might be a pretty challenging feat. So, by the nature of that, the benefit of a DST is that it's just that. It allows people to participate and pool their money together to buy bigger and better properties, not be liable for the mortgage associated with it, but more importantly, get out of the management responsibilities. And while still having all of the tax benefits and the tax deferral benefits is owning regular real estate as if they own it themselves. Yes. So, if someone wanted more information about doing a DST or even a 1031 exchange, what would they need to do? How can they get with it? I think you could easily contact us via our website which is wwwdreamclanlive.com. But as I mentioned earlier, my recommendation, Kina, will be contact someone like you. Contact a real estate professional. Have your property evaluated and reviewed to make sure that we know what numbers we're working with. And at that point, let's get together. Let's take a look at the property and what options are available for a 1031 exchange. We always like to work with great real estate professionals like yourself because you kind of quarterback the plan, the overall arching plan. Our job is to just help you find solutions. All right, so yes. And I have had a client work with Troy. It was a wonderful experience. And sometimes, I guess I've had another client. Sometimes they don't always work but Troy is there to kind of guide you and let you know what will work and what will work. So thank you so much. And if you guys have any more questions for Troy, I would be happy to connect to you. Do you offer other services? Also, I'm sure you are a full service financial wealth planning. We definitely are. And thanks for asking, Kina. We focus on wealth management. And when we work with our clients, we build and we construct wealth plans looking at various financial disciplines. So thank you, yes. We help in all aspects. Yes, so more than just the Delaware statutory trust which can be done in Hawaii, not just in Delaware. All right. Definitely. Yes. Thank you so much, Troy. And thank you everyone. Yes, thank you everyone for joining. The life of the land is in its real estate. I will see you all in two weeks. And we will be talking about a self-directed IRA which can be used to purchase real estate investments and help with real estate investing. So that one would be another good option with everything that's going on and the way the market is going. And as we mentioned right now, the real estate market is just, it is just going crazy. We have more buyers than we have properties. We have buyers looking for properties. I have buyers looking for properties. So please reach out if you have anything. And thank you, think Tech Hawaii. And I will see you all again in two weeks.