DST Strategy for 1031 Exchange
For those of you who really want to dig in. But it's easier to call us!
Is it time to restructure and simplify your real estate portfolio?
Are you looking for ways to potentially benefit from the equity you've built up in real estate investments without losing your gains to taxes? Would you like to reduce the burden of daily property management for you and your family? Do you want to exchange a high maintenance property for a passive interest in a higher quality property? Sell your non-income or low income producing property for a steady, tax-advantaged income stream?
The Power to Protect, Grow and Diversify. Thanks to the Internal Revenue Code (IRC) 1031, a properly structured exchange allows an investor to sell an investment property, acquire a new property, and defer all capital gain and recapture taxes. This lets you reinvest sale proceeds that would otherwise be paid to the government as capital gains taxes, allowing you to generate even higher income.
Reasons to Consider a 1031 Exchange
- Defer tax on capital gains and depreciation recapture
- Relieve the burden of active real estate ownership and property management
- Improve tax-advantaged cash flow and appreciation potential
- Gain the ability to exchange into higher quality properties
- Achieve greater diversification
- Simplify estate planning for your heirs
1031 Exchange Overview
Whenever you sell investment real estate, or a business that owns real estate, and you have a gain, you generally have to pay tax on the gain and depreciation taken. IRC Section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in other investment real estate. There are, of course, specific requirements that you must follow so that your sales transaction will qualify. All proceeds from the sale must go through the hands of a “Qualified Intermediary” (QI) and not through your hands or the hands of one of your agents. Otherwise, the entire cash proceeds from the sale will be subject to capital gains tax.
The sale and the purchase transactions must be structured properly in order to qualify for tax-deferred treatment under a 1031 Exchange. The QI, often referred to as the 1031 Exchange Accommodator or the 1031 Exchange Facilitator, will complete the necessary legal documents to ensure that you are in compliance with all requirements.
Delaware Statutory Trusts (DST) - An Advanced Real Estate Strategy
The DST strategy is a popular option for 1031 exchanges. It is a co-ownership, passive investment in various types of propeties like multi-family housing, medical buildings, office buildings, senior living, storage, triple net (NNN) leased properties, etc. These may be offered with one property or a diversified portfolio of income producing properties. Minimum investments are as low as $100,000, allowing you to invest in more than one.
Investors receive all the benefits of property ownership, without the hassles and headaches of property management. Investors participate in the net income and any appreciation generated by the property as well as tax benefits from depreciation. Highlights include:
- Institutional quality real estate
- Management-free income property ownership
- High credit quality tenants
- Low minimum investment amounts allowing for diversification
- Non-recourse financing built in
- No lender approval or prequalification
- Professional management
Growing Equity Without Capital Gains
The overriding advantage of a 1031 Exchange lies in the ability to move equity from property to property without having to pay the capital gains taxes.
With the successful use of tax-deferred 1031 Exchanges, a savings of 20% to 40% of capital gains tax and depreciation recapture on the sale of investment property can now be retained to acquire more property. That, in turn allows you to earn more income.
The possibility to trade up to larger and higher quality properties offers opportunities to own better quality institutional real estate. Exchange after exchange can be done creating a positive compounding effect by reinvesting the additional deferred taxes on each subsequent exchange. The deferred tax liability can ultimately be forgiven upon death of the investor, giving heirs a stepped-up tax basis on inherited property.
Alongside your CPA and attorney, we'll provide advice on choosing suitable replacement properties that meet your specific goals and needs. We work with Accredited Investors across the country who seek the benefits of a successful 1031 exchange using the DST strategy.
You don't need to wait until a property is under contract to get the process started. Contact us to learn more.
And check out our DST Podcasts!