Utilizing Delaware Statutory Trusts in a 1031 Exchange

  • Defer Capital Gains Tax

    Section 1031 of the Internal Revenue Code provides an effective strategy for deferring capital gains tax that may
    arise from the sale of a business or investment real property. By exchanging the real property for like-kind
    real estate, real property owners may defer taxes and use the proceeds to purchase replacement property. Likekind
    real estate includes business and investment real property, but not the property owner’s primary residence.
    It is important to note that there are several specific guidelines that must be followed in order to successfully
    execute a 1031 exchange transaction. For instance, the cash invested in the replacement property must be
    equal to or greater than the cash received from the sale of the relinquished property. In addition, the sum of the
    cash invested and the debt placed on the replacement property must be equal to or greater than the sum of
    the cash invested and the debt placed on the replacement property. In other words, additional cash can make
    up for a shortfall in debt placed on a replacement property, but additional debt cannot make up for a shortfall
    in cash invested in a replacement property. Prospective investors should consult their tax advisors regarding a
    1031 exchange.

  • DSTs are the Partial Ownership Structure of Choice

    A Delaware statutory trust (DST) permits fractional ownership where multiple investors can share ownership in a
    single property or a portfolio of properties, which qualifies as replacement property as part of an investor’s 1031
    exchange transaction. A DST takes all decision-making out of the hands of investors and places it into the hands
    of an experienced sponsor-affiliated trustee.

  • Investors with Property to Exchange

    A typical 1031 exchange involving the eventual investment into a DST has
    three basic steps:

SALE

Exchanger sells property,
known as the
relinquished property,
and proceeds are
escrowed with a Qualified
Intermediary (QI)

PURCHASE

Qualified Intermediary,
through a written
agreement with the
investor, transfers
funds for purchase of
replacement property

EXCHANGE

Exchanger
receives beneficial
interest in a DST

Key Benefits of DST 1031 Exchanges

  • ESTATE PLANNING
    All 1031 exchange investments receive a step-up in
    cost basis so your heirs will not inherit capital gain
    liabilities, and provides them with professional real
    estate management versus the burden of hands-on
    management.

  • INSURANCE POLICY
    If for some reason the investor can’t acquire the
    original property they identified, a secondary DST
    option allows them to meet the exchange deadlines
    and defer the capital gains tax.

  • ELIMINATE BOOT
    Any remaining profit on the sale of your relinquished
    property is considered “boot.” This remaining money
    becomes taxable unless you eliminate it. The excess
    cash (boot) can be invested in a DST to avoid
    incurring tax.

  • SWAP UNTIL YOU DROP
    The DST structure allows the investor to continue to
    exchange real properties over and over again until the
    investor’s death.

  • NO MANAGEMENT RESPONSIBILITIES
    The DST is the single owner and agile decision maker
    on behalf of investors.

  • ACCESS TO INSTITUTIONAL-QUALITY
    PROPERTY
    Most real estate investors can’t afford to own multimillion
    dollar properties. DSTs allow investors to
    acquire partial ownership in properties that otherwise
    would be out-of-reach.

  • LIMITED PERSONAL LIABILITY
    Loans are nonrecourse to the investor. The DST is the
    sole borrower.

  • LOWER MINIMUM INVESTMENTS
    DSTs can accommodate much lower minimum
    investments, whereas 1031 exchange minimums
    often are $100,000.

  • DIVERSIFICATION
    Investors can divide their investment among multiple
    DSTs, which may provide for a more diversified real
    estate portfolio across geography and property types.

Securities Offered through Arkadios Capital – Member FINRA/SIPC. Information available on third-party sites is for informational purposes only. There are risks associated with investing in real estate and Delaware Statutory Trust (DST) properties including, but not limited to, loss of entire investment principal, declining market values, tenant vacancies and illiquidity. Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated. 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. If you are unsure if you are an accredited investor and/or an accredited entity please verify with your CPA and Attorney. The information herein has been prepared for educational purposes only and does not constitute an offer to purchase or sell securitized real estate investments. Because investors situations and objectives vary this information is not intended to indicate suitability for any particular investor. This material is not to be interpreted as tax or legal advice. Please speak with your own tax and legal advisers for advice/guidance regarding your particular situation.