Key Benefits of Using 1031 DST Exchanges
These are the potential benefits that CPAs, real estate brokers, and real estate attorneys may evaluate when a client is considering a Delaware Statutory Trust (DST) investment as replacement property in a 1031 exchange. Every situation is unique, and suitability depends on the client’s objectives, financial profile, and overall tax strategy. The information below is educational in nature and should be reviewed alongside the client’s tax and legal advisors.
No Management Responsibilities
The DST is the single owner and agile decision maker on behalf of investors.
Access to Institutional-Quality Property
Most real estate investors can’t afford to own multi-million dollar properties. DSTs allow investors to acquire partial ownership in properties that otherwise would be out-of-reach.
Lower Minimum Investments
DSTs can accommodate much lower minimum investments, whereas 1031 exchange minimums often are $100,000.
Insurance Policy
If for some reason the investor can’t acquire the original property they identified, a secondary DST option allows them to meet the exchange deadlines and defer the capital gains tax.
Diversification
Investors can divide their investment among multiple DSTs, which may provide for a more diversified real estate portfolio across geography and property types.
Eliminate Boot
Any remaining profit on the sale of your relinquished property is considered “boot.” This remaining money becomes taxable unless you eliminate it. The excess cash (boot) can be invested in a DST to avoid incurring tax.
Limited Personal Liability
Loans are nonrecourse to the investor. The DST is the sole borrower.
Estate Planning
1031 exchange investments may be eligible for a step-up in cost basis so your heirs will not inherit capital gain liabilities, and provides them with professional real estate management versus the burden of hands-on management.
Swap Until You Drop
The DST structure allows the investor to continue to exchange real properties over and over again until the investor’s death.
Risks & Considerations
DST investments involve risks, including but not limited to:
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Illiquidity
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Market risk
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Sponsor and property performance risk
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Lack of operational control by investors
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Potential changes in income distributions
DSTs are not appropriate for all investors. Each client’s situation should be evaluated carefully with their professional advisors.
Have a Client Evaluating Replacement Property Options?
If you are advising a client who is:
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Approaching a 45-day identification deadline
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Facing limited replacement property inventory
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Considering passive ownership
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Replacing leveraged property
We can discuss how DST structures are typically evaluated within a 1031 exchange.