Current tax laws have made a certain investment vehicle more appealing to real estate investors. Delaware Statutory Trusts, known as DSTs, provide a way to defer gains from real estate sales for income tax purposes through a 1031 Like-Kind Exchange. DSTs allow real estate owners to passively invest with several other investors in large properties, such as apartment buildings, shopping centers and other sizable commercial properties. Before deciding to invest 1031 proceeds in a DST, it’s important to understand some key benefits they provide.
What Can a DST Do for Investors?
1) Avoid Taxable Gains When Buying and Selling
Finding a property within an exact dollar amount is a challenge for investors when performing a 1031 Exchange. Since all remaining profit on the sale of a relinquished property is taxable, this poses a problem when selling a property and buying another with different price tags. A DST can solve this issue by investing the excess profit in a DST to completely avoid taxable income.
2) Use a DST Property as a Backup for a 1031 Exchange
To successfully complete a 1031 Exchange, new properties must be identified within 45 days. This can be a tough timeline due to financing, inspections and other problems that cause properties to fall out of escrow. If an investor can’t acquire the target property within the timeline, investing in a DST can act as an insurance policy to meet 1031 deadlines and defer the capital gains tax.
3) Diversify Easily
DSTs provide the opportunity to invest in multimillion-dollar properties that otherwise would be outside an investor’s price range. Investors can invest in multiple DSTs across different states to increase diversification and protect against natural disasters and other risks damaging their entire portfolio.
4) Use as an Estate Planning Tool Allowing Multiple “Swaps”
Investing in a DST can be a valuable estate planning tool and eliminate confusion if the investor passes away. In this situation, the heirs would continue to receive distributions from the DST investment, if any, and each of the heirs choose what to do with their inherited portion upon the sale of the property owned by the DST. Properties can also be exchanged over and over again until the investor passes away and their heirs receive a step up in basis.
Though Delaware Statutory Trusts are not new, current tax laws have made them a potential solution for passive IRC §1031 exchange investors and direct (non- IRC §1031) investors alike. If you are considering investing in a DST, contact an Anders advisor to assist you with identifying the advantages and disadvantages. Learn more about the Anders Real Estate Group.
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