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Using a Delaware Statutory Trust (DST) for a 1031 exchange can be a strategic choice for many investors, particularly those looking for a more passive investment approach or those facing challenges in finding suitable replacement properties. Here’s a detailed look at why a DST might be beneficial for your 1031 exchange, along with an example to illustrate the process.
A DST is a legal entity created under Delaware law that allows multiple investors to hold fractional interests in real estate. These interests are considered like-kind to real property for the purposes of a 1031 exchange, as long as the DST complies with the requirements set forth in Revenue Ruling 2004-86. This ruling ensures that the DST is treated as a grantor trust, meaning the investors are considered to own a direct interest in the property held by the DST.
Benefits of Using a DST in a 1031 Exchange:
- Passive Investment: DSTs are managed by a trustee or sponsor, which means investors do not have to deal with the day-to-day management of the property. This is ideal for those who prefer a hands-off investment approach.
- Diversification: By investing in a DST, you can gain access to high-quality commercial properties that might otherwise be out of reach. This allows for diversification across different property types and geographic locations.
- Pre-Packaged Financing: DSTs often come with pre-arranged financing, which can simplify the process for investors. This is particularly beneficial if you are looking to match the debt requirements of your 1031 exchange without having to secure financing independently.
- Flexibility in Investment Amounts: Unlike Tenant-in-Common (TIC) arrangements, which are limited to 35 investors, DSTs can accommodate a larger number of investors. This allows for smaller minimum investment amounts, making it easier to match the net proceeds from your relinquished property.
- Backup Option: A DST can serve as a reliable backup property on your list of identified properties. If your primary identified property falls through, or if you have remaining funds after purchasing a primary replacement property, a DST can help you achieve full tax deferral.
Example of a 1031 Exchange Using a DST:
Let’s say you own a rental property valued at $500,000, which you decide to sell. After accounting for selling expenses, you net $480,000. You want to defer the capital gains tax by reinvesting in a like-kind property through a 1031 exchange. However, you’re having difficulty finding a suitable replacement property within the 45-day identification period.
This is where a DST can be advantageous. You identify a DST that owns a portfolio of commercial properties, and you decide to invest your $480,000 in this DST. The DST is structured to comply with the requirements of Revenue Ruling 2004-86, ensuring that your investment is treated as a like-kind exchange.
At Deferred.com, we act as your qualified intermediary, facilitating the exchange process. We ensure that the proceeds from your relinquished property are held in a manner that prevents constructive receipt, and we coordinate the transfer of your investment into the DST. By using our "No Fee Exchange" service, you save on intermediary fees, maximizing your investment potential.
By completing the exchange into the DST, you achieve several goals: you defer the capital gains tax, diversify your investment portfolio, and enjoy a passive income stream from the DST’s properties. Additionally, you have the peace of mind that comes with professional management and pre-arranged financing.
Using a DST for a 1031 exchange can be a smart move for investors seeking a passive investment strategy, diversification, and flexibility in their real estate portfolio. At Deferred.com, we are here to guide you through the process and ensure a smooth, cost-effective exchange.
Have more questions? Call us at 866-442-1031 or send an email to support@deferred.com to talk with an exchange officer at Deferred.
Sources
- Delaware Statutory Trusts (Article)
- TAM 200039005 (Failed Reverse Exchanges)
- Rev. Rul. 2004-86 (Classification of Delaware Statutory Trusts for 1031 Exchanges)
- What To Do About Exchange Expenses in a Section 1031 Exchange? (Article)
- Goolsby v. Commissioner
- Deferring Losses On The Sale of Property Using 1031 Exchanges
- What Is a Three-Party Exchange?
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