Section 1031 of the Internal Revenue Code allows an investor to defer the payment of capital gains taxes that may arise from the sale of a business or investment property.By using the proceeds of the sale of such a property to purchase “like-kind” real estate, taxes may be deferred, as long as the investor satisfies certain conditions.A 1031 exchange is an IRS-recognized tax deferral strategy that allows an investor to sell an investment property and acquire a similar property with the intent to defer capital gains and depreciation recapture taxes.
The transaction is named for Internal Revenue Code §1031, which states:
“No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment, if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment.”
1031 exchanges can be structured through Delaware Statutory Trusts (DSTs), investment vehicles that are used to hold commercial real estate assets. DSTs can offer accredited investors an effective real estate investment solution with a number of potential benefits.
DELAWARE STATUTORY TRUSTS
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What is a Delaware Statutory Trust (DST)?
A Delaware Statutory Trust (DST) is a legal entity created under Delaware law as a trust that holds title to 100% of the interest in real property.
Investors acquire a beneficial interest in the trust, with limited personal liability for the underlying assets. DSTs differ from Tenancy in Commons (TICs), another 1031 Exchange fractional ownership strategy, in that each investor does not own a fractional, undivided interest in a property as a co-owner. Therefore, DST investors are not required to share the associated costs of ownership, or be considered “tenants in common.”
Sometimes, finding a like kind replacement property within the allowable time frame
can be a challenge. As an alternative, investors can place their sale
proceeds into a Delaware Statutory Trust investment.A Delaware
Statutory Trust is a special type of trust that is formed under Delaware
law for the purpose of conducting business. An IRS revenue ruling
qualifies them as a suitable replacement property in a 1031 Exchange.For
investors, the benefits of using a DST as a replacement property in a
1031 Exchange include passive income, diversification, and the ability
to defer capital gains taxes. Potential downsides include liquidity
and fees.
To determine
if a DST investment is the right fit as a replacement property in a
like kind exchange, investors should work with their CPA and/or tax
professional.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.
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