By Matthew McFarland, Associate, Kay Properties & Investments
If you’re a serious investor, you need to know about the IRS Code Section 1031—this section of the IRS code is commonly referred to as “the 1031 Exchange.” The 1031 Exchange allows investors to defer taxes through the exchange of investment property for investment property, or “like for like.” Recently enacted tax legislation stipulates that the 1031 Exchange can only be utilized if a property is purchased or exchanged for real estate used for business or investment purposes.
The History of the Delaware Statutory Trust
After the Tax Cuts and Jobs Act was enacted in late December 2017, 1031 Exchanges were dramatically impacted. Prior to this, the exchange of personal property was allowed under Section 1031. The new legislation is now restricted to real property exchanges.
The 1031 Exchange stipulates that you must exchange like-kind real estate and purchase equal or greater value with all of the net equity proceeds from a sale to completely defer taxes. There can be many challenges when using the 1031 Exchange including, but not limited to, difficulty in locating available like-kind property, exposure to different asset classes, and finding something in one’s price range. One must be able to identify the new property or properties within 45 days and close on the property within 180 days to defer taxes. This is not realistic in all scenarios and that is where a Delaware Statutory Trust can become useful.
The IRS provided clarity for their view of the Delaware Statutory Trust or DST for 1031 Exchanges in 2004 under IRS Revenue Ruling 2004-86. A DST is a legal entity that has already purchased and financed investment property. The trust permits fractional ownership where multiple investors can share ownership of a single property or an entire portfolio of properties. Using a Delaware Statutory Trust in the 1031 Exchange can be a good option for individual investors looking to diversify and mitigate concentration risk. This can be done by diversifying one’s proceeds into different geographical areas, different asset classes, across different DST companies, etc. Utilizing the DST takes the stress out of meeting the stipulations of the 1031 Exchange by creating readily available inventory and quick closing procedures.
To learn more about the Delaware Statutory Trust properties and the 1031 exchange process, please reach out to your Kay Properties registered representative.
About Kay Properties and www.kpi1031.com
Kay Properties is a national Delaware Statutory Trust (DST) investment firm. The www.kpi1031.com 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 an active 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 15 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.
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