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Why Are DSTs Most Suitable Replacement Option For 1031 Exchanges?

by Rishav

You could be having a tough time in managing your investment property. Once a property turns old, it requires repairing and maintenance on a regular basis. Consequently, as a property owner, you must invest more money and time in managing your property. Plus, the endless effort as well. Due to growing day-to-day responsibilities, you may think of selling your property and invest the proceeds in another asset. However, on doing so, the proceeds you receive at the end of the sale will be taxed normally, and you will end up paying hefty capital gains tax, which certainly wouldn’t please you. But, if you do a 1031 exchange on your current property, you can defer entire capital gains tax.

A 1031 exchange lets you swap any investment property with another without any tax consequences.

Regulated by the IRS, Section 1031 or 1031 exchange is an investment tool for investors looking to trade a non-performing asset for another property. By reinvesting the entire sale proceeds in a new property, you prove your investment intent and qualify for a 1031 exchange. When planning a 1031 exchange, you may want to look at some replacement options in advance. You get 45 days from the sale of your property to identify a replacement option. So, having identified potential replacement options in advance can help you close your property identification before the deadline. 

Invest in DSTs as they pre-packaged investment options and can be closed easily. 

A DST or Delaware Statutory Trust is a private trust that owns income-producing real estate. A DST investment offers shared-ownership in large investment properties. When you invest in a DST, you get the ownership of one of its properties along with other investors. DSTs own, manage, and administer all properties, and investors are not required to look after those properties. DST investments are viewed as real estate investments and work as ideal replacement options for 1031 exchange investors.

Getting into the depths of DST investments – 

A sponsor or a real estate firm usually holds several income-producing assets under a DST umbrella. You can compare different DST portfolio and invest in one that suits you. You may find up to a hundred investors or even more in a single DST. Due to this, you don’t require to invest huge capital into a DST, and you also buy DST shares for as low as $100K. DSTs are mostly profitable deals for small investors who want to own premium investment properties but may not have the capital to own it individually.

Here are some major benefits of a DST investment – 

  • No property management – Being a DST beneficiary, you don’t need to indulge in property management, as DST properties are managed by professionals. 
  • Diversification – You don’t need to invest the entire money in a single DST property. Rather you can split your proceeds and invest in multiple DST assets. 
  • Pocket-Friendly – Say you have only $500K that you received from the sale of your old property. You can compare different DST options and invest in a DST property that fits in your budget. 
  • Tax Advantage – On investing your 1031 proceeds in a DST property, you are not required to pay capital gains tax on the transaction. 
  • Easy to close – DSTs are pre-packaged investment options, which means you can easily close a DST investment without waiting for months. 

Besides these benefits, you can also expect increased cash flow, an opportunity to 1031 exchange in and exchange out a DST, and many more. With so many perks, DSTs are ideal investment options for 1031 investors. However, there are also a few limitations that you may want to consider before investing in a DST.

  • DST investors don’t receive the property title. As a single DST may have a hundred or more investors, it’s impossible to transfer the property title in the name of one or all investors. 
  • DST investors don’t have voting rights. So, in case of any dispute, they need to reach out to the trustee.
  • A DST can’t receive contributions either from its new or current beneficiaries once the offering is closed. 
  • The trustee can’t reinvest the proceeds obtained from the sale of its real estate. 
  • The trustee is not permitted to renegotiate the terms of the existing loan. 
  • The trustee can only make limited capital expenditures on the property pertaining to (a) normal repair and maintenance, (b) minor non-structural capital improvements, and (c) those required by the law.
  • Any cash held, other than necessary reserves, must be distributed among the beneficiaries on a current basis.

Undoubtedly, DST investment provides many benefits to investors. However, like any other investment, it also poses some risks. That’s why it’s important that you consult a DST advisor or expert before initiating your investment. 

To kickstart your DST investment, you can go through some exclusive DST properties available in the property section of the website. As soon as you lock a property, you can reach out to one of our experts, and they will assist you from there.

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