How you can defer taxes indefinitely using a 1031


“You may know about a 1031 already, but are you brushed up on your knowledge of Delaware Statutory Trusts? You should be.”

A real estate investor, if fortunate comes to a point where they want to sell a property at a profit. Many investors know they may be able to utilize Internal Revenue Code Section 1031 and exchange their property for a replacement property, in turn deferring the capital gains. This has been one of the cornerstones of real estate investing because the deductions taken to make income tax deferred while owning a property also reduces cost basis. Distinct advantage of utilizing section 1031:  As long as the rules are followed each time an investor sells and subsequently buys a property, the taxes can potentially be deferred indefinitely. At the time of death, your heirs will generally receive a stepped up cost basis to the current market value of owned property, regardless of how many exchanges the investor may have done in the past (depending on the total market value of the estate).

Now, while most real estate investors know how to take advantage of a 1031 exchange in the traditional sense, there is an option to invest in an alternative structure and still defer the gains.  This is called the Delaware Statutory Trust or (DST).

A DST gives investors another avenue to take advantage of the tax code while still staying within the parameters of the 1031 requirements.  Many investors are utilizing the DST Structure as evidenced by Mountain Dell Consulting, LLC’s1 estimate of $1.4 billion in new equity to be placed in 2016. If a property owner is tired of dealing with the hassles of property management, yet has a low cost basis, the DST structure still allows for a way to take advantage of section 1031 and pass on the day-to-day management tasks to some of the country’s top real estate management firms.  Along with hands on management by an experienced sponsor, the investor receives detailed quarterly reports on the performance of the asset.  If there is any leverage used in one of these programs, the debt is all non-recourse to the investor.  This may be of particular interest if the current property owned has a personal guarantee, as the investor can exchange the property for a DST and not be liable for the new debt of the DST.  A DST can also be used for a partial exchange.  For instance, if an investor is selling a $10 million property and replacing it with one valued at $8 million, the remaining $2 million may be invested in a DST and still defer the capital gains.  We also see DST’s used quite often as a back-up plan in case one or more of the properties an investor identified to complete their exchange falls through.

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(Source: New York Real Estate Journal)

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