In short
A proposal starts from your goals, tax exposure and timeline, then sets out the strategies and offerings that fit. How to read each part and what your CPA checks.
A proposal from us is not a menu of DSTs. It starts from a conversation about your financial goals, tax exposure and investment preferences, and it ends with the strategies and the real, available offerings that fit your timeline and financial needs. There are no offering specifics in this post, because those belong in the private placement memorandum. What follows is what goes into a proposal, how to read each part, and what to hand your CPA to check.
What we need before a proposal exists
Step 1 of our process is a conversation. We learn your specific financial goals, tax exposure and investment preferences, whether you are selling one property or several, and whether we are the right fit. We also look beyond the real estate to your full financial picture and long-term goals. The questions we ask are set out in the questions we ask on a first call.
From that call we need five facts: your closing date or expected closing date, the loan balance that will be paid off, your adjusted basis, the state the property sits in and the state you live in, and how much income you need from the replacement. Everything else in a proposal is built on those five.
The parts of a proposal
A proposal answers four questions in order.
What is at stake if you do nothing. Your realized gain is the amount realized less the adjusted basis of the property you give up, and in a straight sale all of it is recognized. In an exchange, recognized gain is generally the smaller of the realized gain and the cash, other property and net liabilities assumed by the other party, as the Instructions for Form 8824 set out at lines 15, 19 and 20. The proposal shows the gain and what deferring it is worth to you.
What has to be replaced. The money that has to go back into real property is your equity, and the debt paid off at closing is treated as money received unless new debt or your own cash covers it, under Reg. section 1.1031(d)-2. The proposal states the equity figure and the debt figure separately, because they are solved differently. Our exchange equation guide shows the arithmetic.
Which strategies fit. This is where a proposal differs from a list. The structures we work with are a traditional DST, where the trust already holds stabilized property with financing, leases and management in place; a cash out DST, a zero cash flow structure built on long-term triple-net leases with investment-grade tenants and non-recourse debt, where operating income services the loan and there are no current distributions; a direct title security, where you own a single property through a single-member LLC, receive fixed income during the lease term and decide when to sell or refinance; and, for gain that cannot be deferred, accelerated depreciation funds and opportunity zone funds. A proposal may combine them, for example a small allocation to a high-leverage structure to cover the debt figure and the rest in unleveraged offerings.
Which offerings are available now. Step 2 connects you directly with reputable sponsors offering real, available properties aligned with your timeline, with firsthand access to the managers and the deals they currently oversee. The proposal names the offerings that fit and leaves the details to each offering’s documents.
How to read the tax numbers
Hand the first page to your CPA with your closing statement and depreciation schedule. The three things to check are the adjusted basis, which drives everything, the debt figure, which must match the payoff on the settlement statement, and the state exposure. Our pages on calculating adjusted basis on a rental and on whether a 1031 defers state tax give the CPA the starting points. A proposal is a model, not a return; the return is your CPA’s.
How to read the offerings
Each offering comes with a private placement memorandum. For a direct title security the package includes the memorandum, a customized supplement and a subscription agreement, tied to a specific property with a physical address, title ownership and a CUSIP number. Read the risk factors, the fee table and the loan terms before the projections, and never treat a projection as a promise; distributions are not guaranteed. The sponsor’s Form D is on file with the SEC within 15 days after the first sale (SEC, Rule 506(b)), and interests sold under Regulation D are restricted securities that cannot be freely resold. Our guide to reading a DST PPM and Form D covers the rest.
A hypothetical proposal in numbers
Round figures, hypothetical. You are closing a $2,000,000 sale with a $600,000 loan and a $500,000 adjusted basis. Realized gain is $1,500,000 before expenses. Equity reaching the intermediary is $1,400,000. The proposal shows two figures to solve: $1,400,000 of equity to reinvest and $600,000 of debt to cover with new debt or outside cash. One way to solve it is a traditional DST allocation for income plus a smaller allocation to a leveraged structure that carries enough non-recourse debt to cover the $600,000; another is to add $600,000 of your own cash and hold everything unleveraged. Each path has a different income and risk profile, and that is the choice the proposal is built to put in front of you. Run your own numbers with your CPA.
What to do now
- Gather your closing statement from the purchase, your depreciation schedule and your current loan payoff figure.
- Decide the income you need from the replacement and whether you need cash out, since those two answers drive the structure.
- Request a free proposal and send it to your CPA before you sign a subscription document.
