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Local Living
A community podcast for Palm Beach to Parkland.
Local Living
Unlocking 1031 Exchanges: Meet Larry Karp with 1031 Financial
Are you an investor looking for ways to keep your money working for you without the burdens of managing properties? Step into the world of 1031 exchanges and Delaware Statutory Trusts (DSTs) with our special guest, Larry Karp from 1031 Financial. In this episode, we dive deep into the strategies that enable you to defer capital gains taxes while maximizing your investment potential.
Larry reveals the ins and outs of the 1031 exchange process, explaining how you can sell your investment property and reinvest the proceeds without immediately incurring taxes. Whether you're an experienced investor looking to diversify your portfolio or a newcomer intrigued by real estate, this episode offers valuable insights galore.
Delve into the advantages of DSTs—where you can invest in large-scale real estate while enjoying the perks of passive income. With institutional sponsors backing these trusts, you can rest easy knowing your investments are in skilled hands. Larry also emphasizes the importance of understanding risk profiles, ensuring that you make informed decisions based on your financial goals.
Tune in for an engaging discussion packed with actionable advice and learn how to efficiently manage your investment strategies. Don't forget to reach out to Larry for more information on these exciting opportunities. If you enjoyed the episode, please subscribe, share, and leave a review!
www.1031financial.com
347-293-0084
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Welcome, welcome everyone to Local Living. We are your community podcast for Palm Beach to Parkland. I'm your host, David Conway, and today we have Larry Karp with 1031 Financial. Larry Karp with 1031 Financial. Larry, welcome to the podcast.
Speaker 2:Thank you, David. I'm very excited to be here on the podcast with you.
Speaker 1:Yep, my pleasure. So, as I said, larry's with 1031 Financial. He is also a local resident, lives right here in Boca Raton in Broken Sound, if I'm not mistaken. Is that right, larry? That is correct, wonderful. So why don't you start out by telling me, and telling our listeners a little bit more about 1031 Financial?
Speaker 2:Great. 1031 Financial with the website is 1031financialcom is a firm built about 14 years ago from the founder, scott Offerman, out of New York City, and essentially what we do is we have a little niche in commercial real estate that are, excuse me, contemplating doing something called a 1031 exchange to defer their capital gains tax on the sale of investment property. Right, and what we do is we represent a an alternative investment space called Delaware Statutory Trusts and essentially, delaware Statutory Trusts also called DSTs, dsts, dsts Effective in 2004,. There was an IRS revenue ruling that states that fractional undivided interest in real estate, investment property, investment real estate qualifies for a 1031 exchange. Just a quick reference for those that don't know what a 1031 exchange is it's an IRS tax code tax codes that enables an investor that is sitting on a low cost basis of investment property. You know, essentially, property they bought typically many years ago and now they're looking to sell for whatever reason. They just are getting older. They really don't want to manage the property, they don't want to be a landlord anymore, what have you?
Speaker 2:And in the US they're essentially going to receive tax. They're going to be taxed on the capital gain of that, of that, of the sale of that investment property. It can range. You know, every state is different. Down here in Florida there's a state tax but where an investor would probably get be allocated tax on their long-term capital gains, depending on their tax bracket, that could be 15 or 20%. They also will be taxed on something called the ACA, that's the Affordable Care Act. That's about a 3.8% tax on top and then if they've taken depreciation on that real estate asset, they would get taxed on the depreciation recapture and typically it's 25% of the amount that they took for depreciation.
Speaker 2:So all in here in Florida, for example, the average tax rate would be somewhere between 25 and 30%. So on, let's say, a million dollar capital gain from the sale of an investment property, they would have to pay about a 30, you know, 300,000, roughly a $300,000 tax bill. Sure and 31. Exchange was designed for was to essentially take those proceeds and reinvest it into other investment property, and you know so essentially you sell the property, you, you within a 1031, exchange you, you defer the gains and you take the proceeds and put into new investment properties. Excuse me Now, where it goes back to Delaware statutory trust and I mentioned it at the beginning was there a form of replacement property on that, you know, on that leg when you're, when you're looking to take the proceeds and purchase.
Speaker 1:So really help crystallize it just a little bit for me. So I've got a piece of property. I've had it for a while. I've had to manage it to some extent. I don't want that responsibility any longer. I enjoy maybe taking a little income from it, but I'm looking to get out of it and let's say, with a million dollar property I may have to take a $300,000 hit on the capital gains tax or a million dollar capital gain. So I still like a little income. I'd like to avoid the taxes and do it in a legal manner where I still have an investment with an opportunity to grow. That's where you come in and we will. In essence, I will be taking part of a purchase of another property that I don't have to manage. Is that correct, Correct and is there income opportunity on that?
Speaker 2:Yes, the DSTs. Every DST that's put together is different. They're designed to basically mirror investment property. The only difference is now they're managed by big institutional real estate sponsors.
Speaker 1:Okay.
Speaker 2:So the property management is now their responsibility. You're essentially now a passive investor where you're buying a slice of this DST, which is also considered private placement, okay. So, for example, say it's a hundred million dollar DST, it's the underlying asset, is in multifamily, you know, apartment complex in somewhere in the Southeast, let's say in Georgia, and basically it yields about a 6% annual return. You're able to defer, excuse me, the gains from the sale. You're able to defer the gains from the sale. Take those gains by round. Number that million-dollar portion of that $100 million property. You're a limited partner that owns 1% of that vehicle, of that DST or private placement, and by holding it it usually has about a shelf life of about seven or seven or maybe 10 years. It rarely goes full cycle but you are, you know, cause, the the sponsor is looking to sell it early. You now are receiving the monthly income you know, based on that 6% annual return that I mentioned and not guaranteed. But hopefully, on the backend, when they sell the property, the sponsor um, you'll, you'll hopefully receive some capital appreciation, right. So, for example, to crystallize it, the sponsor say is a company like a Cantor Fitzgerald's, okay, right, and you invested in the Cantor Fitzgerald's um, atlanta, uh, multifamily DST, right, it yields and you've received your, your monthly distributions. Now it's a seven year hole. But now in year five, um, you, the investor, gets an email from Cantor. Says hey, mr Investor, great news that we just sold that hundred million dollar property to Blackstone for one hundred thirty million. So now that million dollars is worth a million. Three your monthly distributions. Or B, roll it into another 1031 exchange and put it into other DSTs or, if you like, investment property, other investment property.
Speaker 2:So the one thing I didn't touch on the sponsors are typically billion dollar companies that specialize in this space. They look for cash flowing properties that in their view, they're buying under market. Where eventually they can, with some value add, they can fix it up and then sell it above market. And they bring in people like myself. I'm a registered rep that brings in accredited investors to invest in their, in their private placement or their DST. So essentially, when they're looking to sell the equity, that's my job to bring in accredited investors to invest in that.
Speaker 2:Dst and DSTs are all different. They essentially cover every asset class in real estate, right From, as examples, multifamily student housing, industrial, self-storage, medical facilities, you name it. They have different levels of returns right, different levels of um of returns right typically, or the conservative end. It could be four percent, five percent, six percent, you know up to say ten percent potentially, but it's also depending on the underlying asset right. So, essentially, like a ten percent uh vehicle will probably be in something like minerals you know the underlying assets, like a mineral fund, for example.
Speaker 2:And we, what we do at 1031 Financial is we work with the entire DST marketplace and the marketplace consists of roughly 50 institutional sponsors covering about 100 plus different DST offerings at any time. That covers about $8 billion in equity. So we're a perfect think of us like an insurance policy. When you're going through a 1031 exchange, you have a 45-day ID period or a time limit to identify replacement property and, as you know, in real estate things fall through or they get delayed. We always have equity available and what we look to do is we match up.
Speaker 2:When a client comes to us, we first identify their risk profile what are they trying to achieve, what levels of income are they looking for and what's their risk tolerance? So we're very careful about how we we support or work with that client to understand, you know, to match their, their income and their risk profile. So like, for example, that million dollar investment they're looking to defer instead of putting them in one single million dollar DST. And we diversify also by asset class, you know. So we'll put 250 into multifamily, 250 into storage, 250 into student housing, et cetera, you know, and we present it to the client and if that's what you know, they like that approach, then that works. Or there are clients that say to us I only want multifamily, or I only want storage, or I only want geographically things in the Southeast or things in red States, for example. Clients have different wants but at the end of the day, our job is to make sure that we presented the best options to match up with their risk profile.
Speaker 1:And so tell us a little bit more about you. So extensive finance history, or how did you get into this sector of the industry?
Speaker 2:Well, first and foremost, my background has been in sales, large enterprise sales, business development, and I had a stint in consulting. All this was based out of Manhattan, working for some very big corporations. I started in telecom working with Sprint and Verizon, working on large enterprise clients for both of them. I also was in enterprise software sales working at SAS out of Cary, north Carolina, you know again, selling to again their Fortune Fortune 100 clients. And I had a five-year stint with Accenture where it was technology consulting, working with their global clients, their diamond clients that are very large billers and you know. So essentially I had a background in which I enjoy in sales, as I said, sales, bd and consulting but networking and consulting but networking, and essentially how it evolved for me, after 25 plus years of my career in those areas, companies based out of New York, we moved here to South Florida in May of 21.
Speaker 2:And I was kind of itching to do something different and after about two years being down here I just felt that I really wanted to take the plunge and do something a little more entrepreneurial. So 1031 Financial, again, as I mentioned, my friend and the founder of the company basically said hey, you're now physically in Florida, we're only based in Manhattan and the outskirts and you know metropolitan Manhattan. How about opening up Florida? It's a hot market. The valuations have gone up significantly. You have obviously the aging demographic that's at a point in their lives where they probably want to cash out, but they love getting that monthly check instead of continuing to manage real estate, and DSTs are a perfect option. So I just basically knew in the back of my mind that for the balance of my career, I want to do something A where I help people and B, it aligns with the right demographic as I age also.
Speaker 1:So it must be gratifying, because not only are you enabling folks to keep that monthly income, but they're also avoiding that pain of paying that approximately 30% on their capital gains. That's a big number.
Speaker 2:Exactly, and the beauty is that you is that this is a niche. The 1031 exchange tax code has been around for over 100 years, so people in the real estate space on the investment property side have been deferring taxes using 1031 exchange for a very long time. But less people know about DSTs Delaware Statutory Trusts and the reason is because they're considered DSTs, are considered a Reg D offering under FINRA and the SEC because it's considered fractional real estate or securitized real estate is what I meant to say. Considered fractional real estate or securitized real estate is what I meant to say. So for me to be able to get into the space, I had to take three. I had to take three exams to get three different licenses. First the SIE the securities industry is essential which is for people that know a series seven is kind of a series seven light. Then I took the Series 63, which is for state compliance Okay. And then the final one was the Series 22 for private placements.
Speaker 1:And I don't know much about these, but am I correct the clients? They're not paying you commission, Is that correct?
Speaker 2:Correct. No, they do not pay us commission. I get paid directly from the sponsors, those billion dollar. You know company sponsors that I mentioned that that only focus on bringing DSTs to market.
Speaker 1:So you are local. Now how are you enjoying the South Florida lifestyle?
Speaker 2:Well, you know enough said the South Florida lifestyle. Well, you know enough, said I mean living in Boca Raton. You know, up and down and I travel up and down South Florida it's, it's tremendous, it's, it's really the right phase of my life. You know, I think the timing was perfect. I love it down here. I made some really great friends. I mean I've been my wife and I have been coming down here for God, I mean at least 30 years. You know have have friends and family down in South Florida. I think you know I joke, I think by law when you live in metropolitan New York city that comes, you reach a certain age, you kind of have to move to South Florida. So we took the plunge. But yes, we love it down here.
Speaker 1:Yep, we're glad to have Florida. So we took the plunge, but, yes, we love it down here. Yep, we're glad to have you. So if you could leave our listeners with one thing, because I know going in there's, you know, for most of us this is something new, it's something different that we're not too familiar with. Is there something that you would like the listeners to know? Maybe something that they're believing, or a myth that they think exists, that doesn't that you'd like to share with them?
Speaker 2:Just basically that the people that do know of this option, the Delaware Statutory Trust or DST option it's not just for the very senior demographic that is just at the point that they want out or they can't physically manage property anymore. Because we're seeing especially this happened after COVID the demographics skewed younger OK, to the to like the baby boomer age, like around my age, and you know in that that, that level, because you know this this age demographic has also done very well in real estate over the years and they're also at a point they just tired of dealing with tenants, toilets and trash, you know, and and they are looking for an exit where they wouldn't get killed in paying capital gains tax. That Delaware statutory trusts are growing in awareness and popularity and this is a great option to you know, to leverage your you know your gains in a 1031 exchange and, to put it, this is a great form of replacement property where you can be purely passive and, just again, don't have to be a landlord.
Speaker 1:And am I correct that there are people that have been using these DSTs, rolling them over successfully for years?
Speaker 2:right, Yep, they keep rolling. I mean, the IRS came out with the Revenue Ruling 2004-86 that I think I mentioned earlier, that said that fractional interest in real estate qualifies, right. So that's when the DSTs are created. So that's when the DSTs are created and basically, you know, as I mentioned, they each have a shelf life for a yeah, a shelf life where typically seven or 10 years, but again, they typically, on average, they do not. We've seen they really haven't really gone that far. They average about four to five years for the exit. And what happens is the client loves, you know, the passive investment, loves getting their, their distributions and and hopefully make some money on the backend when they you know appreciation of the backend, when they sell it, they roll it into more DSTs, right, so eventually it just becomes a great income play, you know and you know, with great diversity and mitigating risk.
Speaker 1:So Well, listen, you know, I, along with, I'm sure of the listeners, have learned a great deal today. I appreciate you sharing this information Now, if somebody wants because I know you do events, yes. So if somebody wants to reach out to you, get more information or, at minimum, you know, have a conversation with you, learn a little bit more. This, if this may, you know, may help them. What's the best way to get ahold of you?
Speaker 2:The best way is probably by email, larry, at 1031financialcom. I'm also on most of the social media platforms on YouTube platforms on YouTube, on Instagram, on Facebook, on LinkedIn, you can find me. We also, as mentioned, right, we do constant seminars, you know, basically typically at a nice restaurant like a steakhouse, and we've done all over the state and all you know, especially down here and reach out. We have one coming up shortly in Key Biscayne next week. Okay and yeah, and I'd love to talk to you and we'll go from there.
Speaker 1:So Larry at 1031financialcom Correct. Well, listen, larry. Thanks for joining us on the podcast today. Thank you and folks, once again I'm David Conway. This is Local Living and we look forward to having you back real soon.