The role of DST companies and trusts for 1031 exchanges

1031 exchanges offer the real estate investors the opportunity to defer taxes during property transfers. For the unversed, when you aim for a tax-deferred 1031 exchange, the purchase of a beneficial interest in Delaware statutory trust can be referred to as a direct interest in real estate. For like-kind exchanges, that are significant for 1031 exchanges, there are a lot of challenges for making a successful completion. We highlight those issues below.

The challenges of like-kind exchanges

  • For real estate investors, it is not always possible finding a suitable replacement property.
  • It can be time-consuming if someone wants to secure bank finances for replacing the amount of debt on the original property.
  • The 45-day timeline is important, but it is not easy identifying it within this time frame.
  • Real estate investors must close the purchase within 180 days, but this is again easier said than done.

Likewise, there are several other challenges that may surface. In such situations, beneficial owners of dst companies that own real estate will be deemed as having a direct interest in such properties for the sake of section 1031. In a nutshell, when investors shift the investment funds in real estate holdings that are passively held, DST is the way to go. The advantages of DST are varied. Let us take a detailed look.

Qualifying for 1031 exchanges

When you join hands with a good DST company, it is considered as a direct investment in properties and become eligible for 1031 tax-deferral treatment. However, if DST is not identified accurately, it will result in a failed 1031 exchange.

Timing

As already mentioned, real estate investors find it increasingly difficult to maintain the time frame of 45 days and 180 days respectively for acquiring and closing the property deal. DST companies can help maintain these deadlines.

Sizing

1031 exchange investors who deal find it difficult to find replacement properties that have a close match with the property they sold can get help from DST companies. They will guide the investors to invest the exact amount that is essential for qualifying such 1031 exchange requirements.

Non-recourse debt

Chances are a DST that might include debts. These investors take it for granted the share of the debt on such properties, for tax reporting purposes. Such loans are referred to as non-recourse. It suggests any such loan limits the lenders’ remedies towards the property. Additionally, the investor’s assets outside the property remain protected.

DST is a readymade package

Consider DST as a pre-packaged investment. Since the property is already in safe hands, it significantly reduces the risk of missing 1031 time frames. All the necessary actions against the property are complete which further makes the task easier for the investor.

Institutional-Grade Assets

Another crucial advantage of working with DST companies, they are co-investment properties. Thus, it allows multiple 1031 investors to purchase equity ownership interests in properties that could have never been possible in normal circumstances.

Diversification

Lastly, the diversification factor is the most attractive feature for real estate investors. They can diversify into several DST investments. You should know, there isn’t any limit on the number of DSTs an investor can consider for investing. However, remember, such diversification does not guarantee any assured returns, nor does it offer protection against losses. Still, an ace real estate investor would know how to go about their job and utilize this advantage to good effect.

So, as you can see, for 1031 exchange investors, DST is an appealing option. You will not find any other solution that offers such flexibility in investing efficiently, acquire the best properties, meeting the necessary time frames, and many other options to protect your investment interest.

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