As real estate investors, there is a proven tax-deferral tool at our disposal that can help us avoid paying capital gains taxes on the sale of investment properties. It’s called a 1031 exchange, and it allows us to defer taxes by reinvesting the proceeds of a property sale into a new investment property. However, performing a 1031 exchange can be easier said than done. Fortunately, a delaware statutory trust 1031 exchange can make the process considerably simpler.
A DST is a legal entity created under Delaware law that allows multiple owners to invest in a property as tenants in common. One or more sponsors buy a property with the intention of selling it to investors in the form of beneficial interests. DSTs are often used in 1031 exchanges as they allow investors to acquire an ownership interest in real property, while not having to manage it. DSTs often appeal to investors seeking passive income in a low-touch investment.
In a traditional 1031 exchange, you have only 45 days from the sale of your relinquished property to identify the replacement property you wish to purchase. Add to that the pressure of finding the right property and the time required for completing your due diligence and closing. By investing in a DST, you have more time to conduct your research. You can take advantage of the sponsors’ due diligence when you invest in a DST since they are required by the SEC to provide a comprehensive Private Placement Memorandum (PPM) that details the risks associated with the investment.
Another advantage of investing in a DST is that the investor can leverage professional management for the asset, which reduces the risk and covers a greater range of properties than one can typically find on their own. Many investors desire to make passive income from their real estate investments and leave the management to professionals.
Investing in DSTs does come with some potential disadvantages though. One downside of DSTs is that they are illiquid investments, which means that they cannot be sold like stocks or mutual funds. The investor must be comfortable with a long vacation period from the investment and assume that the value will not fluctuate much until it is sold. Even if an investor wanted to sell a beneficial interest in a DST, it would require the buyer qualifying with the DST’s trustee. Lastly, investors may have difficulty finding a DST that suits their 1031 exchange.
Conclusion:
While DSTs can be a good tool for 1031 exchanges, they are not ideal for all investors. As with all tax-deferral strategies, you should consult with a qualified professional or tax advisor before making any financial moves to help you achieve the best possible results and ensure compliance with IRS regulations. When you work with a professional and approach these investments wisely, DSTs can be a powerful way to leverage your money, achieve tax-deferred growth at a lower risk, and potentially create a legacy that can benefit your mutual interests for years to come.