By: Steve Haskell, Vice President, Kay Properties & Investments, LLC
Most real estate investors have heard of the 1031 exchange. Property owners utilize this tax advantage to defer taxes from the sale of their investment property as long as they replace it with a property of equal or greater value. However, many have still not heard of a DST 1031 Exchange. A DST 1031 Exchange allows investors to exchange their investment property for one or more pieces of large, high quality real estate. Here are a few reasons these investors may consider a DST 1031 Exchange.
Potentially mitigate risk through diversification. The DST 1031 Exchange is a solution for accredited investors desiring to insulate themselves from market volatility by exchanging a single property for a diversified portfolio of passive real estate. DSTs allow investors to manage concentration risk by purchasing pieces of quality real estate all over the US. For example, a 1031 Exchange investor may diversify by selling a single property and then purchasing a piece of a Walgreens in Dallas, a piece of a 200 unit apartment building in Raleigh, and a piece of a $50 million medical building in Phoenix. Advisors always preach diversification when it comes to your stock portfolio, why should real estate be any different?
A DST 1031 Exchange is a completely passive/turnkey exchange option. DST properties tend to be stabilized, generating potential monthly investor distributions, and management is already in place. Potential distributions are typically delivered once a month to investors bank accounts. Tax packets are provided to investors at the end of the year through a 1099 supplemental and goes on the schedule E of the investors tax return. Just like any other real estate, there is no guarantee of appreciation or distributions. However, 1031 Exchange investors choose DSTs so they can spend less time dealing with tenants, toilets, and trash, and spend more time on the golf course, traveling the world, and with their family.
A DST 1031 Exchange typically has no closing risk. Many traditional exchangers find themselves in a precarious and stressful situation as they frantically search for a replacement property within 45 days of the day they closed on their relinquished (sold) property. Problems will often show up in due diligence after it’s too late! Most DST providers allow exchangers to reserve a position in the DST before they close on the property they wish to sell. This way, the investor can typically be certain the replacement property is ready and available when the exchanger is ready to buy. This way, investors have time to review the building inspections, cash flow analysis, environmental reports, appraisals, and more…all provided with the DST Private Placement Memorandum for investors to read.
DST 1031 Exchanges are often able to close in 3 to 5 business days. Potential distributions begin to accrue upon closing and typically land in the exchangers bank account between the 15th and the 20th the following month. Traditional exchangers may take months to complete due diligence and close escrow on the replacement property. For many exchangers, this could add up to hundreds of thousands of dollars in lost opportunity cost.
1031 Exchanges can be a fantastic strategy for real estate investors to preserve and build wealth. For many, a DST 1031 Exchange is a potential solution to their goals and objectives.