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Using the Zero Coupon DST to Support Reducing Mortgage Boot

Using the Zero Coupon DST to Support Reducing Mortgage Boot

As the market conditions change, we are seeing many investors opting to sell certain current real estate holdings. In some cases, these property sales have high Loan to Value (LTV) ratios that present challenges to investors planning to pay, reduce or defer their capital gains tax. In most cases there may be strategies to help maximize the investors after tax sale proceeds.

The Investor's Problem

For investors with low or no taxable basis, the sale of the relinquished property can create a scenario where the capital gain is higher in proportion to the equity proceeds available for reinvestment or tax liability payment. The higher LTV creates a high level of mortgage boot. It is critical that the investor consult with their tax advisor to calculate and understand the potential tax liability created from the sale.

  • Here is a scenario: based on the assumption of the sale of a $1,000,000 property with a 70% LTV and a remaining basis of $25S,000, the investors could end up using a majority of the cash proceeds to cover the potential tax liability. Potential Solution – Partial
  • Potential Solution – Partial Exchange

    Strategy to cash out while reducing potential Mortgage Boot and potential total Tax Liability
  • The investor whose objective is to cash out and maximize the amount of remaining equity proceeds from the sale, may consider a strategy to help reduce the high level of mortgage boot and further reduce the overall all potential tax liability. The investor could purchase a like-kind replacement property with aportion of the equity proceeds and a high LTV. This could be a direct property purchase with a high LTV or a DST with a high LTV, ask us to show a sample case. Further, this strategy can also be used in a full exchange with other potential cash flow generating properties or DSTs.
  • More information on the High LTV DST

  • The High Leverage, Zero Coupon DST is a portfolio of properties leased to tenants of excellent credit. A bank is generally willing to lend a high LTV amount with the assumption that the loan will hyper amortize. All of the rents paid by the tenant will go to the loan interest and principal and will reduce the LTV over the hold period. No cash flow is paid to the investor, but each payment should help increase the investors' equity in the DST.