When searching for a replacement property for your 1031 exchange, a Delaware Statutory Trust (DST) may be a viable option. These investment vehicles provide accredited investors with exposure to professionally managed, institutional-grade investment properties while also eliminating the hassle of direct property management.
If you currently own an investment property and want to defer your capital gains, but you’re tired of being a landlord, then a DST might be right for you. As you weigh your options, consider these potential benefits.
There are many different types of DSTs available, giving investors the opportunity to gain exposure to property sectors such as multifamily residential real estate, hotels, industrial, retail, oil and gas properties, and more. This allows you to enjoy the diversification that comes with owning investment real estate as well as the ability to diversity across a multitude of property sectors.
Since many DSTs have minimum investments as low as $25,000 to $100,000, it’s fairly easy to spread the proceeds of a property sale across multiple DST investments.
2. Freedom from Management Obligations
While owners of traditional investment real estate need to handle everything from collecting rent checks to calling the plumber, a DST frees you from all property management obligations. The DST sponsor is fully responsible for arranging and overseeing all the important details – including the property management, rent collection, and bookkeeping. This allows you to enjoy the benefits of owning a professionally managed property investment without any of the effort.
3. Access to Institutional-Grade Properties
Many DSTs hold properties with values typically ranging from $25 million to $125 million. While the average investor may not be able to purchase a hotel, grocery store, medical facility, or other similar property on their own, the structure of a DST allows you to access these properties by pooling your money with other investors.
The DST sponsor is responsible for fully vetting each property purchased, and many are the same type and quality as those owned by large institutional investors such as pension funds, insurance companies, and real estate investment trusts (REITS).
4. Potential Passive Income and Appreciation
Most DSTs seek to provide a monthly income. This potential cash flow is attractive to many investors, particularly those who are at or nearing retirement age.1
Typically, a DST will hold properties for five to ten years before selling them. When the properties are sold, investors receive their share of the proceeds, including any gains that result from the appreciation of the underlying properties.
5. 1031 Exchange “Backup”
Finding an appropriate replacement property within the 45-day identification period can be one of the most challenging aspects of completing a 1031 exchange. Not only can a DST be a strategy for investors who want to get out of direct property management, but it’s also an effective backup plan.
IRS guidelines allow investors to identify more than one potential replacement property. If you’re unable to find a property to purchase or you’re concerned that unexpected complications could cause you to miss the 45-day or 180-day deadlines, listing a DST as one of your identified properties can offer you a bit of protection. If other options fall through, you’ll still be able to complete your purchase and defer your capital gains taxes.
In addition, while matching the exact debt and equity ratios you need to complete a full exchange can be a challenge with direct property purchases, a DST helps to streamline this process. You can also exchange your DST into other DSTs in the future, giving you even more flexibility.
Is a DST 1031 Exchange Right for You?
If you’re interested in learning more about using a DST as a 1031 exchange replacement property, download our free eBook today!
1Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated.
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.
Because investor situations and objectives vary this information is not intended to indicate suitability or a recommendation for any individual investor.
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.
There are material risks associated with investing in DST properties and real estate securities including liquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, 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 potential loss of the entire investment principal. Past performance is not a guarantee of future results. Potential cash flow, returns and appreciation are not guaranteed. IRC Section 1031 is a complex tax concept; consult your legal or tax professional regarding the specifics of your particular situation. This is not a solicitation or an offer to sell any securities.
A REIT is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate. There are risks associated with these types of investments and include but are not limited to the following: Typically, no secondary market exists for the security listed above. Potential difficulty discerning between routine interest payments and principal repayment. Redemption price of a REIT may be worth more or less than the original price paid. Value of the shares in the trust will fluctuate with the portfolio of underlying real estate. Involves risks such as refinancing in the real estate industry, interest rates, availability of mortgage funds, operating expenses, cost of insurance, lease terminations, potential economic and regulatory changes. This is neither an offer to sell nor a solicitation or an offer to buy the securities described herein. The offering is made only by the Prospectus.
Investment advisory services offered through Bangerter Financial Services, Inc. A state Registered Investment Advisor. Registered Representative and securities offered through Concorde Investment Services, Inc. (CIS), member FINRA/SIPC. Bangerter Financial Services, Inc. is independent of CIS.