DST and 1031: A Match Made in Tax-Deferral Heaven

Delaware Statutory Trusts (DSTs) and 1031 exchanges are two popular investment vehicles for real estate investors. By combining these two strategies, investors can potentially defer capital gains taxes and diversify their real estate holdings.

A DST is a legal entity formed under Delaware law that holds title to a property and distributes income and expenses to its investors. In a DST, investors own a beneficial interest in the trust, and the trustee manages the property. DSTs are commonly used in commercial real estate transactions, allowing multiple investors to invest in a single property while enjoying the benefits of limited liability, pass-through taxation, and potential tax benefits.

Meanwhile, a 1031 exchange is a tax-deferred exchange that allows investors to sell an investment property and reinvest the proceeds in a like-kind property. By using a 1031 exchange, investors can defer capital gains taxes on the sale of their property and potentially increase their buying power.

To take advantage of a 1031 exchange to place funds in a DST when selling an investment property, investors must first identify a suitable replacement property within 45 days of selling their investment property. The DST must be identified as a potential replacement property during this time. The investor must then contact a qualified intermediary (QI) to facilitate the 1031 exchange. The QI will hold the proceeds from the sale of the investment property until they can be used to acquire the replacement property.

The investor can then use the proceeds from the sale of the investment property to invest in a DST that has been identified as a potential replacement property. The DST must be structured as a property to the investment property that was sold. Finally, the investor must close the 1031 exchange within 180 days of selling their investment property. The QI will transfer the proceeds from the sale of the investment property to the DST to complete the exchange.

While DSTs and 1031 exchanges offer potential benefits for real estate investors, they also carry risks. Investors should carefully consider the investment strategy, the specific property involved, and the track record of the sponsor before investing in a DST. Additionally, investors should consult with a qualified tax advisor to ensure that they comply with all 1031 exchange requirements and take advantage of any tax benefits available.

In conclusion, combining a DST and a 1031 exchange can be a powerful strategy for real estate investors. By deferring capital gains taxes and diversifying their real estate holdings, investors can potentially achieve their investment goals. However, as with any investment, it's important to carefully evaluate the risks and consult with a qualified professional before making any decisions.

Disclaimer: This blog post is provided for informational purposes only and should not be considered financial, tax, or legal advice. Please consult with a qualified professional before making any investment or tax decisions.