Over the last few decades, real estate has been the go-to investment vehicle for investors worldwide. The opportunity to generate passive income, tax advantages and the ability to defer capital gains taxes through the use of the 1031 like-kind exchange have long made real estate an attractive option for savvy investors.
This article provides information about one strategy that may allow investors to defer capital gains taxes ─ the Delaware Statutory Trust or 1031 DST.
Thinking of doing a 1031 exchange into a DST or have questions regarding 1031 exchange DST investments, call us today for help.
What is a Delaware Statutory Trust?
A DST (Delaware Statutory Trust) is simply a separate legal entity created that allows investors to pool their resources together to hold fractional ownership in the holdings and assets of a trust. The trust is established by a professional real estate company, referred to as “DST sponsor”, who first identifies and acquires the real estate assets.
A 1031 DST property can be any commercial property; apartments, retail space, office buildings, industrial parks, etc. Much like a REIT (Real Estate Investment Trust), an individual DST may hold title to multiple commercial properties at one time.
Instead of directly owning a property in a DST, the investor owns a fractional interest in the DST property(ies) that a sponsor institutionally manages. Upon taking up a fractional interest in the DST property, the investor takes a passive role in the trust, while the sponsor handles landlord duties and other property management tasks.
DST 1031 Explained: How Does a 1031 DST Work
Typically, a sponsor (usually a seasoned real estate company) will set up the trust, acquire the DST properties, and name the trustees responsible for managing the trust. For most DST trusts, the trustees tend to have fiduciary responsibilities to the various fractional owners.
Since the trust is responsible for arranging the investment, sourcing financing for the trust, acquiring the DST properties, and hiring property managers, it has direct ownership of the DST assets. The investors own only a fractional interest in the trust.
Similar to an LLC, all income and distributions are passed through and taxed to the individual owners. Since DSTs are considered as 1031 exchange-qualifying transactions, the entire process surrounding a DST is highly regulated. All Delaware Statutory Trusts have a consistent DST structure and share seven attributes, sometimes referred to as the seven deadly sins of a DST.
Can You 1031 Into A DST?
A 1031 Exchange, named for Section 1031 of the U.S. Internal Revenue Code, is a transaction approved by the IRS that allows real estate investors to defer the tax liability or capital gains taxes on the sale of their investment property. As per Revenue Ruling 2004-86 of the Internal Revenue Code, a DST serves as alternative replacement property for a 1031 Exchange transaction.
To successfully defer tax using a 1031 exchange, the proceeds from the sale of the relinquished property must be reinvested into another “like-kind” replacement property of equal or greater value within 180 days of the closing date of the relinquished property.
By investing in a DST, an investor can reinvest the proceeds from the sale of their old properties into a set of DST properties via a 1031 exchange. Please note that when doing a 1031 exchange into a DST, you will typically identify and close on the DST properties within 45 days instead of 180 days.
For example, you sold your relinquished property for $800,000 and now decides to do a 1031 exchange to defer the payment of taxes. You can invest the $800,000 into four or even up to eight DSTs since most DST investments have a minimum investment amount of $100,000.
Why You Should Consider 1031 Exchange DST Investment
Doing a 1031 exchange into a DST comes with many personal, financial, and tax benefits. These benefits include:
- A DST investment is a passive investment that relieves you of all forms of landlord responsibilities.
- Access to institutional-grade real estate assets
- Diversification across different property types and geographical location
- Excellent as a 1031 exchange alternative to mitigate the risks associated with exchange timelines and boot.
- Potential monthly rental income
- Capital Gains Tax Savings
- Low Risk of Exchange Failure
Is A Delaware Statutory Trust 1031 Exchange Right for You?
Doing a 1031 exchange into a DST is a great option for real estate investors looking to exit a holding(s) but does not want to take on capital gains or tired of landlord duties. It is also an excellent option if you are new to the world of real estate investing with no experience in property management. If asset class diversification, tax advantages, and potential rental income sound great, then doing a 1031 exchange into a DST property is your best bet.
To answer any of your questions regarding doing a 1031 exchange into a DST, don’t hesitate to get in touch with us today.