Do you own a property that has reached depreciation or has stopped generating revenue? Most investors choose to sell their property in such situations. However, they also end up paying hefty capital gains tax on the transaction. To save your profit from taxes, you can do a 1031 exchange on the subject property and defer up to 100% capital gains tax. There several replacement options for 1031 exchanges, and among all, DSTs are the most popular ones.
A DST (Delaware Statutory Trust) is a private trust formed by filing a Certificate of Trust with Delaware Division of Corporations. It is governed by Chapter 38, Part V-Title 12 of the annotated Delaware Code. DSTs own, manage, administer, and sell income-producing properties. DST shares can substitute 1031 exchange replacement properties and help you defer capital gains tax. DSTs have high-grade investment properties in their portfolio, and you can invest in multiple DST assets at once. You can use a 1031 exchange and trade an old or non-performing asset for DST properties.
Easy to close, flexible, highly-rewarding, and less expensive – a few factors that make DSTs ideal investment options.
DST investments are considered as real estate investments. Therefore, when you buy DST shares, you actually invest in the trust’s properties and not in the trust. As it’s a shared ownership structure, by investing in DSTs, you can get hold of assets that you might not be able to afford individually. DSTs generally have a large structure. You can find up to a hundred investors or even more in a single DST. And due to this, a DST investment may start from as low as $100K. Remember what I mentioned just now? A DST investment can help you own properties you can only dream of at present.
DST properties are backed by pre-arranged property or asset managers, which means you don’t need to bear the burden of property management. You can also split your 1031 proceeds into smaller amounts and invest them in multiple DST assets. It’s an excellent way to diversify your investment portfolio.
Why makes DSTs suitable for 1031 exchanges?
So, how DST shares work as ideal replacement options for 1031 exchange investors? As you may know, 1031 exchanges allow investors to defer capital gains tax on exchanging an investment property for another like-kind property. As DST investments are considered real estate investments, they qualify for 1031 exchanges.
As per the rules, you get a time limit of 180 days to complete your 1031 exchange. From identifying the potential replacement property to acquiring it, everything needs to be done within these 180 days. If you acquire any investment property as your 1031 exchange property, then you won’t get any other benefit apart from the opportunity to defer capital gains tax. Whereas, by investing in a DST, you can get hold of a management free institutional-grade property and still defer up to 100% capital gains tax. Therefore, if you’ll mix 1031 exchange with a DST investment, you can enjoy numerous benefits and tax advantages.
Complete a DST 1031 exchange in six easy steps –
- Choose the property you want to relinquish and list it for sale. Find a buyer and close the sale of your property.
- Sign a 1031 exchange agreement with a Qualified Intermediary. A Qualified Intermediary is an individual who facilitates 1031 exchanges and performs all tasks on behalf of the investor.
- Transfer your sale proceeds into an escrow account, which is managed by your QI.
- Go through different DST investment options and choose the one that fulfills your requirements.
- Buy the same as your 1031 exchange replacement property within 180 days (starts the day the relinquished property is sold).
- Submit Form 8824 to the IRS on the tax filing day, plus other required documents.
As you can see, you can easily acquire DST shares and complete your 1031 exchange using these steps. However, just like any other investment, DSTs also have a few limitations that you may want to look at before planning your investment.
Drawbacks of a DST Investment –
- No property title – DST investors don’t receive property titles. As a single DST has many investors, it’s impossible to transfer the property title in the name of one or all investors.
- No voting rights – Being a DST investor, you don’t have voting rights. Therefore, in case of any dispute, the investors within a DST need to consult the trustee for resolving it.
- No single-member LLCs – DST investors aren’t allowed to form single-member LLCs.
These are a few limitations that come with a DST investment. However, keeping the benefits of DST investment in mind, these drawbacks don’t look too significant. Still, it’s recommended that you consult an experienced 1031 advisor or expert before investing in DSTs. The assistance of an advisor can help you in avoiding small mistakes that aren’t visible to the naked eyes.
This is where we come to your service as we can connect you to a team of qualified DST advisors and 1031 experts. We also make sure that one of our advisors stay with you throughout the transaction. In addition, we also cater to investors with services like fund transfer, arranging bank cheques, preparing documents, etc.