Consider These Potential DST 1031 Exit Strategy Options: Cash Out, 1031 Exchange or 721 Exchange

One of the most important questions all real estate investors should ask themselves is, “What is my long-term strategy?” In the case of Delaware Statutory Trust (DST) investors, exit strategies come into play once the investment period has concluded, or gone “Full Cycle”. Full Cycle is a term used to describe DST property that has been sold on behalf of investors after a period of time. A good example of a Kay Properties DST investment that went full-cycle is the Alexander Pointe Multifamily DST in Orange Park, FL.

When a DST 1031 investment goes full-cycle, investors need to evaluate the entire spectrum of options available to them, including:

  • Taking cash and triggering a tax event
  • Complete a 1031 Exchange into another Delaware Statutory Trust offering or other eligible like-kind property
  • 721 Exchange (If it is an option)
Consider These Potential DST 1031 Exit Strategy Options: Cash Out, 1031 Exchange or 721 Exchange

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Providing Investors Options for Their DST 1031 Exit Strategies

Kay Properties has helped thousands of clients invest in more than $30-billion of DST investments since its founding, so it understands how important exit strategies are for investors. As a result, Kay Properties makes it a point to explain exit strategies up front and in detail to allow each client to fully understand the business plan for each DST investment.

Kay Properties encourages investors to understand the full business plan and risk factors for each DST investment so investors can decide for themselves what offerings and corresponding exit strategies are appropriate based on their own individual circumstances. Kay Properties also encourages all investors to consult their tax attorney and certified public accountant prior to making any investment decisions.

For a listing of 1031 Exchange like-kind properties, go here.

The Three Most Common Exit Strategies for Investors

That being said, let’s look at some common exit strategies for DSTs. Each of the below options have potential advantages and disadvantages for investors, so each investor is encouraged to speak with a Kay Properties team member for details regarding which strategy may be the right fit for them.

Option One: Cashing Out

Because of tax consequences, this is usually the least appealing option for 1031 exchange investors. However, there are times when investors opt to not do a 1031 exchange and simply cash out, deciding to pay the associated tax liabilities that can quickly add up; Federal Capital Gains (15-20%), State Capital Gains (0-11.3% depending on the state he/she lives in), Depreciation Recapture Tax (25%) and the Medicare Surtax (3.8%) will all be due upon sale. This final tax bill for many investors may be very large, convincing many investors to seriously consider potential tax-deferral via another 1031 exchange into DST investments.

Option Two: 1031 Exchange.

A 1031 exchange (also known as a like-kind exchange) is the most popular and therefore most familiar exit strategy for investors following a DST investment full-cycle event. Because section 1031 defers taxes that would otherwise be recognized in a sale without a 1031 exchange, many real estate investors continue to exchange, and continue the deferral by exchanging their DST investments over and over. In this way, investors enter a series of exchanges, sometimes completed over decades. This is commonly known as a “swap ‘till you drop” strategy. This is considered by many to be an effective strategy for building real estate wealth over time and creating an estate planning tool.

Option Three: 721 Exchange Option

Another potential tax-deferral tool that is lesser known by even experienced investors is called a 721 exchange. The IRC Section 721 offers investors the potential for tax-deferred exchange when a Real Estate Investment Trust (REIT) acquires their property.Here’s how it works for owners of DSTs: After an investor invests in a Delaware Statutory Trust property, and the property goes full cycle, investors may have the ability to utilize a 721 exchange if a REIT purchases the DST real estate. In some cases, this could be mandatory and in other cases it could be an option. Instead of owning shares of the REIT in the exchange (which would be taxable), investors receive Operating Partnership (OP) units. This is all done on a tax-deferred basis through the 721 exchange.

The main caveat to the Section 721 exchange is that once an investor proceeds with the exchange, he loses the ability to continue 1031 exchanging and deferring taxes. He now only has the option to convert his Operating Partnership units to REIT shares and pay his taxes—if investors have the option for liquidity from that REIT.

Which of these 1031 exchange alternatives is best? Every case is specific, so it’s best to consult a Kay Properties licensed team member who can recommend the appropriate 1031 exchange options based on the investor’s unique situation, goals, risk tolerances and objectives. Contact us at 1-(855) 899-4597 or for expert guidance.

About Kay Properties and

Kay Properties is a national Delaware Statutory Trust (DST) investment firm. The platform provides access to the marketplace of DSTs from over 25 different sponsor companies, custom DSTs only available to Kay clients, independent advice on DST sponsor companies, full due diligence and vetting on each DST (typically 20-40 DSTs) and a DST secondary market.  Kay Properties team members collectively have over 150 years of real estate experience, are licensed in all 50 states, and have participated in over $30 Billion of DST 1031 investments.

This material does not constitute an offer to sell nor a solicitation of an offer to buy any security. Such offers can be made only by the confidential Private Placement Memorandum (the “Memorandum”). Please read the entire Memorandum paying special attention to the risk section prior investing.  IRC Section 1031, IRC Section 1033 and IRC Section 721 are complex tax codes therefore you should consult your tax or legal professional for details regarding your situation.  There are material risks associated with investing in real estate securities including illiquidity, vacancies, general market conditions and competition, lack of operating history, interest rate risks, general risks of owning/operating commercial and multifamily properties, financing risks, potential adverse tax consequences, general economic risks, development risks and long hold periods. There is a risk of loss of the entire investment principal. Past performance is not a guarantee of future results. Potential cash flow, potential returns and potential appreciation are not guaranteed.

Nothing contained on this website constitutes tax, legal, insurance or investment advice, nor does it constitute a solicitation or an offer to buy or sell any security or other financial instrument. Securities offered through FNEX Capital, member FINRASIPC.

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