By Dwight Kay and the Kay Properties Team
A 1031 exchange is considered by many to be the most effective tax deferral tool available. Under IRS code section 1031, investment real estate owners are able to defer the capital gain tax on the sale of appreciated investment property if they reinvest in “like-kind” property. Real estate held for business or investment purposes can qualify as “like-kind” property. This includes single-family rentals, apartment complexes, office buildings, storage facilities, industrial buildings and many other types of commercial properties.
Although you may be familiar with a 1031, we’ve found that a surprising amount of professionals we’ve worked with, including real estate investors, CPAs, real estate brokers and even real estate attorneys, do not know about the use of a Delaware Statutory Trust (DST) to complete a 1031 exchange without the hassle of taking on the management responsibilities that come with typical 1031 exchanges into traditional real estate.
A DST 1031 investment offers many potential benefits for someone who is looking to sell their appreciated real estate. Not only does it allow the seller to defer the Capital Gains Tax if they use it to complete their 1031 exchange, a DST can also offer the following potential benefits:
- No more management responsibilities – tenants, toilets, trash, etc… all gone! – a DST is professionally managed
- Diversification into multiple properties in more than one market, which can potentially lower risk and concentration exposure if you invest in DSTs with multiple properties that are located in different geographic markets (think, “what if my main asset is destroyed in an earthquake, or the local government imposes sweeping rent control destroying millions in built up apartment owners equity?”)
- Access to high quality real estate – DST 1031 investments are often comprised of 10-50 million dollar multifamily apartment buildings in dynamic and growing markets throughout the country. 1031 DST investments can also hold long term net leased properties to tenants such as Walgreens and FedEx
- Low minimum investment amounts – oftentimes the minimum investment for a 1031 DST exchange property is only 100k
- Predictability and flexibility when closing – DSTs often close in 3-5 business days
- Non-recourse financing is often locked and in place for those who need to replace the value of a mortgage they paid off on their relinquished property via a 1031 exchange
- All-Cash/Debt-Free DSTs – certain DSTs have no loans and are owned free and clear completely eliminating the risk of a lender foreclosure. These debt-free DSTs can potentially be an appropriate option for investors who have already paid off their properties, owning them free and clear. When making a 1031 Exchange, these investors have no need for purchasing a DST with debt. Staying All-Cash/Debt-Free lowers the risk potential and profile for these investors.
At Kay Properties and Investments, LLC we specialize in 1031 DST investments and work with clients all over the country to help them understand if a 1031 exchange into DST investments makes sense for them.