What Is A 1031 Exchange

Investors get a passive investment option in Delaware Statutory Trust (DST) investments which still qualifies as “like-kind” property in a 1031 exchange. Based upon IRS Revenue Ruling 2004-86 (DSTs) these securitized investment structures give 1031 exchangers an option to go beyond single owner traditional real estate options as replacement properties

Property involved in a 1031 tax deferred, like kind exchange must be held for productive use in a trade or business, income production (rental) or investment purposes.

What Is A Delaware Statutory Trust (DST)?

A Delaware Statutory Trust (DST) is a separate legal entity which is created as a trust under Delaware statutory law, which permits a flexible approach to the operation and design of the entity. Investors in a DST have the right to receive distributions from the operation of the trust, either from sale or rental income of the property. They also own a pro rata interest in the trust. Investors do not have deeded title to the property. Trust itself has deed to the property and who, through the signatory trustee, makes the all the decisions regarding the disposition of the property including its eventual sale. The beneficiaries (Investors) of the trust have no control over the day to day management of the property or the timing and details of its sale. While initially this seems to be not a good deal to the investor, DST structure opens up the possibility for many advantages. Check DST Benefits Section to know more

IRS Revenue Ruling 2004-86 created a path for DST’s to be used for the purposes of a 1031 tax-deferred exchange. This revenue ruling states that a beneficial interest in a DST which owned real estate would be considered a “direct interest in real estate” and thus qualify for 1031 exchange, assuming of course that all the other requirements are satisfied. Since the year 2000, DSTs have increasingly been used as a form of asset protection, tax deferral, and balance sheet advantages in securitization, real estate, and mezzanine financing. IRS Revenue Ruling 2004-86 paved the way for Delaware Statutory Trusts to become the most popular ownership structure used by smaller investors to own investment-grade properties together with different other investors.

Due to the nature of DST financing and legal limitations, the use of a Delaware Statutory Trust will generally be confined to long-term “A” credit triple-net leased properties (“box-in-one”) or properties leased to an affiliate of the sponsor (a master tenant) who will manage the property on a triple-net basis (a master lease). Because of the additional problems seen with TIC ownership structures during the Great Recession, the trend to use DST as 1031 Exchange only got stronger. Today about 80% of the securitized real estate offerings for 1031 exchange are DSTs.

Top 10 Benefits of Purchasing a DST Interest:

Investors purchasing an interest in a Delaware Statutory Trust In addition to all the benefits of securitized real estate, also get the following additional benefits:

Free from day-to-day management

Without property to manage, you may enjoy more leisure time to relax or pursue other interests. You may even relocate and reside many miles from the location of your building. You can relax and trust professionals to maintain the buildings, do the leasing, collect rent, service the mortgage, and handle all of the other day-to-day management responsibilities.

Increased monthly cash flow is likely

Your investment in a DST interest provides you with a check every month based on the net cash-flow generated from your pro-rata ownership in the real estate. The cash flow that owners typically receive is in the 5-7% range annually (cash on cash). When capital appreciation and principal pay-down on an amortizing loan is included, the total annual projected returns generally range from 14%-18%.

Professionals manage the property

Buildings owned by DST’s are typically professionally managed by national real estate companies who have strong audited track records and extensive experience in their respective sectors, types, and locations of real estate. In addition, because these are the same companies that acquire the properties and arrange the DST programs, they have a vested interest in the performance of the properties.

No legwork to locate properties

A highly qualified national real estate company will locate the building(s) for you, provide all due diligence, arrange for the financing, and do everything necessary to acquire the real estate and set up the DST program. A wide range of DST properties exist in many different asset classes and geographical locations, so DST advisors will help you easily identify properties within the requisite 45 days, acquire within 180 days, and have “back-ups” in case your preferred purchase becomes unavailable unexpectedly.

Investments in larger, safer properties

You purchase larger and higher-quality buildings that tend to attract tenants with greater financial strength and stability.

Diversification of your assets

Large net proceeds may be split among several properties and invested in several different markets and asset types.

Gain non-recourse debt

Accredited investors assume institutional grade, pre-arranged, non-recourse (i.e., no personal guarantee) financing with easy approval. You can invest in properties which range from all-cash debt free acquisitions to properties with up to ~85% leverage (zero coupon).

Opportunities begin as low as $25,000

The DST structure allows for multiple owners and minimum cash investments are usually only $25,000 and minimum 1031 exchange investments as low as $100,000. The lower minimums make DST investments very flexible. Investment sizes can be structured to match an owner’s equity and debt requirements for their 1031 or cash investing needs.

Benefits from multiple tax advantages

Not only can you defer capital gains taxes until death (at which point they are forgiven), you may also be able to benefit from depreciation and other deductions which shelter some of your investment income from taxes.

1031 Exchange in and 1031 Exchange out

Not only do DST’s allow an owner to 1031 exchange equity into them, but they allow an investor to 1031 exchange their proceeds back out into other properties (or another DST) upon a sale.

“Our tax-deferred 1031 exchange programs can save millions in taxes, increase investor equity, and compound annual cash flow distributions and returns”

Start 1031 Exchange