How Real Estate Investors Can Use Delaware Statutory Trust (DST) Properties to Replace Debt in a 1031 Exchange

By Alex Madden, Vice President, Kay Properties and Investments, LLC

Savvy real estate investors understand the primary reason for selling and buying real estate via 1031 exchange is to defer capital gains tax that would otherwise be due on the sale. By “exchanging” one or more pieces of property for one or more like-kind pieces of equal or great value helps the investor defer capital gains taxes.

However, one of the critical requirements that must take place to make any 1031 exchange work in the eyes of the Internal Revenue Service (IRS) and the individual real estate investor is to ensure that some form of debt replacement occurs in the event the relinquished property has been leveraged. Debt replacement practice basically states that when an investor acquires a replacement piece of property in a 1031 exchange, they must incur a level of debt that is equal to or greater than the amount owed on the former piece of real estate at the time of sale.

A Simple Example of How a Delaware Statutory Trust 1031 Exchange Can Help in Debt Replacement

To illustrate the concept of how a Delaware Statutory Trust 1031 exchange can greatly help solve the debt replacement equation, imagine an investor exchanging a piece of real estate with a net value (sale price minus closing costs) of $2 million. The investor has a mortgage on the property of $750,000. That $750,000 will be paid off at closing and must be replaced as part of the acquisition. In order to complete the exchange, the acquired property must be worth $2 million or more.

The investor has several options and may replace that $750,000 mortgage debt or be hit with capital gains taxes:

  • Take out another mortgage of $750,000 (or more if the new property costs more than the net sales price.)
  • Combine a smaller mortgage of, say, $500,000 plus adding additional cash of at least $250,000 (to equal the original debt figure.)
  • Inject $750,000 which in cash which would basically replace the original debt with cash.
  • Invest in a Delaware Statutory Trust 1031 exchange that already has built-in debt.

How to Replace Debt using Delaware Statutory Trust 1031 Exchanges 

DST 1031 exchanges already have debt prepackaged into the investment, so they make the debt replacement component of a 1031 exchange relatively simple to accomplish. In addition, investors also have greater flexibility because they can put their investment dollars into multiple DSTs with a variety of debt and equity combinations which helps investors achieve their required debt replacement targets.

Compare this scenario to an investor who conducts a 1031 exchange with a single property, like an apartment building. Not only would they have to find a replacement investment property within the desired price range, they most likely would also have to bring in their own money to the deal while working against the mandated 180-day timeframe allowed to complete the exchange. Delaware Statutory Trust 1031 exchanges allow investors a much greater choice of replacement property options with much less effort.

One of the things many investors like about Kay Properties & Investments is the firm’s ability to provide investors seeking debt replacement a myriad of choices. Because of the firm’s ability to work with so many different sponsor companies, it provides clients the ability to participate in custom, exclusively available, off-market DST properties as well as those properties that are available to the wider marketplace.

This also means that Kay Properties & Investments marketplace features investment opportunities with leverage that span a wide range of debt levels that can accommodate just about every investor’s particular needs. Also, for investors that don’t have any debt to replace since they owned their previous property free and clear of with no loans, Kay Properties DST marketplace also has debt free DST properties which have no mortgages. So, it is easy for investors to find options that fit their investment objectives and that can match their equity and debt targets.

Investors who would like more in-depth details on options relating to how to use DSTs to replace debt in a 1031 exchange can contact Kay Properties & Investments at (855) 899-4597 to discuss your options. 

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 115 years of real estate experience, are licensed in all 50 states, and have participated in over 21 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 Growth Capital Services, member FINRASIPC, Office of Supervisory Jurisdiction located at 2093 Philadelphia Pike Suite 4196 Claymont, DE 19703.

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