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.