Why It’s More Important Than Ever for 1031 Exchangers

As a Qualified Intermediary (QI), your role in guiding clients through the 1031 exchange process is critical, especially when it comes to meeting the 45-day deadline for identifying a replacement property. Given the current real estate environment, where rising interest rates, low inventory, and increased competition make finding suitable properties more difficult, having a backup replacement option has become more important than ever. One solution? Delaware Statutory Trusts (DSTs) provide a reliable fallback for clients when primary options don’t materialize.

Understanding the Need for Backup Replacement Options

In today’s real estate market, various factors are limiting the availability of quality replacement properties for 1031 exchange investors.

Rising Interest Rates
With interest rates remaining stubbornly high, borrowing costs have surged. This has reduced liquidity across the real estate market, slowing transactions and limiting the inventory of available properties. For your clients, this means fewer choices and increased difficulty in meeting the 45-day identification requirement.

Low Inventory in Certain Sectors
Specific sectors, such as multifamily and industrial, are experiencing low supply. The demand for these property types far outpaces the available inventory, making it harder for your clients to find the right fit in time.

Increased Competition
Institutional buyers and large investors are crowding the market, making it difficult for individual investors to compete. In many cases, properties are being snapped up quickly, leaving fewer opportunities for smaller investors.

Given these challenges, it’s essential to have a backup strategy in place. As you know only too well, failure to identify a replacement property within the tight 45-day window can result in a taxable event, potentially costing your clients significant capital gains taxes. This is where DSTs come in—offering a quick, efficient fallback option to ensure the 1031 exchange process stays on track.

What Makes DSTs an Ideal Backup Option?

Ease of Acquisition and Pre-Packaged Investments
DSTs are pre-structured, turn-key investments that allow your clients to reallocate exchange proceeds quickly. Unlike traditional real estate acquisitions that may require extensive due diligence, DSTs are ready to go, with sponsors having already completed much of the groundwork. Financing is often in place, and the properties are professionally managed, making them a fast and effective solution when time is of the essence.

This ease of acquisition is particularly valuable as a backup option. If a client’s primary property deal falls through, a DST can be seamlessly substituted to meet the 1031 exchange requirements, without the stress and uncertainty of a rushed search.

Diversification Benefits and Risk Mitigation
DSTs offer access to institutional-grade properties across various sectors, including commercial, industrial, and multifamily. This diversification can reduce the risks associated with investing in a single asset class, providing your clients with more stable returns. During periods of economic uncertainty, having a diversified portfolio becomes even more critical.

By incorporating DSTs into their 1031 exchange strategy, your clients can tap into properties they wouldn’t typically have access to, further enhancing their portfolio’s resilience and growth potential.

The Growing Relevance of DSTs in Today’s Market

Heightened Volatility in Real Estate Valuations
Today’s real estate market is marked by rapid changes in property valuations, driven by inflationary pressures and fluctuating interest rates. For your clients, this volatility can make it difficult to assess the long-term potential of a replacement property. In such an unpredictable environment, DSTs can potentially offer a more stable, income-producing option. If a client’s preferred property fails to materialize, a DST can potentially provide passive, consistent returns.

Demand for Passive Investments
Many accredited investors are increasingly seeking passive income streams without the responsibilities of direct property management. DSTs have gained favor because they offer hands-off ownership while still satisfying 1031 exchange requirements. For your clients, this provides the dual benefit of meeting tax-deferral goals while avoiding the operational headaches of traditional real estate management.

Practical Steps for Incorporating DSTs into Your Exchange Strategy

Work with an Experienced Wealth Manager
Partnering with a skilled wealth manager or 1031 exchange advisor is key to identifying and vetting DST opportunities that align with your client’s financial goals. These professionals can help ensure that the DST options fit into your client’s overall investment strategy while adhering to IRS guidelines for 1031 exchanges.

Timing and Execution
The key to using a DST as a backup option is timing. Begin reviewing DST options early in the exchange process, allowing your clients to have a fallback ready within the 45-day identification window. Work closely with your clients to clearly outline primary property preferences, but always keep one or more DSTs on the list of identified properties to avoid last-minute scrambling.

Coordinate with your clients’ wealth managers to ensure that all paperwork and timelines align for a smooth and compliant exchange process.

Conclusion

In today’s volatile real estate market, where high interest rates, low inventory, and increased competition are limiting replacement property options, DSTs have become a critical backup strategy for 1031 exchange clients. Offering ease of acquisition, diversification benefits, and passive income, DSTs ensure that your clients have a reliable fallback if their primary property doesn’t pan out.

At Bangerter Financial, we specialize in helping investors incorporate DSTs into their 1031 exchange strategies. Contact us today to learn how partnering with us can help you better serve your clients and avoid costly taxable events.

Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services offered through Concorde Asset Management, LLC (CAM), an SEC registered investment adviser. Insurance products offered through Concorde Insurance Agency, Inc. (CIA). [Insert DBA name here] is independent of CIS, CAM and CIA.