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Sponsored: Utilizing Delaware Statutory Trusts in a 1031 Exchange

Section 1031 of the Internal Revenue Code has been cited as one of the most powerful wealth-building tools still available to taxpayers. 1 A 1031 Exchange allows investors to defer the payment of capital gains taxes that come from the sale of a business or investment property. However, to qualify for these tax benefits, there are important requirements that must be met.
 
First, an investor must acquire a “like-kind” property. Like-kind properties can include office buildings, multi-family complexes, hotels, retail centers, industrial warehouses, tenant-in-common (TIC) interests, and Delaware Statuary trust (DST) interests, just to name a few. Generally, any property that is held for an investment can qualify, but it is important to remember that the new asset value and debt on the replacement property, along with the cash invested in it, must be greater than or equal to that of the relinquished property.


 
Since exchangers cannot take constructive receipt of the relinquished property’s sales proceeds, they must also involve a qualified intermediary (QI) that facilitates the 1031 Exchange by entering into a contract for the exchange of properties. Additionally, exchangers are required to follow a very specific 180-day transaction schedule.

The potential benefits of a 1031 Exchange
If exchangers can meet the requirements for a 1031, they potentially benefit from tax deferral, build wealth, potential growth in the underlying value of exchange properties, as well as the monthly income generated from operational cash flow.
 
Taking it one step further with Delaware Statuary trusts
As mentioned earlier, exchangers can utilize properties held within a DST as a like-kind replacement property. DSTs are established under Delaware state law, set up as separate legal entities, and created as trusts, qualifying them under Section 1031. Unlike other exchange options, DSTs have the potential to offer additional advantages.
 

  • Greater access

DSTs may include up to 1,999 investors, which may lower investment minimums

  • Regular distributions2 

DST earnings and proceeds above reserve amounts must be distributed on a regular basis

  • Opportunities for diversification3 

Similar to other private real estate offerings, including tenant-in-common (TIC) interests, DSTs allow exchangers to split their investments among multiple DST properties, potentially mitigating risk

  • Lower potential default risk

DSTs have one real estate borrower and owner, which may lower an investment’s default risk

  • No management responsibilities

DSTs leave the management and decision-making responsibilities to a team of professional and experienced managers

  • No stress over exchange deadlines

DSTs can close very quickly, lowering concern of missing transaction deadlines
 
However, like all investments, DSTs carry risks that exchangers must understand. DSTs require a lengthy time commitment and are designed for investors who can commit to a long-term investment of seven to ten years and do not require liquidity from the 1031 investment. Additionally, as with any real estate investment, exchangers are subject to the potential for high vacancy rates and loan defaults.
 
Resource4 – A firm with proven experience with private real estate offerings
 
Since 2004, Resource has implemented a distinctive approach to acquiring, managing, and selling real estate assets, offering solutions that seek to generate value and maximize returns. Resource has raised more than $353 million in capital, acquired $815 million in assets under management, and provided tax-advantaged access to more than 3,600 investors through 15 full-cycle investment programs, including seven 1031 Exchange offerings.
 
Are DSTs in a 1031 Exchange the right option for your clients?
DSTs in a 1031 Exchange have the ability to provide many potential benefits to qualified investors. However, they can be complicated entities that require due diligence and a company with extensive private offering experience.
 
To learn more about Resource and DSTs, call (866) 773-4120 or visit www.ResourceAlts.com.
 
Resource is a sponsor of The DI Wire, and the article was published as part of their standard directory sponsorship package.

Private placements are extremely complex investment vehicles that may provide tax benefits. Neither Resource, nor any affiliate of Resource, provides tax and/or legal advice. It is highly recommended that you speak with your tax and legal counsel prior to investing in private placements to understand how the investment will impact your specific situation.
 
Resource Securities LLC, member FINRA/SIPC, distributes various investment products and is a wholly owned subsidiary of C-III Capital Partners LLC.
 
This information is educational in nature and does not constitute a financial promotion, investment advice, or an inducement or incitement to participate in any product, offering or investment. It is not intended to be used as a tool to determine your specific financial situation, tax status, investment objectives, investment experience, suitability for any specific investment, risk tolerance or investment profile. Resource is not adopting, making a recommendation for or endorsing any investment strategy or particular security. The materials included herein are the property of Resource and may not be repurposed in a separate likeness without the express written consent of Resource.

  1. Jason Vanclef. The Wealth Code 2.0. 2009.
  2. Distributions are not guaranteed and 1031 investments are inherently illiquid.
  3. Many Delaware Statutory Trusts and 1031 exchanges offer ownership interests in a single property, so investors may need to invest in multiple real estate investments, or in different regions or asset classes to achieve diversification.
  4. Resource is the marketing name for Resource Alternative Advisor, LLC and its affiliates.