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.
- Jason Vanclef. The Wealth Code 2.0. 2009.
- Distributions are not guaranteed and 1031 investments are inherently illiquid.
- 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.
- Resource is the marketing name for Resource Alternative Advisor, LLC and its affiliates.