Utilizing a DST on a 1031 Exchange with Kyle Shimoda

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Kyle Shimoda became a full-time financial specialist in 2005 and is currently a Wealth Advisor at INPAC Wealth Solutions. He was born and raised on the island of Kauai and moved to Oahu in 1999. He attended the University of Hawaii and Kapiolani Community College to study marketing, finance and culinary arts.

INPAC is an innovative financial planning firm serving the Pacific, hence the name INPAC= INnovative + PACific. At INPAC, you will find Wealth Management Services, Holistic Approach to Planning and Passion for your Future.

To reach Kyle you may contact him in the following ways:
Phone: 808-784-4001
Email: kyle@dreamplanlive.com
Website: INPAC Wealth Solutions (dreamplanlive.com)
Social media: (2) INPAC Wealth Solutions | Facebook

Interview Transcription

ATTILIO: 
Our guest today was born and raised on the island of kawaii and moved to Oahu in 1999. He attended the University of Hawaii and Kapiolani Community College to study marketing, finance and culinary arts.

ADRIENNE: 
He became a full time financial specialist in 2005 and is currently a Wealth Advisor at INPAC wealth solutions. Please welcome back today’s guest, Kyle Shimoda.

ATTILIO: 
Kyle Shemoda Hi, are you there?

KYLE: 
Hello,

ADRIENNE: 
welcome back. Welcome back. So we get to go a little deeper, I know that you call in with your tip of the week on the DSTS and wealth building strategies. But we’re excited to have you we can have a little bit of a longer tip.

ATTILIO: 
Well, here’s the deal. Let’s, you know, the building of a house starts with what a good foundation. So let’s start with the foundation of the discussion for today. In you know, the Denzel Washington was an attorney in the movie, Philadelphia, I think it was, and he always had, every time he would come into a situation as an attorney to kind of unravel the mess. He would say this one line, do you guys know what the line is? of that character in that movie?

ADRIENNE: 
And go explain it to me like I’m an 11 year old,

ATTILIO: 
she Adrian knows she’s to go up on her train all the time. Yeah, because I say it all the time. And I And and I have it tattooed on the inside of my leg anyway, and my arm and I look at it to remind myself that I either need things expensive and simple, or we need to explain things simply. So Kyle, explain it to us, like kind of an 11 year old. And actually, you know, maybe even go down a little bit because some 11 year olds are pretty sharp, maybe like an eight year old. What is it? 1031? And what is the DST?

KYLE:
Okay, let’s start with the 1031. So everyone exchange is part of the IRS code that allows a real estate investor to sell a property that’s held for investment and replaced it with a lifetime investment property. And by doing so they’re able to defer all of their capital gains. So why someone would want to do that is let’s say someone bought a property for 100,000 and a long time ago, and they’ve been renting it out for many, many years and not depreciate it to a million. So there’s $900,000 of gains. If they sell it and take the proceeds, they would have to pay taxes on that 900,000. So you’d have to add up federal, the Medicare surtax depreciation recapture all together, it could be anywhere between 30 and 45% in taxes. So wow, maybe writing might be writing a check to the IRS for you know, $400,000. Right. So to avoid or defer those taxes is, what the IRS allows is for someone to sell a property and as long as they replace it right away, right, they have 180 days to find a close on a replacement, then you can carry over your cost basis and your gain until the day you finally fill in cash out, then you pay the taxes at that time. Well, what

ADRIENNE: 
happens if you die?

KYLE:
Under current law, that’s one of the best ways to transfer wealth because under the current law, if you hold a property, real property like real estate and defer it all those gains when you pass away and leave it to beneficiaries, as long as they’re natural people like your kids or grandkids, your nephews and nieces. Uncle, it’s dealio they get a step up in basis so that your beneficiaries would inherit that million dollar property. And their basis would step up from 100,000 to a million, the base fill it after you’re gone. Zero Taxes.

ATTILIO: 
Kyle, you know, when I die, I want to have open casket you know what I want them to say when they gather all my open casket?

KYLE:
What, thank you,

ATTILIO: 
he moved. Another thing you don’t want, I want them to say, Hey, I think that guy owes me money.

ADRIENNE:
Back to this law that they have. So if you pass away, basically your heirs get the step up in cost basis. So it gets reset from that 100,000, which we started with the example to a million and they could sell that property and not have to pay any taxes. They don’t even have to do a 1031 exchange. Right. They don’t have to. They could just pocket that cash.

ATTILIO: 
You know, we Oh, go ahead. Go ahead. Go ahead, Carl.

KYLE:
I just wanted to finish that thought with you know, saying that real estate is one of the best ways to build wealth because you can stock your property for a long time for all those gains, do 1031 exchanges defer to new property. And then it’s one of the best ways we’re looking for the best way to transfer wealth because of that step up. So

ADRIENNE: 
I know that there’s like another little strategy that you guys have found, which is to do that cash out refi before you go ahead and do that 1031 Exchange So your cash?

ATTILIO: 
Are you locked to right? Can you do he like to? Or is it has to be cashed out?

KYLE:
Probably a little bit faster. Yeah. Okay, we find many people before listing their property, they might borrow some money on the property. And, you know, they can use that money for whatever they want, and then they sell it with, with the debt on the property to a 1031 exchange and, and how the rules work. I’ll try and keep this simple and not get too much into the weeds. Oh,

ATTILIO: 
you went up to 12 year olds? Okay. Keep going, keep going.

KYLE:
Yeah, let’s say they got that million dollar property. It was free and clear in these sites, you know, before I sell it, I want to pay off, you know, maybe my primary residence or I want to, you know, buy a second home in Vegas, whatever it is, right? They go in, they can get a HELOC on that property, or that investment property, take that money, pay off their primary residence mortgage, buy that second home, and then they list the property and sell it. And then they can tend to when exchange the proceeds of the difference from the Sell, sell for a million. They’re gonna pay off that 300, let’s say $300,000. Mortgage. Right, so they have $700,000 left.

ADRIENNE: 
What happens with the debt, Kyle, that 300,000? And it gets paid off? Because there’s there’s some rules, right, that go with that debt?

KYLE:
Yes. So the rule is for the 1031 exchange is you have to replace equal or greater value of the sales price. So if you sell for a million, whether it has zero debt, or it has a mortgage, your replacement property also has to be 1 million

ATTILIO:
has to be 1 million or so it’s equal or greater is the math. Same thing on the debt equal or greater?

KYLE:
Yep. So in this case, you know, if they had a $300,000 HELOC, which got paid off, after they sold the property, they only have 700,000. Leftover Yeah, yeah, they have to replace a million which means that the either a half to get another mortgage or 3000 or more, or B, they can come out of pocket cash. Or see they could just pay the taxes.

ADRIENNE:
Or D I have a final I’ve got to find out what they can do a DSC D

ATTILIO: 
you know, multiple choice A B or C or D S T Yeah, that’s a new tagline. You got a choice? aboc or DST rocket? Yeah, so let me see if I if my 12 year old brain my eight year old brain comes following. We do we sell a subject property what do we call it? This is called the subject property relinquished property relinquished the relinquished property for a million. We must buy a light coin for a million. My relinquished property has $400,000 in on a mortgage, I need to make sure that my my replacement like kind property is not only a million bucks, but as a $400,000 worth of debt, at least on it. And then every everything is hunky dory with a 10. With with the IRS, the tax deferred with anti Iris Yes. Anti Iris. Yeah,

KYLE:
I think we just that was a 15 year old level. Yeah, one year level. I want to jump back just a second. Yeah, you know, with the 1031 exchange process, you’ve got to add to close on the on the with the replacement. However, in the first 45 days, you could choose and think specifically, which property or properties, right, it could be multiple, you intend to close on. And so on the 46 day, whatever is on that list is set in stone. So if something happens, and you find another property like oh, you know what, I don’t like the ones on that list. I want a different one. Yeah, it’s that’s a failed exchange, and then it’s a taxable event. Or maybe an all in all good intentions. You had this property in mind. It was perfect. And for whatever reason it fell at the end, taxable event, right. So I would say one of the big issues is just that that timeframe can be so tight, and the IRS does not care if you’re 45 days and your 100

ATTILIO: 
don’t like stories, even grumpy stories. They’re like, No, just the rules.

KYLE:
Yeah, that’s the rule. It doesn’t matter if it lands on Thanksgiving or Christmas. Right? It’s that’s a hard set rule a Sunday. It could be Christmas on a Sunday. That is your day,

ATTILIO:
that is the day. So 45 days from the day you close escrow you got to choose. And then 180

ADRIENNE:
multiple properties. Yeah, or a DST on that list. I think one of the choices Kyle is it’s up to three that you can Have within that 45 days after that 45 day is done, like there’s no swapping anything out. It’s

ATTILIO: 
within the 45 days, what our advice is, is make one of the three, the DST. Just just just to give you flexibility. Now let’s talk about DST versus buying a property in the same market you just sold in? What are the what are the pros and cons of that?

KYLE:
Oh, I’ll take a step back their eight year old, what is it the Delaware statutory trust, IRS passed the ruling back in 2004 to allow sponsor companies or real estate companies to form these trusts, purchase property, place them into these trusts and then open up to investors. These are all filed with the SEC is only for accredited investors, which is why you know you most people have not heard about this is because we’re not able to and what no one is able to publicly promote this. Because you’re not able to control who’s hearing that promotion or that marketing. So it’s only for accredited investors. It’s SEC filed with the SEC. And the types of properties that go in and this is under the IRS ruling is it has to be quality commercial property, in many cases institutional property in the hundreds of millions of dollars.

ATTILIO: 
Like for example,

ADRIENNE: 
what is an accredited investor? What’s

ATTILIO: 
happening credit? Let’s

ADRIENNE: 
talk about that. Because not everyone’s familiar with that term. And who would qualify to even put a DST on their 1031 Exchange list?

KYLE:
Let’s hear. And many people are accredited and don’t even know it. So the VA accredited investor, you have to have $1 million of net worth. If your LLC or corporation has to be 5 million,

ATTILIO: 
or you know, okay, key boy. Oh, yeah,

KYLE:
so it’s all worth it’s either or not both. That is either net worth, or income income, what’s the income is 200,000 per person? Or 300,000? For a couple?

ATTILIO:
You know, I just had an idea. I think for any boyfriends to date, my daughter, they need to be an accredited boyfriend.

KYLE:
Please submit your application.

ATTILIO:
I have a new I have a new term. It’s called accredited boyfriend.

ADRIENNE: 
Tell them that you’re going to be doing a background and credit check on them before they’re approved for dates.

ATTILIO: 
Yeah, like that. I’m

KYLE:
gonna put that on my trust. Yeah,

ATTILIO: 
I’m like, What’s your Kyle? Oh, your name is Joy. Okay, what’s your FICO score

ADRIENNE: 
Social Security.

ATTILIO: 
I need you to sign this application. It’s for me to pull your credit and do a background check on you. Yes, those two accredited boyfriends so all you dads out there new programs called accredited boyfriends for your daughters. You’re not doing for the doing for your son’s to

KYLE:
a maybe I’m thinking ahead maybe starting a dating app. Credited boys

ATTILIO: 
call it grandpa. Grandpa’s dating app for for grandchildren and all kids and like you can go you know what I got? So then when the boy come over and say, Hold on, I gotta check with grandpa. You go on the grandpa app, you punch in their information, boom. All this stuff pops up right then and there. Say Hold on, hold on. I checked in with grandpa. Sorry. Brah.

ADRIENNE: 
Okay, so back back to the DST. What exists so it’s only for accredited investors, we can put it on a list of replacement properties. But what exactly is it? What did they entail

ATTILIO: 
or give us examples of the DST? Yeah,

KYLE:
yeah, I’ll give you both so it’s it’s the securitized real estate portfolio that qualifies as like kind replacement property.

ATTILIO: 
Okay, you losing me so I just kidding cabling?

KYLE:
Yeah, so unlike a lot of people think, you know, this sounds like a REIT, a real estate investment. The primary difference is a REIT does not qualify for 21 exchange because you own shares, not physical property.

ATTILIO:
You can’t and you cannot write a check to go into DSC, it’s got to come from a 1031 Correct.

KYLE:
You could write a sec however, 1030 ones is the most powerful way to get into a deal. Yeah,

ATTILIO: 
well and then that’s what it was developed for anyone. It’s not just for the lay persons investors, it’s for accredited investors doing a 1031 of investment property, wanting to get into an institutional type grade commercial property. Give us some examples that we would recognize that we don’t realize you know, it’s just like you see it every day you don’t realize it’s a DSD. Like for example

KYLE:
40% of all Walmart’s

ATTILIO: 
No wait, did you say Walmart

ADRIENNE: 
Okay, 40% of all Walmart’s are held in a day St.

KYLE:
Yeah. And he used to be a lot higher. I heard by him that Yeah. There might be might be direct ownership, maybe with a private investor or hedge fund or something. Yes. A lot of Walmart’s there in DC. Verizon headquarters is in a DSD?

ATTILIO: 
Not sure if you guys heard of Amazon distribution centers they’re in some of those are in a DST?

KYLE:
Oh, yeah. Medical facilities, strip malls, grocery stores, self storage.

ATTILIO:
Talking about self storage, there might be somebody on this show right now that might have a personal example to share. Would that be Adrian? Yes. What would you know, in a couple sentences? What was your example? Your personal example of a DST?

ADRIENNE: 
So yeah, I was in a situation where I was facing about a $40,000. tax bill. And I happened to meet Kyle’s wife, Laurie at a personal development seminar. And we were just sharing. And when I shared my story in this kind of stressful financial situation that I was in Kyle’s wife, Laurie said, Oh, my husband can help you. And I just thought, this lady does not know what she’s talking about. Nobody can help me with this, you know, this upcoming tax bill, and I’m gonna have to pay. But then after talking to Kyle, learning about the DST, and how the loan and the debt that’s replaced, is its what is that called? Where it doesn’t show like, I don’t need to qualify for it. It’s like not on my credit. It’s on the DSTS credit. Yeah. Non recourse and non recourse? Yep. Finding out about this nine non recourse strategy. Oh, wow. Sign me up. So I did a 1031 exchange, actually was the very first property that I bought. So there was quite a bit of depreciation recapture tax. And I did own it free and clear just how to a HELOC on it. But the tenant income, what I was getting, you know, from the years of tenant income now has been replaced by the DST and I’m actually making more money with DST and more appreciation and no stress because there’s no tenants. Yeah, no property taxes and maintenance fees. It’s just the money just shows up in my account. So I basically went from that, like, I think I was at like a five or 6% cap rate up to eight, eight. So it’s been it’s been quite lucrative.

ATTILIO: 
It’s been a it’s been a good journey. Adrienne is in excellent shape with all this running back and forth to her mailbox for her mailbox money. No, it’s not even that she just checks her banking app and the money shows up. Now, Kyle, I recorded agents conversation her story with us right now. And I just ran it through a new technology. It’s a pidgin processor. And would you like to hear that replay?

KYLE: 
Oh, I’d love to know. Can I have another? Hi? Yeah, hi.

ATTILIO: 
So, you know, I had this property in Florida and I needed to get rid of them and I was facing a whole bunch of taxes. And I was like, Oh, the IRS getting nuts on me. So I said I went talking with Laurie have this thing for personal growth. And she said oh, you know, my husband can’t help you. And I said no way girl your husband helped me and she said yes where he can So anyway, I went meet with Kyle and he told me about this strategy we’ll have on I think he went call him on DST but I just call him on this and anyway I wouldn’t do this with a 1031 I mean avoid the taxes anti IRS she’s one mean anti she take the taxes no matter what no excuses with her she hit you with the slipper if you don’t pay on the taxes so anyway, I avoided the taxes from anti IRS got into one storage unit you know what he’s put it all buckle loose. They always like deal with goddess junks in the in the garage. And then they put them into storage and and pay people to have on there. And now I get income from that. And I’m so happy right now that you know, green bottle

KYLE: 
right here in an English accent now.

ATTILIO: 
Anyway, that’s the DST you 1031 Your Investment Property? Was it defer the capital gains? Invest in something that’s institutional grain you you, you know, there’s three things you have when you have an investment property, you have growth. You have income, and you have tenants. Which one of those three gets eliminated when you put your investment capital into it when you tend to anyone into a DST which one of those three gets eliminated? Or the responsibility of it gets eliminated

KYLE: 
responsibility. Yeah.

ADRIENNE: 
Yeah, not having to deal with the tenants or even like, I mean, I had a property manager so my property manager was dealing with the tenants but just even having to deal Like the property manager like that, and she was my mom. It’s just stressful like having to make those decisions and hear about coilette,

ATTILIO: 
all that kind of stuff. When the storage unit when the guy though, who just went put all his stuff in the storage had on big chimichanga for breakfast, and then when bought the toilet, did you get a call on that?

ADRIENNE: 
No, I get, I get zero calls, the money just shows up on my account, and I get my statements. And it’s wonderful. And I highly recommend that, you know, if any of our listeners are doing a 1031 or have an investment, and they just want to find out more, we do have a webinar like we are coming up with Kyle, I think we do them pretty frequently. If you go to our website, Team lally.com, forward slash d S T, you can register, you can register, you can find out more information, you can even contact Kyle from that page on our website, do a one

ATTILIO: 
on one webinar with him privately. The last thing I want to share with people is you know a lot of people we’ve Kyle you and I was talking about it last night you get these people like oh like managing my stuff on myself. That’s like saying, You know what, ah like doing brain surgery on my on myself? No. If you get a if you can get a similar or better income and growth, why not get rid of the headaches of direct management or even indirect management through a pm

ADRIENNE: 
or diversify in the mainland? I mean, here’s the thing, like, we love investment property, we love helping people buy investments, but then there’s also this little thing called diversification and having that as part of your portfolio is I would say a prudent business decision. Yeah,

KYLE: 
yeah. Yeah. Yeah. You know, a lot of the work I do is financial planning, risk management, Wealth Management. And so when we look at this investments in general is how do we reduce risk where we can prove income where we can and you know, a lot of people going yeah, I’m very diversified with my real estate you know, I got a condo over here one down the street one in Waianae yet it’s all concentrated on Yeah, you know, all imagine your country and on on I like Well, yeah, it gets hit with a, a hurricane there.

ATTILIO: 
Here’s, here’s where the lack of diversity kicked people’s will call is, when we had the eviction moratoriums. Oh, yeah, so paying rent, and all your properties was on a wall who that affected all your properties. And that wasn’t necessarily the case. In other places. I don’t know are the evicting people from storage units? I don’t think so.

ADRIENNE: 
Well, it’s called storage. It’s called an auction and it gets auctioned off and then your unit gets re rented out. Yeah, that’s what I hear about it. And there’s no like, tenant landlord code on that. So you don’t pay the rent like you’re out. Yeah. So

ATTILIO: 
well, Kyle, thanks so much. Oh, go ahead.

KYLE:
I want to like one last point. I think it’s very important. We talked about accredited investors and big numbers that chameleon I think we forgot to mention the minimum that you can exchange into DSP is only 100,000 Wow. So actual, you become a fractional owner alongside other investors. So you might sell your million dollar property and you might have 100,000 leftover that you put into one DSP

ATTILIO: 
in an Amazon distribution saying hey, you know what I just ordered from my company.

ADRIENNE: 
So thanks, Kyle, we gotta we gotta wrap it up. So teamlally.com forward slash DST.

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