March 4, 2025 • 31 mins
About the Guest: Warren Thomas
Warren Thomas is a distinguished expert in real estate taxation and investment, known for his extensive background and expertise in Delaware Statutory Trusts (DSTs) and 1031 exchanges. With a career that began as a CPA and auditor at Ernst and Young, he founded his own successful CPA firm in Southern California, focused on small business and tax matters. Currently, Warren is a co-founder of ExchangeRight, a leading firm in the DST space, known for its significant growth and robust investment strategies, managing a portfolio that spans across 47 states.
Episode Summary:
In Episode 125 of the Teaching Tax Flow podcast, hosts Chris Picciurro and John Tripolsky explore the intricacies of Delaware Statutory Trusts (DSTs) with special guest Warren Thomas from ExchangeRight. This episode delves into the mechanics of DSTs as a unique investment vehicle within the framework of a 1031 exchange, highlighting their inherent benefits for investors looking to defer capital gains taxes and reposition their real estate portfolios. Thomas brings his extensive expertise to the fore, discussing the evolution of DSTs and their current role in real estate investment strategies.
The discussion opens with Chris and John setting the stage by outlining the basics of DSTs and their relevance in modern real estate transactions. Warren Thomas provides a detailed explanation of how DSTs function as a viable option for investors, especially retirees or those seeking to simplify their real estate holdings. Throughout the episode, Thomas emphasizes the flexibility and tax advantages of DSTs, including the ability to exchange different types of property and the strategic use of debt and leverage within these trusts. Listeners gain insight into the practical applications of DSTs, learning how they can avoid the complexities of direct property management while still benefiting from real estate investments.
Key Takeaways:
* Understanding DSTs: Delaware Statutory Trusts are powerful tools for deferring capital gains taxes and are an excellent alternative for real estate investors looking for passive income without the hassle of direct property management.
* 1031 Exchange Mechanics: Investors can transition from active property management to a more passive role through DSTs, which offer pre-structured financing solutions that can accommodate various investment and tax strategies.
* Investment Flexibility: DSTs allow for diverse real estate investment opportunities, enabling investors to move between different asset classes and benefit from institutional-grade properties without personal liability for debt.
* Exit Strategies: Various options exist at the conclusion of a DST investment cycle, including cashing out, rolling into a Real Estate Investment Trust (REIT), or executing another 1031 exchange, offering investors tailored financial outcomes.
* Tax Advantages and Estate Planning: Investing in DSTs can provide substantial tax benefits, including depreciation opportunities and potential step-up in basis, optimizing estate planning strategies.
Notable Quotes:
* "We've never had a missed rent payment. That's a, that's pretty incredible." - Warren Thomas
* "You get that ongoing tax sheltering that can go on forever." - Warren Thomas
* "Most of the DST programs are going to have a stated minimum of 100,000." - Warren Thomas
* "An investor we believe should always be able to just cash out." - Warren Thomas
* "There are estate tax advantages we could cover on another podcast to both the DST and the 721 exit." - Warren Thomas
Stay tuned to the Teaching Tax Flow podcast for more insightful discussions on tax optimization strategies and real estate investment opportunities. Don't miss our future episodes where experts co
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
John Tripolsky (00:04):
Hey, everybody. Welcome back to the teaching tax
flow podcast episode 125. We arelooking at DSTs today. That's
right. DSTs.
But before we do that, let'stake a brief moment as always
and thank our episode sponsor.
Ad Read (00:20):
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John Tripolsky (00:52):
Alright, everybody. Back here on the
Teaching Tax Flow podcast. Onthis episode, we are gonna dive
into DSTs, so those Delawarestatutory trusts. If you don't
know what that is, good. You'rein the best place to learn about
it.
Chris Pacquero, welcome back toyour own show, sir. How are you
doing today?
Chris Picciurro (01:06):
Well, thanks for having me back, John. I
appreciate it. I am doing great.We know this weather is warming
up around, the country, and thisis kind of the, you know, it's
kind of a fun time of year, butI am really excited about this
topic. It's something that we'vebeen wanting to talk about for,
actually, quite a while.
And, you know, we we spend a lotof time planning our, planning
(01:29):
our content, but, really excitedto talk about this strategy,
this week. We have an amazingspecial guest. But other than
that, I'm doing great and, youknow, excited to jump in and,
John Tripolsky (01:44):
And you have to say something about the weather.
Right? Because, obviously,you're down south. I'm up north.
You say it's warming up.
It is still warming up, but it'sstill below freezing for me,
good sir. So one of these days,I'm gonna have to shave my beard
off just so I don't get iciclesgrowing in this thing. But in
the meantime, we'll talk aboutsomething that people actually
care about. So these TSTs, Iwill Chris, I'll let you
introduce our guest here. Again,I'm really excited about this
(02:06):
one too to kinda echo what yousaid.
It's been on our kind of everevolving roster for probably
well over a year, year and ahalf, where we've just been
looking. We've looked for agreat guest to speak on it,
somebody that knows a lot aboutit, you know, eats, breathes,
breathes, lives, sleeps,everything about these, and I
think we have that person. SoI'll let you take it from there.
Chris Picciurro (02:26):
You are correct. And we talk in teaching
tax flow about legally andethically reducing the tax you
pay in your lifetime. We've hadan episode on what's called the
ten thirty one exchange. So forthose taxpayers that fit the
avatar that, you know, maybethey're repositioning their
portfolio, they're sellingproperty. We know one of the
three one of the three laws ofteaching tax law or is that tax
(02:46):
agencies are your involuntarybusiness partner.
Tax laws are written toencourage and discourage certain
behavior. Hence, we always talkabout how real estate is an
asset that the, that that thegovernment encourages us to
invest in because of the taxbreaks. So one of those big tax
breaks is a ten thirty oneexchange, and a ten thirty one
exchange, we're gonna dive intothat in a little bit. We also
(03:08):
have a full episode on that andsome some of a lot of content on
our YouTube channel on that. Butbut for someone that maybe wants
to sell an asset, reposition,and they're sitting on to a
large taxable gain, but theydon't wanna pay tax on that.
Maybe they just wanna keep thatmoney going and reinvesting into
real estate. This is a greatopportunity. And so we're gonna
(03:30):
build on our previous knowledgeof ten thirty one exchanges, and
we're gonna look at somethingcalled a Delaware statutory
trust. You'll commonly hear itreferred to as a DST. In the tax
world, we have so many acronyms.
So when you're at your realestate meetup or you're at your
next cocktail party or your yourkid's soccer or baseball game,
oh, yeah. You hear about the,you know, Oh, I win. I had this
(03:51):
apartment building. I, you know,I I did a DST. Now you could
shake your head and say, ohgosh.
I know what that is. So thanksfor listening. But, really
excited to jump into DelawareStash Trust. So we have from
Exchange Right, who is a companythat I've done business with and
our private CPA firm's donebusiness with. Amazing to work
with, Warren Thomas, arecovering practicing CPA at his
(04:11):
own practice, and he's fromwell, we all know if you're a
sports fan where the Tournamentof Roses is, joining us from
Pasadena, California today.
Last time, the Michigan StateSpartans were there did they did
walk away with a victory,although that was a long time
ago. But welcome, Warren. Howare you doing? And thanks for
joining us.
Warren Thomas (04:29):
Thank you. Yes. I'm doing well. And I am I am in
Pasadena today, and the weatherhere is about 82 degrees. So
that's a a good place to be.
Chris Picciurro (04:39):
Maybe you can get out on that golf course next
to the Rose Bowl. I don't knowif you golf, but,
Warren Thomas (04:44):
I'm I've golfed badly for fifty years. So
Chris Picciurro (04:47):
yes.
Warren Thomas (04:49):
Most of the reg I'd be running a charity
tournament. I'd be interested incoming and playing as long as
it's the best ball foursome,and, you can use me for putting
or something like that.
Chris Picciurro (05:00):
No. I empathize. I would be searching
for the pickleball courts aseveryone knows. And, John, yes,
we're five minutes in, and I'vealready mentioned pickleball. I
usually try to avoid it.
At least don't. Good work. Goodwork. You have points to
John Tripolsky (05:09):
Usually, you wait until the end or at least
the last 20% of it. So you'reyou must be very ambitious
today.
Chris Picciurro (05:14):
Well, I've been out on the courts a lot. Well,
Warren, can you give us a littlebit of a a background about
yourself and and how you kindagot into, exploring
opportunities with the Delawarestatutory trust? And then we'll
jump into what we what kind ofanimal we're even talking about.
Warren Thomas (05:28):
Yeah. Happy to do that. So just my background, I
started as a CPA and auditorwith a company called Ernst and
Ernst, which is now Ernst andYoung. And then, that that was
quite a few years ago, but I,then founded a CPA firm in
Southern California, ran thatfor twenty five years. It was
primarily a small business andtax practice.
And, my, so I have CPA. I havemasters in taxation. But by the
(05:53):
early two thousands, we wereworking with quite a few,
investors that were engaged inten thirty one exchanges. And so
we began doing due diligence ona number of companies that were
bringing out programs for theten thirty one exchange
investors. So we were reviewingall sorts of asset classes from
hotels to office to multifamilyto oil and gas to net lease and
(06:17):
really got our education bydoing due diligence.
Chris Picciurro (06:22):
Well, so so you're kinda on on the other
side of it. Right? You'relooking at looking on behalf of
your clients, and you mentionedsomething interesting that, you
know, a lot of times peopledon't really understand about
ten thirty one exchanges, andand, again, we're gonna jump
into DSTs in a moment that whenwe talk about a a like kind
exchange, which means you'reyou're you're selling a real
(06:44):
estate or an asset, you know, areal estate asset and acquiring
another real estate asset, a lotof there's a lot of
misconceptions on what a likekind exchange in and and can you
exchange from, you know, maybeyou own a single family home and
and you're looking to get into,even a mobile home syndication.
Are you allowed to kinda mix andmatch asset classes?
Warren Thomas (07:06):
Yeah. You sure are. So, a a like kind exchange,
like kind can mean a propertyheld for, investment purposes or
for business purposes. So, youcould go from a, apartment or a
lot of our investors have singlefamily rental properties, and
and others might have, you know,a 30 unit or whatever it is.
(07:29):
But, the the basic character ofbeing held for business or
investment purposes is the sameregardless of the asset class.
So they can actually move fromthat residential rental into an
office building, into a trailerpark, into, any of these other
asset classes. And and they canalso move from owning that
individual property to owning apiece of an entity that's called
(07:54):
the DST, the Delaware StatutoryTrust. So it's it's really
provided, investors with a greatamount of flexibility that they
wouldn't have had years ago. Andand the the DST was developed
actually through a a a revenueruling in 02/2004. So for the
last twenty one years, it's beenpart of, the tax law history,
(08:16):
and now it involves manybillions of dollars a year of an
investor's capital that aretypically coming out of active
management and and wanting toget into an institutional type
asset class that might havemight have more predictability,
more stability than what theyhave been engaged in with their
their personal rentalproperties.
Chris Picciurro (08:37):
So and this is a really good point because we
find a lot of we find a lot ofpeople couple misconceptions on
ten thirty one exchanges. We oneof the oh, gosh. We might hit
all three of the laws ofteaching tax. So one of them is
cash flow and tax flow aredifferent. And what I mean by
that is let's say you bought asingle family home for $500,000
as a rental property.
You've owned it for severalyears. It's now worth a million
(08:58):
dollars, and you have a note onit of 200,000. And let's just
say there's no closing cost, yousell that for the million, you
pay your loan off for 200,you're left with 800,000 of cash
at closing. Is it? To complete afull $10.31 exchange, you
actually have to deploy amillion dollars.
Right? You can't just take the$800,000. And that's but what
what what can happen is life canchange. You know? Life can
(09:20):
change where something calledyour bankability isn't what it
was before.
Interest rates are higher. I'verun into a lot of situations
where we have early retireesthat have millions and millions
of assets, but they struggle toget financing because they don't
they're not don't have a lot ofrecurring income. And that's a
really nice case for a Delawarestatutory trust. So as you said
(09:40):
about twenty one years ago,there was a revenue ruling that
allowed and make sure I'm sayingthis right, a Delaware statutory
trust or a DST to qualify as aten thirty one exchange asset.
Is that
Warren Thomas (09:52):
Yes. Fair
Chris Picciurro (09:52):
to say?
Warren Thomas (09:53):
That's correct. And and there is a difference
between a Delaware statutorytrust, technically, and I know
we don't wanna get too technicalhere, but it's a grantor trust
similar to having your livingtrust. If you and your wife have
a living trust and, you holdyour assets in that title, IRS
sees that as a, what we call, adisregarded entity. They don't
(10:14):
count it as though it's acorporation or partnership,
which may have restrictions ondoing a ten thirty one exchange.
So under the Delaware statutorytrust, they see it as a just a
pass through entity.
You can go from owning, a singleownership of a rental to going
in and being you might be one ofof 30 or one of a hundred owners
(10:36):
of a very large diversifiedportfolio. And and to your
point, you you mentioned aboutqualifying for loans. If you
need a loan, these DSTs areoften structured with loans so
that you don't have to qualify.If you're no longer bankable for
some reason, you can't get aloan in the future, and you need
to place that $800, but you need$200 of loan, those are built
(11:01):
into the DSTs. And you don'thave to submit tax returns.
You don't have to submit thefinancial statements to qualify
with the bank. They're kindabuilt into the process. So the
DSTs can solve some practicalissues that some folks have, on
qualifying for for a ten thirtyone exchange. So they're quite
handy.
Chris Picciurro (11:20):
Right. So we'll build on that. So let's so and
it could be someone maybe theyjust don't want to have that
debt on either, at least, youknow, on their you know, as a
traditional loan going throughthose traditional banking
outlets. So talking through youknow, let's talk through my
example I just came up with. Wehave let's say we have a
taxpayer.
They sold that property. Theyhave $800,000. First of all, if
(11:42):
you're gonna do a $10.31exchange, you can't let that
$800,000 hit your bank account.You're gonna have to use
something called a qualifiedintermediary. Or you know what?
Remember remember thoseacronyms. So if you wanna seem
cool at the baseball field,that's a QI. You you wanna get a
QI involved. They're gonna holdthat money for you until you
could find what's calledreplacement property, and that's
where the DST comes into play.So, Warren, can so in in that
(12:03):
case, so we've got someonethat's looking to place $800,000
for the cash, but ultimately,they're they're placing a
million dollars so they getRight.
Credited for a million dollarsin that exchange and then they
do they get allocated a certainamount of debt from the DST?
Warren Thomas (12:18):
Yeah. Yeah. So, we like, in our case, we we
build DSTs that have no debt andwe build DSTs that have very
modest amounts of debt. Now ifyou need a lot of debt, my
company, I I build our programsfor the retiree. So, there
there'll be other programs thatyou know about and and you can
introduce folks to that are thatmight be more aggressive than
(12:41):
what we do.
But my average investor is abouta 72 year old. They typically
are a retiree that's made mostof their money, through real
estate. So for those that needdebt, they'll come into a
package that already has debt.And the the use of debt's quite
interesting because we haveinvestors that come to us that
actually have no debt or theyhave very little debt, but
(13:03):
they're looking for a programthat has debt. Right?
And why do they look for that?Because that that debt if if
they came in with 800 and theywent into a program, that had
50% debt, they're now buyingabout a million 6 worth of
property, not just the millionthey they started with. And so
that extra $600 worth ofproperty can be depreciated and
(13:27):
can generate extra taxdeductions that go on year after
year after year. And because ofthe nature of that debt where
they didn't have to qualify forthemselves and it is what we
call nonrecourse, it means theycan't go back after your private
assets in order to, you know,satisfy that debt. You basically
(13:49):
have levels of protection, andyou get that ongoing tax
sheltering that can go onforever.
So, there's there's reasons toconsider maybe using a a debt
DST even though you might nothave much debt or you might not
have any debt. On the otherhand, we've got investors that
say, hey. Look at I bought thisproperty thirty, forty years
(14:10):
ago. I've paid it off. I'm I'mnow at an age I just don't wanna
go into anything with debt, andso they don't have to.
They've got we've got we've gotdebt free DSTs. You've got them
on your shelf. You know? They'reavailable. So either way, we can
plan for the needs of theinvestor and for the risk
(14:30):
profile of the investor.
Chris Picciurro (14:32):
So you can go in like I say, yeah, you can go
in debt or no debt. Yeah, ruleof thumb, it sounds like that
typically people going into theDST program is someone that is
it, you know, let's say, intheir retirement years. Rule of
thumb, what's what's there'sthere's probably something about
and and I'm sure, you know,there are a lot of, DSTs out
(14:53):
there. Right? And what we'regonna talk about that in just a
couple of minutes.
But, what is typically theaverage amount of loan to value
or or debt percentage so that'sacceptable the most because you
have to get over leveraged.Right?
Warren Thomas (15:04):
Right. So it it depends on the asset class. So
our specialty is net lease. Sonet lease is like triple net
properties, double netproperties. And then within that
specialty, I will only buy thosethat are investment grade,
meaning the corporation standingbehind it, and that corporation
(15:25):
has to be a high credit quality.
And so I've got over 1,300properties in all of the DSTs
we've done, and we've never hada missed rent payment. That's a
that's pretty incredible, butit's reflective of the type of
asset that I buy. So you'regonna find other DSTs that are
that may be buying other assetsthat have different
(15:48):
characteristics of growth orwhat have you. So, in in our
programs, when you look at debt,how much debt is appropriate?
Well, just as I'm buying assetsthat tend to be more
conservative by nature, I'm alsogoing to limit the amount of
debt I use because I know my, mytypical investor is going to be
(16:11):
a retiree or pre retiree.
So I just wanna be mitigatingrisk. But directly answering
your question, I will typicallybe at a 41 to 46%, debt load on
my debt programs, and I'll andthen I'll have those that have
no debt. If this were three,four years ago when the cost of
(16:31):
debt was really cheap, I mean, Iwas getting loans at 3.3 percent
for ten years. Right? Sometimesit would be 3.6, three point
eight.
Well, now Right. Debt cost you$6.06 and a quarter. I don't
want higher debt. I wannamoderate my debt, and I want a
lot of cash flow available everymonth to not just cover the
(16:52):
debt, but to far exceed thedebt. And that's it's called a
debt coverage ratio, and I wannabe really healthy on that.
So that's the way I use debt.Other sponsors, other companies
will use it in different ways.
Chris Picciurro (17:04):
When I know so and that's something to
consider. If you're thinkingabout the $10.31 exchange, Let's
remember that you're, you know,good I'm gonna hearken back to
those prior episodes and some ofour content, but you've gotta
identify property, replacementproperty, and there are some
strict strict timelines Right.To to close on that replacement
property and that's why puttingit, you know, like the DST as a
(17:26):
replacement property option whenyou might have to pick up debt
or even if you don't have topick up debt is a very viable
option because there are manyrisks that you're not dealing
with such as not closing. I hada I in our private CPA price, I
real story. We had a client fromCalifornia, sold a very highly
appreciated asset, waspurchasing eight properties for
(17:47):
that asset.
So remember, if you're doing a10:31 exchange exchange, it's
not one for one, but waspurchasing eight properties and,
identified, I think, 10properties. And what happened
was is the prop the the theyweren't the higher, value
properties, we'll say, but the,the lender pulled out because
(18:08):
because the the the inspectionswere so bad, and it blew this
whole deal up. And had that hadthat person identified a DST as
an option as a replacementproperty, they could have
backfilled some, some of the,replacement property, if that
makes sense. So Yeah. Yeah.
That would be a lot offlexibility.
Warren Thomas (18:26):
That's a real risk. You only have forty five
days to identify what you'regoing to buy. And if for some
reason that property fell out,like in your case, that lender,
but if you go to a DST, it'slike I don't bring a DST out
until the day that I purchasedthe number of properties that
are in that DST, so they're notat risk of not closing. You know
(18:47):
exactly what you're getting. Youknow the lease links.
You know who the tenant is. Youknow the cash flow. You know the
debt, terms. All of that'salready pre predone by the time
it comes out as a DST. So ittakes a lot of that risk off the
table for the investor that, isis trying to work with that
(19:08):
forty five day ID requirement orthe hundred and eighty day
closing requirement, which wedidn't really talk about that.
So I'm assuming the listenersalready know about that, but
there's some rules you have tobe really careful of. And then
you also have to be careful ofID ing because there's three
different rules on ID ing, andwe don't need to get into that
on this podcast. But, you canutilize a DST as a safety valve.
Chris Picciurro (19:30):
Exactly. Bottom line is you can't go into Zillow
in its ID a million propertiesjust because you you when you
start, you there's you've gottayou've gotta close on a certain
percentage of either theproperty's ID ed or property
values, and and that's where aqualified intermediary plays a
huge role. And, now I know youcan only speak for exchange,
Roy. What are in general, whatare some of the minimum amounts
(19:51):
for, to enter into a DST?Because especially if you're
using you know, let's say you'reusing multiple properties as
replacement property.
Warren Thomas (19:59):
Yeah. Yeah. So on the the minimums, most of the
DST programs are going to have astated minimum of a hundred
thousand, and I'll just use oursas example. We've had 9,000
investors come in into ourprograms. I didn't mention it at
the beginning, but I founded acompany called Exchange Right,
which is reflected by the bannerbehind me, the colors.
And, I founded that in 2012 withtwo partners, and we grew by 40%
(20:24):
per year for the next ten yearsand became the third largest DST
sponsor in the country. And andwith that, we have programs that
have assets in 47 states andtheir net lease assets and all
that we've already talked about.But, when you when you get
engaged with a sponsor, youwanna make sure that they've got
(20:45):
the the program available to youand that they know what they're
doing because the risk is reallyit is with the sponsor. I'm
probably not answering yourquestion directly, but that's a
little bit about the DSTindustry, has a number of
sponsors in it, all sorts ofdifferent asset classes, and all
of them are trying to solve thecommon investor requirements.
Chris Picciurro (21:09):
Well, no. This is so I think we've covered if
you if you if you're in asituation where the you know,
you're looking for a replacementproperty, This is I I should I
know this. I've been doing thisfor over twenty years. Can you
invest in a DST outside of a$10.31 exchange transaction, or
is it specific?
Warren Thomas (21:26):
You can. And, that goes goes back to your
question was actually onminimums. And I and I didn't
answer that question, but statedminimums are usually about a
hundred thousand dollars. Butwhen I get a $5,000,000
investor, you know, if you cameto me and said, hey. I've got
somebody who got 47,000 andthey've got they need the ID and
(21:46):
they need to buy, I don't reallycare.
Because at the end of the dayfor us as a sponsor, it's just
spreadsheet work. You know? Andthe $5,000,000 versus the 47,
yeah, it doesn't really matter.But most sponsors will limit it
to a hundred thousand, minimuminvestment size.
Chris Picciurro (22:03):
Mhmm. Mhmm. No. That makes sense. So we talked
about kinda getting into this,and we're gonna wrap this up
because I wanna I want people tothink a lot of times with tax
planning and strategy andinvestments, you think about,
man, this is a really greattransaction.
I'm good. Take a breath. Ittakes a lot of stress off. But
there are some other benefits onthe you know, what happens five
(22:25):
years down the road, six yearsdown the road, seven years down
the road? You mentioned,obviously, there's some time you
know, a lot of times areactually tax advantages using
that leverage where you can youcan't depreciate tax deferred
money, but but if you do takedebt on, you could see some
depreciation deduction.
So the income could be taxfavored. But down the road,
let's say you do invest in a inin a DST and that that they own
(22:48):
a property that doubles in valueand sells. Is someone gonna get
stuck with, with that tax bill,or do they have options?
Warren Thomas (22:57):
They have options. So, you know, you they
come into the DST because theythey may be going from where
they were actively managing. Itmight be because of age. It
might be because they wanna haveretirement days and vacations
and things that they can't getwhile they're doing all that
maintenance. It might be becausethe cash flow is better in a DST
than it might be owning yourrental property and it might be
(23:20):
they're trying to create new taxdeductions, but they wanna hang
on to the property.
They wanna hang on to rentalsbecause they get a step up in
tax basis at death and they canpass that then to their heirs
without having a taxation on it.So that's the motivation for the
10/31. So now they're in a DST,and the DST has a full cycle
(23:41):
event coming eventually. Right?So some DSTs like, we have a
whole series of DSTs where thefull cycle event occurs before
year five.
K? So, some other companies aregonna go year 70, year 10 as you
mentioned. But at that fullcycle event, what are their
options? So in our programs, weintroduce to the industry the
(24:04):
concept of multiple exit optionsfrom the DST. So our DSTs,
depending on whether it's an allcash DST or a levered DST, the
common three exit options are,one, cashing out.
An investor, we believe, shouldalways be able to just cash out.
The reason that's important isbecause the the retiree, the pre
(24:28):
retiree that's coming into theDST, they're gonna be in that
DST if if they needed to cashout. Whether that need is
because they had a death andthey get the step up and they
really don't need to doexchanges any longer, we wanna
give them that option. So that'soption one. We only get about 10
or 11% of our capital that wantsto exit when the DST goes full
(24:50):
cycle.
Option number two is doing whatwe call a seven twenty one
exchange. I know that'ssomething you wanted to talk
about today, but a seven twentyone exchange allows them to take
their DST interest, roll it intoa much more diversified program,
which is a REIT program or anoperating partnership of a REIT.
(25:13):
And for those that have neverheard of a REIT, it's a a real
estate investment trust. Andseven twenty one exchanges take
the property of the DST, youhave the option. Do you wanna
roll it to the REIT?
And if our DST had eight to 20properties in one DST, the REIT
currently, we've got 362properties. So do you want more
(25:37):
diversification? Well, maybe so.And why would you want it? Well,
theoretical risk mitigation.
The more diverse, the moretheoretically risk mitigated it
is. But second, that d the, theDST, which is generally an
illiquid investment, you move itover to the seven twenty one,
(25:57):
and the seven twenty one hours,they'll have quarterly
liquidity. So if an investorthat's done a ten thirty one,
he's rolled to the seven twentyone when that was available,
he's getting paid cash flowevery month, might even be more
cash flow than they were gettingin the DST or more cash flow
than they're getting in theirold rental. But now they have
(26:19):
opportunity for liquidity. Solet's say the kitchen needs to
be remodeled.
So you're you guys are married.You know, your wives say it's
time to spend that $40. Well,instead of having to cash in
that whole DST and pay tax onit, you can be in that $7.21 and
say, okay. This quarter, we'regonna cash in, you know, $20 to
get it started, and nextquarter, maybe it's another 20
(26:41):
or you decide to cash in all 40.Or a death occurs while you're
owning that seven twenty one,and you're gonna get a step up
in tax basis in the 07/21.
And you can now say, hey. Cashin the whole thing, and there's
no taxation to pay. So now youcan get off of that train. So
(27:01):
that that cashing out of the DSTis one option. The rolling to a
seven twenty one is the secondoption.
Or for some investors, theywanna continue to do ten thirty
ones. So we get about 30% thatwanna do another ten thirty one.
We get about 60 somethingpercent that wanna do seven
twenty one, and we get 10 or 11%that cash in from the DST. So
(27:22):
that's kind of a a quickoverview of it, but, we can dive
in further to any of any ofthose angles.
Chris Picciurro (27:28):
Right. I think we might have to have another
podcast just on that, the 07/21.And I think that, you know so
here's the thing, guys. Ifyou're thinking about this now
I'm gonna date myself a littlebit. Back in the day when you
went to a hotel, you well, evenbefore credit cards, you know,
my parents would break out thosetraveler's checks, but you
ultimately maybe would arrive.
You'd you'd put a credit card onfile, and then you would pay,
(27:50):
for your room and for all ofyour, you know, goodies that you
got, throughout the your staywhen you check out. Right? Well,
guess what? If you never checkout of the room, just you could
live there forever and neverpay. So think about that with
your real estate.
Think about those options youhave as, hey. I'm in this
property. I can 10:31 and andget a DST. I can move over to a
(28:11):
REIT. As long as you're usingthe right people, that's why I
thank you for to Warren and hisamazing team at Exchange.
Right? We talk aboutimplementation partners and and
people, you know, we talk aboutall the time. Ideas are cheap.
You can find them on TikTok,Instagram. Implementation's
important.
So thank you for coming on theshow. You are one of our
valuable implementationpartners. I learned a lot, and
(28:33):
and I think we've got some ideasfor more topics, John. What do
you think?
John Tripolsky (28:36):
Yeah. Absolutely. It's it's funny if
anybody who's watching this hasprobably seen me, you know,
kinda doing one of these. I gotI got my trusty little pen out
here burning holes in mynotepad. Yeah.
Chris Picciurro (28:44):
I wrote some stuff down too.
John Tripolsky (28:46):
And and, honestly, Warren, it's you know,
coming into this, I didn't knowa whole lot about DSTs. I knew
you know enough to be dangerous,which is why I keep Chris in my
life for twenty plus years. Thatway I can get dangerous, and you
can save me from it. But it itit was really interesting to me,
and you did a fantastic jobabout explaining it. Right?
Like, there's different outs, ifyou will. There's different
options. It's not just, youknow, you get in, you lock it,
(29:07):
and you're stuck thereregardless. I mean, sure,
there's time commitmentsregardless, but you thank you so
much for diving into diving intothat detail. I think it'll
surprise a lot of people.
Warren Thomas (29:16):
Very good. Very good. Lots of estate tax
advantages we could cover onanother podcast, to both the DST
and the 07/21 exit. So, happy togo over that in the future, but,
it's been a privilege and justpleasure to be able
John Tripolsky (29:31):
to be on here with you today. Absolutely.
Well, thanks for joining us.And, yeah, now that you said it,
and everybody heard it, we'reputting the hook in. Yes.
So now you have to come back andjoin us. We'll just let you know
when we're gonna do it. So Okay.We appreciate it. Chris, thank
you as always for coming on yourown show.
Obviously, it's kind of arequirement, if you will. You
know, AI is pretty in prettyintense, but it it is very hard
(29:51):
to duplicate your voice and yourglowing personality, sir. So we
have to have you keep comingback here. We can't
Chris Picciurro (29:57):
wait a while. Yeah. Exactly.
John Tripolsky (30:00):
Although we can edit out, you know, when you say
pickleball.
Chris Picciurro (30:02):
You know? One one That's all you're good at
seeing my glowing head. Ithought the ball joke was
coming, but that's alright?
John Tripolsky (30:07):
No. No. I cut those off at about episode 100,
so I've given you a littlebreak. But, yes, everybody who's
listening or watching this,definitely subscribe to the
channel here on YouTube as wellas if you're not familiar with
it, we are on Spotify, Apple,iTunes, pretty much anywhere
that you can possibly find apodcast. This one is streaming
on.
So be sure to check it out. Goback. We'll drop some of them
(30:29):
that we referenced during thisspecific episode of previous
ones. I know we talked about the10/31. We'll drop that one in
here.
A little quick link for you togo and find that. And as always,
we'll see you back here nextweek. Roughly same time,
different date, and completelydifferent topic here on the
Teaching Tax Flow podcast.
Disclaimer (30:49):
The content provided is for educational purposes
only. We encourage you to seekpersonalized investment advice
from your financialprofessional. For all tax and
legal advice, please consultyour CPA or attorney. Investment
advisory services are offeredthrough Cabin Advisors, a
registered investment adviser.Securities are offered through
Cabin Securities, a registeredbroker dealer.
The content of this podcast doesnot constitute an offer of
(31:10):
securities. Offerings can onlybe made through an offering
memorandum, and you shouldcarefully examine the risk
factors and other informationcontained in the memorandum.
Hey, everybody. Welcome back to the teaching tax
flow podcast episode 125. We arelooking at DSTs today. That's
right. DSTs.
But before we do that, let'stake a brief moment as always
and thank our episode sponsor.
Ad Read (00:20):
This podcast is brought to you by Strategic Associates.
Are you a high income earner,real estate investor, or
successful entrepreneur who isfrustrated by having to pay
$75,000 or more of annual taxliability? If so, Strategic
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John Tripolsky (00:52):
Alright, everybody. Back here on the
Teaching Tax Flow podcast. Onthis episode, we are gonna dive
into DSTs, so those Delawarestatutory trusts. If you don't
know what that is, good. You'rein the best place to learn about
it.
Chris Pacquero, welcome back toyour own show, sir. How are you
doing today?
Chris Picciurro (01:06):
Well, thanks for having me back, John. I
appreciate it. I am doing great.We know this weather is warming
up around, the country, and thisis kind of the, you know, it's
kind of a fun time of year, butI am really excited about this
topic. It's something that we'vebeen wanting to talk about for,
actually, quite a while.
And, you know, we we spend a lotof time planning our, planning
(01:29):
our content, but, really excitedto talk about this strategy,
this week. We have an amazingspecial guest. But other than
that, I'm doing great and, youknow, excited to jump in and,
John Tripolsky (01:44):
And you have to say something about the weather.
Right? Because, obviously,you're down south. I'm up north.
You say it's warming up.
It is still warming up, but it'sstill below freezing for me,
good sir. So one of these days,I'm gonna have to shave my beard
off just so I don't get iciclesgrowing in this thing. But in
the meantime, we'll talk aboutsomething that people actually
care about. So these TSTs, Iwill Chris, I'll let you
introduce our guest here. Again,I'm really excited about this
(02:06):
one too to kinda echo what yousaid.
It's been on our kind of everevolving roster for probably
well over a year, year and ahalf, where we've just been
looking. We've looked for agreat guest to speak on it,
somebody that knows a lot aboutit, you know, eats, breathes,
breathes, lives, sleeps,everything about these, and I
think we have that person. SoI'll let you take it from there.
Chris Picciurro (02:26):
You are correct. And we talk in teaching
tax flow about legally andethically reducing the tax you
pay in your lifetime. We've hadan episode on what's called the
ten thirty one exchange. So forthose taxpayers that fit the
avatar that, you know, maybethey're repositioning their
portfolio, they're sellingproperty. We know one of the
three one of the three laws ofteaching tax law or is that tax
(02:46):
agencies are your involuntarybusiness partner.
Tax laws are written toencourage and discourage certain
behavior. Hence, we always talkabout how real estate is an
asset that the, that that thegovernment encourages us to
invest in because of the taxbreaks. So one of those big tax
breaks is a ten thirty oneexchange, and a ten thirty one
exchange, we're gonna dive intothat in a little bit. We also
(03:08):
have a full episode on that andsome some of a lot of content on
our YouTube channel on that. Butbut for someone that maybe wants
to sell an asset, reposition,and they're sitting on to a
large taxable gain, but theydon't wanna pay tax on that.
Maybe they just wanna keep thatmoney going and reinvesting into
real estate. This is a greatopportunity. And so we're gonna
(03:30):
build on our previous knowledgeof ten thirty one exchanges, and
we're gonna look at somethingcalled a Delaware statutory
trust. You'll commonly hear itreferred to as a DST. In the tax
world, we have so many acronyms.
So when you're at your realestate meetup or you're at your
next cocktail party or your yourkid's soccer or baseball game,
oh, yeah. You hear about the,you know, Oh, I win. I had this
(03:51):
apartment building. I, you know,I I did a DST. Now you could
shake your head and say, ohgosh.
I know what that is. So thanksfor listening. But, really
excited to jump into DelawareStash Trust. So we have from
Exchange Right, who is a companythat I've done business with and
our private CPA firm's donebusiness with. Amazing to work
with, Warren Thomas, arecovering practicing CPA at his
(04:11):
own practice, and he's fromwell, we all know if you're a
sports fan where the Tournamentof Roses is, joining us from
Pasadena, California today.
Last time, the Michigan StateSpartans were there did they did
walk away with a victory,although that was a long time
ago. But welcome, Warren. Howare you doing? And thanks for
joining us.
Warren Thomas (04:29):
Thank you. Yes. I'm doing well. And I am I am in
Pasadena today, and the weatherhere is about 82 degrees. So
that's a a good place to be.
Chris Picciurro (04:39):
Maybe you can get out on that golf course next
to the Rose Bowl. I don't knowif you golf, but,
Warren Thomas (04:44):
I'm I've golfed badly for fifty years. So
Chris Picciurro (04:47):
yes.
Warren Thomas (04:49):
Most of the reg I'd be running a charity
tournament. I'd be interested incoming and playing as long as
it's the best ball foursome,and, you can use me for putting
or something like that.
Chris Picciurro (05:00):
No. I empathize. I would be searching
for the pickleball courts aseveryone knows. And, John, yes,
we're five minutes in, and I'vealready mentioned pickleball. I
usually try to avoid it.
At least don't. Good work. Goodwork. You have points to
John Tripolsky (05:09):
Usually, you wait until the end or at least
the last 20% of it. So you'reyou must be very ambitious
today.
Chris Picciurro (05:14):
Well, I've been out on the courts a lot. Well,
Warren, can you give us a littlebit of a a background about
yourself and and how you kindagot into, exploring
opportunities with the Delawarestatutory trust? And then we'll
jump into what we what kind ofanimal we're even talking about.
Warren Thomas (05:28):
Yeah. Happy to do that. So just my background, I
started as a CPA and auditorwith a company called Ernst and
Ernst, which is now Ernst andYoung. And then, that that was
quite a few years ago, but I,then founded a CPA firm in
Southern California, ran thatfor twenty five years. It was
primarily a small business andtax practice.
And, my, so I have CPA. I havemasters in taxation. But by the
(05:53):
early two thousands, we wereworking with quite a few,
investors that were engaged inten thirty one exchanges. And so
we began doing due diligence ona number of companies that were
bringing out programs for theten thirty one exchange
investors. So we were reviewingall sorts of asset classes from
hotels to office to multifamilyto oil and gas to net lease and
(06:17):
really got our education bydoing due diligence.
Chris Picciurro (06:22):
Well, so so you're kinda on on the other
side of it. Right? You'relooking at looking on behalf of
your clients, and you mentionedsomething interesting that, you
know, a lot of times peopledon't really understand about
ten thirty one exchanges, andand, again, we're gonna jump
into DSTs in a moment that whenwe talk about a a like kind
exchange, which means you'reyou're you're selling a real
(06:44):
estate or an asset, you know, areal estate asset and acquiring
another real estate asset, a lotof there's a lot of
misconceptions on what a likekind exchange in and and can you
exchange from, you know, maybeyou own a single family home and
and you're looking to get into,even a mobile home syndication.
Are you allowed to kinda mix andmatch asset classes?
Warren Thomas (07:06):
Yeah. You sure are. So, a a like kind exchange,
like kind can mean a propertyheld for, investment purposes or
for business purposes. So, youcould go from a, apartment or a
lot of our investors have singlefamily rental properties, and
and others might have, you know,a 30 unit or whatever it is.
(07:29):
But, the the basic character ofbeing held for business or
investment purposes is the sameregardless of the asset class.
So they can actually move fromthat residential rental into an
office building, into a trailerpark, into, any of these other
asset classes. And and they canalso move from owning that
individual property to owning apiece of an entity that's called
(07:54):
the DST, the Delaware StatutoryTrust. So it's it's really
provided, investors with a greatamount of flexibility that they
wouldn't have had years ago. Andand the the DST was developed
actually through a a a revenueruling in 02/2004. So for the
last twenty one years, it's beenpart of, the tax law history,
(08:16):
and now it involves manybillions of dollars a year of an
investor's capital that aretypically coming out of active
management and and wanting toget into an institutional type
asset class that might havemight have more predictability,
more stability than what theyhave been engaged in with their
their personal rentalproperties.
Chris Picciurro (08:37):
So and this is a really good point because we
find a lot of we find a lot ofpeople couple misconceptions on
ten thirty one exchanges. We oneof the oh, gosh. We might hit
all three of the laws ofteaching tax. So one of them is
cash flow and tax flow aredifferent. And what I mean by
that is let's say you bought asingle family home for $500,000
as a rental property.
You've owned it for severalyears. It's now worth a million
(08:58):
dollars, and you have a note onit of 200,000. And let's just
say there's no closing cost, yousell that for the million, you
pay your loan off for 200,you're left with 800,000 of cash
at closing. Is it? To complete afull $10.31 exchange, you
actually have to deploy amillion dollars.
Right? You can't just take the$800,000. And that's but what
what what can happen is life canchange. You know? Life can
(09:20):
change where something calledyour bankability isn't what it
was before.
Interest rates are higher. I'verun into a lot of situations
where we have early retireesthat have millions and millions
of assets, but they struggle toget financing because they don't
they're not don't have a lot ofrecurring income. And that's a
really nice case for a Delawarestatutory trust. So as you said
(09:40):
about twenty one years ago,there was a revenue ruling that
allowed and make sure I'm sayingthis right, a Delaware statutory
trust or a DST to qualify as aten thirty one exchange asset.
Is that
Warren Thomas (09:52):
Yes. Fair
Chris Picciurro (09:52):
to say?
Warren Thomas (09:53):
That's correct. And and there is a difference
between a Delaware statutorytrust, technically, and I know
we don't wanna get too technicalhere, but it's a grantor trust
similar to having your livingtrust. If you and your wife have
a living trust and, you holdyour assets in that title, IRS
sees that as a, what we call, adisregarded entity. They don't
(10:14):
count it as though it's acorporation or partnership,
which may have restrictions ondoing a ten thirty one exchange.
So under the Delaware statutorytrust, they see it as a just a
pass through entity.
You can go from owning, a singleownership of a rental to going
in and being you might be one ofof 30 or one of a hundred owners
(10:36):
of a very large diversifiedportfolio. And and to your
point, you you mentioned aboutqualifying for loans. If you
need a loan, these DSTs areoften structured with loans so
that you don't have to qualify.If you're no longer bankable for
some reason, you can't get aloan in the future, and you need
to place that $800, but you need$200 of loan, those are built
(11:01):
into the DSTs. And you don'thave to submit tax returns.
You don't have to submit thefinancial statements to qualify
with the bank. They're kindabuilt into the process. So the
DSTs can solve some practicalissues that some folks have, on
qualifying for for a ten thirtyone exchange. So they're quite
handy.
Chris Picciurro (11:20):
Right. So we'll build on that. So let's so and
it could be someone maybe theyjust don't want to have that
debt on either, at least, youknow, on their you know, as a
traditional loan going throughthose traditional banking
outlets. So talking through youknow, let's talk through my
example I just came up with. Wehave let's say we have a
taxpayer.
They sold that property. Theyhave $800,000. First of all, if
(11:42):
you're gonna do a $10.31exchange, you can't let that
$800,000 hit your bank account.You're gonna have to use
something called a qualifiedintermediary. Or you know what?
Remember remember thoseacronyms. So if you wanna seem
cool at the baseball field,that's a QI. You you wanna get a
QI involved. They're gonna holdthat money for you until you
could find what's calledreplacement property, and that's
where the DST comes into play.So, Warren, can so in in that
(12:03):
case, so we've got someonethat's looking to place $800,000
for the cash, but ultimately,they're they're placing a
million dollars so they getRight.
Credited for a million dollarsin that exchange and then they
do they get allocated a certainamount of debt from the DST?
Warren Thomas (12:18):
Yeah. Yeah. So, we like, in our case, we we
build DSTs that have no debt andwe build DSTs that have very
modest amounts of debt. Now ifyou need a lot of debt, my
company, I I build our programsfor the retiree. So, there
there'll be other programs thatyou know about and and you can
introduce folks to that are thatmight be more aggressive than
(12:41):
what we do.
But my average investor is abouta 72 year old. They typically
are a retiree that's made mostof their money, through real
estate. So for those that needdebt, they'll come into a
package that already has debt.And the the use of debt's quite
interesting because we haveinvestors that come to us that
actually have no debt or theyhave very little debt, but
(13:03):
they're looking for a programthat has debt. Right?
And why do they look for that?Because that that debt if if
they came in with 800 and theywent into a program, that had
50% debt, they're now buyingabout a million 6 worth of
property, not just the millionthey they started with. And so
that extra $600 worth ofproperty can be depreciated and
(13:27):
can generate extra taxdeductions that go on year after
year after year. And because ofthe nature of that debt where
they didn't have to qualify forthemselves and it is what we
call nonrecourse, it means theycan't go back after your private
assets in order to, you know,satisfy that debt. You basically
(13:49):
have levels of protection, andyou get that ongoing tax
sheltering that can go onforever.
So, there's there's reasons toconsider maybe using a a debt
DST even though you might nothave much debt or you might not
have any debt. On the otherhand, we've got investors that
say, hey. Look at I bought thisproperty thirty, forty years
(14:10):
ago. I've paid it off. I'm I'mnow at an age I just don't wanna
go into anything with debt, andso they don't have to.
They've got we've got we've gotdebt free DSTs. You've got them
on your shelf. You know? They'reavailable. So either way, we can
plan for the needs of theinvestor and for the risk
(14:30):
profile of the investor.
Chris Picciurro (14:32):
So you can go in like I say, yeah, you can go
in debt or no debt. Yeah, ruleof thumb, it sounds like that
typically people going into theDST program is someone that is
it, you know, let's say, intheir retirement years. Rule of
thumb, what's what's there'sthere's probably something about
and and I'm sure, you know,there are a lot of, DSTs out
(14:53):
there. Right? And what we'regonna talk about that in just a
couple of minutes.
But, what is typically theaverage amount of loan to value
or or debt percentage so that'sacceptable the most because you
have to get over leveraged.Right?
Warren Thomas (15:04):
Right. So it it depends on the asset class. So
our specialty is net lease. Sonet lease is like triple net
properties, double netproperties. And then within that
specialty, I will only buy thosethat are investment grade,
meaning the corporation standingbehind it, and that corporation
(15:25):
has to be a high credit quality.
And so I've got over 1,300properties in all of the DSTs
we've done, and we've never hada missed rent payment. That's a
that's pretty incredible, butit's reflective of the type of
asset that I buy. So you'regonna find other DSTs that are
that may be buying other assetsthat have different
(15:48):
characteristics of growth orwhat have you. So, in in our
programs, when you look at debt,how much debt is appropriate?
Well, just as I'm buying assetsthat tend to be more
conservative by nature, I'm alsogoing to limit the amount of
debt I use because I know my, mytypical investor is going to be
(16:11):
a retiree or pre retiree.
So I just wanna be mitigatingrisk. But directly answering
your question, I will typicallybe at a 41 to 46%, debt load on
my debt programs, and I'll andthen I'll have those that have
no debt. If this were three,four years ago when the cost of
(16:31):
debt was really cheap, I mean, Iwas getting loans at 3.3 percent
for ten years. Right? Sometimesit would be 3.6, three point
eight.
Well, now Right. Debt cost you$6.06 and a quarter. I don't
want higher debt. I wannamoderate my debt, and I want a
lot of cash flow available everymonth to not just cover the
(16:52):
debt, but to far exceed thedebt. And that's it's called a
debt coverage ratio, and I wannabe really healthy on that.
So that's the way I use debt.Other sponsors, other companies
will use it in different ways.
Chris Picciurro (17:04):
When I know so and that's something to
consider. If you're thinkingabout the $10.31 exchange, Let's
remember that you're, you know,good I'm gonna hearken back to
those prior episodes and some ofour content, but you've gotta
identify property, replacementproperty, and there are some
strict strict timelines Right.To to close on that replacement
property and that's why puttingit, you know, like the DST as a
(17:26):
replacement property option whenyou might have to pick up debt
or even if you don't have topick up debt is a very viable
option because there are manyrisks that you're not dealing
with such as not closing. I hada I in our private CPA price, I
real story. We had a client fromCalifornia, sold a very highly
appreciated asset, waspurchasing eight properties for
(17:47):
that asset.
So remember, if you're doing a10:31 exchange exchange, it's
not one for one, but waspurchasing eight properties and,
identified, I think, 10properties. And what happened
was is the prop the the theyweren't the higher, value
properties, we'll say, but the,the lender pulled out because
(18:08):
because the the the inspectionswere so bad, and it blew this
whole deal up. And had that hadthat person identified a DST as
an option as a replacementproperty, they could have
backfilled some, some of the,replacement property, if that
makes sense. So Yeah. Yeah.
That would be a lot offlexibility.
Warren Thomas (18:26):
That's a real risk. You only have forty five
days to identify what you'regoing to buy. And if for some
reason that property fell out,like in your case, that lender,
but if you go to a DST, it'slike I don't bring a DST out
until the day that I purchasedthe number of properties that
are in that DST, so they're notat risk of not closing. You know
(18:47):
exactly what you're getting. Youknow the lease links.
You know who the tenant is. Youknow the cash flow. You know the
debt, terms. All of that'salready pre predone by the time
it comes out as a DST. So ittakes a lot of that risk off the
table for the investor that, isis trying to work with that
(19:08):
forty five day ID requirement orthe hundred and eighty day
closing requirement, which wedidn't really talk about that.
So I'm assuming the listenersalready know about that, but
there's some rules you have tobe really careful of. And then
you also have to be careful ofID ing because there's three
different rules on ID ing, andwe don't need to get into that
on this podcast. But, you canutilize a DST as a safety valve.
Chris Picciurro (19:30):
Exactly. Bottom line is you can't go into Zillow
in its ID a million propertiesjust because you you when you
start, you there's you've gottayou've gotta close on a certain
percentage of either theproperty's ID ed or property
values, and and that's where aqualified intermediary plays a
huge role. And, now I know youcan only speak for exchange,
Roy. What are in general, whatare some of the minimum amounts
(19:51):
for, to enter into a DST?Because especially if you're
using you know, let's say you'reusing multiple properties as
replacement property.
Warren Thomas (19:59):
Yeah. Yeah. So on the the minimums, most of the
DST programs are going to have astated minimum of a hundred
thousand, and I'll just use oursas example. We've had 9,000
investors come in into ourprograms. I didn't mention it at
the beginning, but I founded acompany called Exchange Right,
which is reflected by the bannerbehind me, the colors.
And, I founded that in 2012 withtwo partners, and we grew by 40%
(20:24):
per year for the next ten yearsand became the third largest DST
sponsor in the country. And andwith that, we have programs that
have assets in 47 states andtheir net lease assets and all
that we've already talked about.But, when you when you get
engaged with a sponsor, youwanna make sure that they've got
(20:45):
the the program available to youand that they know what they're
doing because the risk is reallyit is with the sponsor. I'm
probably not answering yourquestion directly, but that's a
little bit about the DSTindustry, has a number of
sponsors in it, all sorts ofdifferent asset classes, and all
of them are trying to solve thecommon investor requirements.
Chris Picciurro (21:09):
Well, no. This is so I think we've covered if
you if you if you're in asituation where the you know,
you're looking for a replacementproperty, This is I I should I
know this. I've been doing thisfor over twenty years. Can you
invest in a DST outside of a$10.31 exchange transaction, or
is it specific?
Warren Thomas (21:26):
You can. And, that goes goes back to your
question was actually onminimums. And I and I didn't
answer that question, but statedminimums are usually about a
hundred thousand dollars. Butwhen I get a $5,000,000
investor, you know, if you cameto me and said, hey. I've got
somebody who got 47,000 andthey've got they need the ID and
(21:46):
they need to buy, I don't reallycare.
Because at the end of the dayfor us as a sponsor, it's just
spreadsheet work. You know? Andthe $5,000,000 versus the 47,
yeah, it doesn't really matter.But most sponsors will limit it
to a hundred thousand, minimuminvestment size.
Chris Picciurro (22:03):
Mhmm. Mhmm. No. That makes sense. So we talked
about kinda getting into this,and we're gonna wrap this up
because I wanna I want people tothink a lot of times with tax
planning and strategy andinvestments, you think about,
man, this is a really greattransaction.
I'm good. Take a breath. Ittakes a lot of stress off. But
there are some other benefits onthe you know, what happens five
(22:25):
years down the road, six yearsdown the road, seven years down
the road? You mentioned,obviously, there's some time you
know, a lot of times areactually tax advantages using
that leverage where you can youcan't depreciate tax deferred
money, but but if you do takedebt on, you could see some
depreciation deduction.
So the income could be taxfavored. But down the road,
let's say you do invest in a inin a DST and that that they own
(22:48):
a property that doubles in valueand sells. Is someone gonna get
stuck with, with that tax bill,or do they have options?
Warren Thomas (22:57):
They have options. So, you know, you they
come into the DST because theythey may be going from where
they were actively managing. Itmight be because of age. It
might be because they wanna haveretirement days and vacations
and things that they can't getwhile they're doing all that
maintenance. It might be becausethe cash flow is better in a DST
than it might be owning yourrental property and it might be
(23:20):
they're trying to create new taxdeductions, but they wanna hang
on to the property.
They wanna hang on to rentalsbecause they get a step up in
tax basis at death and they canpass that then to their heirs
without having a taxation on it.So that's the motivation for the
10/31. So now they're in a DST,and the DST has a full cycle
(23:41):
event coming eventually. Right?So some DSTs like, we have a
whole series of DSTs where thefull cycle event occurs before
year five.
K? So, some other companies aregonna go year 70, year 10 as you
mentioned. But at that fullcycle event, what are their
options? So in our programs, weintroduce to the industry the
(24:04):
concept of multiple exit optionsfrom the DST. So our DSTs,
depending on whether it's an allcash DST or a levered DST, the
common three exit options are,one, cashing out.
An investor, we believe, shouldalways be able to just cash out.
The reason that's important isbecause the the retiree, the pre
(24:28):
retiree that's coming into theDST, they're gonna be in that
DST if if they needed to cashout. Whether that need is
because they had a death andthey get the step up and they
really don't need to doexchanges any longer, we wanna
give them that option. So that'soption one. We only get about 10
or 11% of our capital that wantsto exit when the DST goes full
(24:50):
cycle.
Option number two is doing whatwe call a seven twenty one
exchange. I know that'ssomething you wanted to talk
about today, but a seven twentyone exchange allows them to take
their DST interest, roll it intoa much more diversified program,
which is a REIT program or anoperating partnership of a REIT.
(25:13):
And for those that have neverheard of a REIT, it's a a real
estate investment trust. Andseven twenty one exchanges take
the property of the DST, youhave the option. Do you wanna
roll it to the REIT?
And if our DST had eight to 20properties in one DST, the REIT
currently, we've got 362properties. So do you want more
(25:37):
diversification? Well, maybe so.And why would you want it? Well,
theoretical risk mitigation.
The more diverse, the moretheoretically risk mitigated it
is. But second, that d the, theDST, which is generally an
illiquid investment, you move itover to the seven twenty one,
(25:57):
and the seven twenty one hours,they'll have quarterly
liquidity. So if an investorthat's done a ten thirty one,
he's rolled to the seven twentyone when that was available,
he's getting paid cash flowevery month, might even be more
cash flow than they were gettingin the DST or more cash flow
than they're getting in theirold rental. But now they have
(26:19):
opportunity for liquidity. Solet's say the kitchen needs to
be remodeled.
So you're you guys are married.You know, your wives say it's
time to spend that $40. Well,instead of having to cash in
that whole DST and pay tax onit, you can be in that $7.21 and
say, okay. This quarter, we'regonna cash in, you know, $20 to
get it started, and nextquarter, maybe it's another 20
(26:41):
or you decide to cash in all 40.Or a death occurs while you're
owning that seven twenty one,and you're gonna get a step up
in tax basis in the 07/21.
And you can now say, hey. Cashin the whole thing, and there's
no taxation to pay. So now youcan get off of that train. So
(27:01):
that that cashing out of the DSTis one option. The rolling to a
seven twenty one is the secondoption.
Or for some investors, theywanna continue to do ten thirty
ones. So we get about 30% thatwanna do another ten thirty one.
We get about 60 somethingpercent that wanna do seven
twenty one, and we get 10 or 11%that cash in from the DST. So
(27:22):
that's kind of a a quickoverview of it, but, we can dive
in further to any of any ofthose angles.
Chris Picciurro (27:28):
Right. I think we might have to have another
podcast just on that, the 07/21.And I think that, you know so
here's the thing, guys. Ifyou're thinking about this now
I'm gonna date myself a littlebit. Back in the day when you
went to a hotel, you well, evenbefore credit cards, you know,
my parents would break out thosetraveler's checks, but you
ultimately maybe would arrive.
You'd you'd put a credit card onfile, and then you would pay,
(27:50):
for your room and for all ofyour, you know, goodies that you
got, throughout the your staywhen you check out. Right? Well,
guess what? If you never checkout of the room, just you could
live there forever and neverpay. So think about that with
your real estate.
Think about those options youhave as, hey. I'm in this
property. I can 10:31 and andget a DST. I can move over to a
(28:11):
REIT. As long as you're usingthe right people, that's why I
thank you for to Warren and hisamazing team at Exchange.
Right? We talk aboutimplementation partners and and
people, you know, we talk aboutall the time. Ideas are cheap.
You can find them on TikTok,Instagram. Implementation's
important.
So thank you for coming on theshow. You are one of our
valuable implementationpartners. I learned a lot, and
(28:33):
and I think we've got some ideasfor more topics, John. What do
you think?
John Tripolsky (28:36):
Yeah. Absolutely. It's it's funny if
anybody who's watching this hasprobably seen me, you know,
kinda doing one of these. I gotI got my trusty little pen out
here burning holes in mynotepad. Yeah.
Chris Picciurro (28:44):
I wrote some stuff down too.
John Tripolsky (28:46):
And and, honestly, Warren, it's you know,
coming into this, I didn't knowa whole lot about DSTs. I knew
you know enough to be dangerous,which is why I keep Chris in my
life for twenty plus years. Thatway I can get dangerous, and you
can save me from it. But it itit was really interesting to me,
and you did a fantastic jobabout explaining it. Right?
Like, there's different outs, ifyou will. There's different
options. It's not just, youknow, you get in, you lock it,
(29:07):
and you're stuck thereregardless. I mean, sure,
there's time commitmentsregardless, but you thank you so
much for diving into diving intothat detail. I think it'll
surprise a lot of people.
Warren Thomas (29:16):
Very good. Very good. Lots of estate tax
advantages we could cover onanother podcast, to both the DST
and the 07/21 exit. So, happy togo over that in the future, but,
it's been a privilege and justpleasure to be able
John Tripolsky (29:31):
to be on here with you today. Absolutely.
Well, thanks for joining us.And, yeah, now that you said it,
and everybody heard it, we'reputting the hook in. Yes.
So now you have to come back andjoin us. We'll just let you know
when we're gonna do it. So Okay.We appreciate it. Chris, thank
you as always for coming on yourown show.
Obviously, it's kind of arequirement, if you will. You
know, AI is pretty in prettyintense, but it it is very hard
(29:51):
to duplicate your voice and yourglowing personality, sir. So we
have to have you keep comingback here. We can't
Chris Picciurro (29:57):
wait a while. Yeah. Exactly.
John Tripolsky (30:00):
Although we can edit out, you know, when you say
pickleball.
Chris Picciurro (30:02):
You know? One one That's all you're good at
seeing my glowing head. Ithought the ball joke was
coming, but that's alright?
John Tripolsky (30:07):
No. No. I cut those off at about episode 100,
so I've given you a littlebreak. But, yes, everybody who's
listening or watching this,definitely subscribe to the
channel here on YouTube as wellas if you're not familiar with
it, we are on Spotify, Apple,iTunes, pretty much anywhere
that you can possibly find apodcast. This one is streaming
on.
So be sure to check it out. Goback. We'll drop some of them
(30:29):
that we referenced during thisspecific episode of previous
ones. I know we talked about the10/31. We'll drop that one in
here.
A little quick link for you togo and find that. And as always,
we'll see you back here nextweek. Roughly same time,
different date, and completelydifferent topic here on the
Teaching Tax Flow podcast.
Disclaimer (30:49):
The content provided is for educational purposes
only. We encourage you to seekpersonalized investment advice
from your financialprofessional. For all tax and
legal advice, please consultyour CPA or attorney. Investment
advisory services are offeredthrough Cabin Advisors, a
registered investment adviser.Securities are offered through
Cabin Securities, a registeredbroker dealer.
The content of this podcast doesnot constitute an offer of
(31:10):
securities. Offerings can onlybe made through an offering
memorandum, and you shouldcarefully examine the risk
factors and other informationcontained in the memorandum.
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