You may have heard about 1031 exchanges, which can be a useful tax deferral tool available for real estate investors. As highlighted in the Internal Revenue Code Section 1031, “real property can be exchanged solely for real property of like-kind,” giving taxpayers the ability to defer capital gain tax on the sale of an appreciated investment property. “Like-kind” properties may qualify as any property held for business or investment purposes, including but not limited to: apartments, office space, industrial, retail, and storage.
While many people are familiar with and utilizing 1031 exchanges, we have discovered that many professionals are not aware of the possibility of using a Delaware Statutory Trust (DST) - an option used to complete a 1031 exchange.
A DST might offer benefits that could be attractive to an investor selling appreciated real estate. In addition to deferring taxes, a DST can offer:
- Institutional real estate access
- Passive management – leaving the real estate management in hands of professionals
- Real estate diversification
- Institutional financing
- Variable investment amounts
As with all investments, there is risk when it comes to DSTs and they are not appropriate for everyone. There are a few potential risks to consider:
- The trustee may be unable to close a deal within the required time-frame
- Limited transferability, lack of liquidity and less control over operating decisions for individual investors
- If the trustee violates one of the mandatory tax restrictions, investor income could become immediately taxable
- The tax code could change, negatively impacting the investor
- There is a potential for property value loss
- There are associated fees and expenses which may outweigh the tax benefits
You may also find the link below helpful in deciding on whether a DST is right for you or not.
With the help of trusted investment, legal and tax professionals, you will be able to understand these risks and compare them against the potential benefits. Exclusive Financial Resources would welcome the opportunity to discuss DSTs with you in more detail to determine whether or not this may be a suitable option for you. Please give Exclusive Financial Resources a call at (980) 242-2533, email Louis Herford at Louis.Herford@ExclusiveFinancialResources.com or schedule a 15-minute discussion here.
This material is neither an offer to sell nor the solicitation to purchase any security. The information is for discussion and information purposes only. It is not intended to replace competent legal, tax or financial planning advice. The applicable tax codes apply to and relate to federal law only. Individual states may have their own additional tax codes. Please contact the appropriate tax and legal professional in your state. This information is provided from sources believed to be reliable but should be used in conjunction with professional advice that is consistent with your personal situation.