Clients & Prospects ask about the 1031 exchange process, particularly seeking clarity on the role of Delaware Statutory Trusts (DSTs) within it.
It’s important to state that a 1031 exchange is not suitable for everyone, as it entails both advantages and disadvantages.
What is a 1031 Exchange?
A 1031 exchange is a tax-deferred transaction that allows investors to sell a property and reinvest the proceeds into a similar property while deferring capital gains taxes.
The process involves several steps.
- First, when you sell the property the proceeds will go to a qualified intermediary. A QI holds the proceeds from the sale and facilitates the exchange.
- Second, you must identify a replacement property within 45 days of selling the original property.
- Third, within 180 days the replacement property needs to be closed.
As we discussed, the primary objective of the 1031 exchange is capital gains tax deferral. There are various ways to utilize a 1031 exchange. One method is with DSTs (Delaware Statutory Trusts)
A Delaware Statutory Trust (DST) is a legal entity established under Delaware law, commonly used for real estate investments. It allows investors to pool their resources while enjoying limited liability and potential tax benefits. DSTs are popular in 1031 exchanges, enabling investors to defer capital gains taxes by reinvesting proceeds from the sale of one property into another. Unlike traditional trusts, DSTs don’t require active management from individual investors, as a trustee handles property management. This structure provides passive income and diversification. With favorable legal and tax regulations, DST’s attract investors seeking flexibility and protection.
Includes:
- Industrial DSTs: Provide exposure to industrial real estate such as warehouses and fulfillment centers.
- Multi-Family DSTs: Focusing on cash flow and apartment complexes.
- Net Lease Agreements: Offering passive income and tax benefits.
- Additionally, options like Student Housing, Healthcare, and Self-Storage can be explored.
It is good to understand what a 1031 exchange is. Each client has a unique situation and it may only be for some even with the tax deferral benefits. Here is a good link as well if you want to research more in-depth. Check my Twitter page for more content!
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