IAA Wealth Management

How a Delaware Statutory Trust (DST) can protect your 1031 Exchange.

When most people think of a Delaware Statutory Trust (DST) in a 1031 Exchange, they see it as a way to completely exit the day-to-day management of real estate ownership and transition to a passive fractional owner. Beyond the benefits of potential diversification and capital gains deferrals, DSTs can be a useful tool for traditional 1031 Exchanges when used in the following ways:

 

1. A place for excess proceeds:

 

In many 1031 Exchanges, investors are not looking to replace their investment property with another of the exact same value. For example, when owners are looking to downsize their business footprint, they often downsize into a smaller property rather than reconfiguring and renting out the extra space in their current building. It can be difficult to find an additional property worth the exact amount of excess funds not being used to buy the new location from the sale of the original property. A DST can be tailored to the exact amount needed to replace the excess proceeds while generating a passive income stream and avoiding the added burden of managing a secondary property.

 

 

2. A 1031 Exchange back-up plan:

 

Real estate transactions fall apart all the time for a number of different reasons; negative findings from pre-close inspections, seller remorse, restrictive contingencies and lack of negotiability, to name just a few. Unfortunately, the tax code sets a very specific timeline in which a 1031 Exchange must be complete. If the closing on an identified replacement property falls through when nearing the end of the 180-day period, it can put the whole exchange in jeopardy. Identifying a DST as a back-up property is an excellent way to insulate the exchange and close escrow in as little as one to three days while satisfying the 1031 Exchange rules.

 

While many accountants and attorneys know about and utilize 1031 Exchanges, the number that understand or even know about DSTs is far fewer. Because DSTs must be sold by a licensed broker, it’s important to work with a Financial Advisor that is experienced with the strategy and DST-sponsors in order to properly review and identify how DSTs fit in your real estate investment portfolio. Delaware Statutory Trusts are a powerful tool that are widely underutilized by real estate investors, and when used properly can enhance the already beneficial 1031 Exchange strategy.

 

Securities offered through registered representatives of International Assets Advisory, LLC, Member FINRA / SIPC. This material does not constitute an offer to sell nor a solicitation of an offer to buy any security. This material is not intended as tax or legal advice, IRC Section 1031, IRC Section 1033, and IRC Section 721 are complex tax codes, therefore, you should consult your tax and legal professional for details regarding your situation. DST 1031 properties are only available to accredited investors (generally described as having a net worth of over $1 million dollars exclusive of primary residence) and accredited entities only (generally described as an entity owned entirely by accredited individuals and/or an entity with gross assets of greater than $5 million dollars). If you are unsure if you are an accredited investor and/or an accredited entity please verify with your CPA and Attorney prior to considering an investment. There are material risks associated with investing in real estate, Delaware Statutory Trust (DST) and 1031 Exchange properties. These include, but are not limited to, tenant vacancies; declining market values; potential loss of entire investment principal; that past performance is not a guarantee of future results; that potential cash flow, potential returns, and potential appreciation are not guaranteed in any way; adverse tax consequences and that real estate is typically an illiquid investment. Please read carefully the Memorandum and/or investment prospectus in its entirety before making an investment decision. Please pay careful attention to the “Risk” section of the PPM/Prospectus. Apvl 11152018-04

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