DANGER #1.
OVERPAYING FOR A REPLACEMENT PROPERTY
First, many 1031 exchange investors, in their panicked state, can overpay for an asset. The reason is because desperate buyers often throw logic out the window. They bid over the asking price, waive contingencies, and stretch their budgets beyond what the numbers justify all to avoid giving Uncle Sam a massive tax check.
DANGER #2.
LITTLE ATTENTION TO DUE DILIGENCE
Another scenario we have seen involves investors who ignore important due diligence protections. In a normal transaction, you’d take your time with inspections, appraisals, environmental reports, and title searches. In a rushed 1031 exchange, those steps often get compressed into a matter of days. That means overlooked structural issues, undisclosed environmental contamination, zoning surprises, or tenant problems surface after closing. By then, it’s too late. The property is yours, and so are the headaches. The bottom line is that buying a bad property under the duress of a closing 1031 exchange deadline can cost you far more than an unwanted tax bill. ENTER THE DELAWARE STATUTORY TRUST
So, if scrambling for a replacement property at the eleventh hour isn't the answer, what is? Enter the Delaware Statutory Trust (DST). What makes DSTs an attractive alternative to direct ownership is the passive nature of DSTs. As an investor, you don't manage the property, chase tenants, or fix leaky roofs. A professional sponsor handles all of that. Instead, investors receive 100 percent of their pro-rata portion of the potential rental income generated by the property’s tenants. In addition, investors also receive 100 percent of their pro-rata portion of any potential net appreciation of the property over the hold period.
However, it is important to note that cash flow from real estate and DST 1031 properties is not guaranteed. As with all real estate, performance is a function of a variety of factors, including the overall economy, individual tenant performance, and maintenance expenses. Just as with all real estate, projected cash flows could be lower than anticipated. Therefore, it is very important for you as an investor to believe in the property, its location, and its tenants before investing, as well as carefully reviewing the risk factors of the offering materials in their entirety.
HOW DSTS SOLVE THE REPLACEMENT PROPERTY CRUNCH
Now let's get to the real details of how Delaware Statutory Trusts help 1031 exchange investors when they’re running out of time.
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