Utilizing Delaware Statutory Trusts or DST 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:
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.