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Selling Investment Real Estate? Think 1031 Delaware Statutory Trust

Tractor plowing farmland, to represent the kind of property sale suitable for 1031 DST

Planning to sell investment real estate? Dreading what you might owe Uncle Sam?

That’s a conundrum many investors face when selling property that has appreciated in value — especially rental properties or farmland.

It’s not a sin to cash out. You could do that. Pay the taxes and move on. Some do. But most just can’t bear the thought of paying more taxes.

Another choice is to perform a 1031 exchange. This is a typical way to defer capital gains taxes while continuing to reap the benefits of owning investment real estate. It simply means an investment property can be sold and capital gains tax deferred if another investment property of like-kind is purchased with the proceeds.

However, many investors don’t want to be bothered by the burdens of tenants, property repairs, and overall management of real estate. Others may wish to diversify their investments by owning different types of real estate in different geographic locations. Or maybe they need to invest quickly.

A Delaware Statutory Trust 1031 exchange, commonly known as a DST, offers more flexibility to investors by allowing them to pool their resources to invest in diversified investment real estate. Investors get access to premium properties, professional property management, and speedier transactions.

There are specific criteria to be met with a 1031 exchange, such as a time limitation for identifying and purchasing replacement property, the way title is held, etc.

By using a DST, if all criteria are met, the investor may be able to sell time-consuming rentals, farmland, or other investment property and then purchase fractional shares of a DST, thereby deferring capital gains taxes, while still retaining growth and income potential. Depending on the DST, selected benefits may include:

  • Diversification of real estate holdings by type, reducing risk associated with owning a single property (e.g. commercial property, multi-family housing, storage units)
  • Diversification of real estate holdings by geography, reducing risk associated with owning a property in just one location (properties available throughout the nation)
  • Investment in premium property that might not have been available to you as an individual owner.
  • Monthly income
  • Professional management of DST property, eliminating the hassles and headaches associated with direct ownership.
  • Tax-deferred real estate investments can continue to build wealth, compounding over the years.
  • Expedited timing, a DST purchase can be made more quickly than traditional real estate.
  • Limited liability and non-recourse financing

The following chart may help you understand the differences between sole ownership and DST ownership.

Sole Ownership vs DST Ownership Chart - PDF

Remember, certain timelines must be met when performing a 1031 exchange. And, using a DST for your 1031 exchange requires that you be an accredited investor. As with all real estate investments, there are risks, so be sure to speak with someone skilled in explaining DSTs to get all your questions answered.

Speak with our experienced DST 1031 representative, Robert Butts, he will be more than happy to answer your questions.

Because investor situations and objectives vary this information is not intended to indicate that an investment is appropriate for or is being recommended to any individual investor. This is for informational purposes only, does not constitute individual investment advice, and should not be relied upon as tax or legal advice. Please consult the appropriate professional regarding your individual circumstance. DST 1031 properties are only available to accredited investors (typically defined as having a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last two years; or have an active Series 7, Series 82, or Series 65). Individuals holding a Series 66 do not fall under this definition) and accredited entities only.  If you are unsure if you are an accredited investor and/or an accredited entity, please verify with your CPA and Attorney. There are material risks associated with investing in private placements, Delaware Statutory Trusts ("DSTs") and real estate securities including the potential loss of the entire investment principal, illiquidity, tenant vacancies impacting income and revenue, general and real estate market conditions, lack of operating history, interest rate risks, competition, including the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and investors should read the PPM carefully before investing paying special attention to the risk section. Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk. Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated.