A recent report by CNBC revealed that between 2016 and 2019, more than 10 percent of all real estate transactions involved a 1031 exchange. However, because of the specific timelines associated with 1031 exchanges, investors often encounter significant problems completing them.
CHALLENGES ASSOCIATED WITH 1031 EXCHANGE TIMELINES
Finding suitable replacement property within the mandated timeframe; Finding the resources to perform the necessary due diligence on the property; Securing bank financing to replace the amount of debt on the original property;
Identifying appropriate properties within the timeframe; Successfully closing on the purchase within the timeframe;
Many of the like-kind exchanges would most likely be sole-ownership properties that would require the owner to be a hands-on owner, eliminating the opportunity for passive ownership.
HOW DOES A DST FIT INTO A 1031 AND ESTATE PLANNING? Helping solve the above 1031 challenges is where the Delaware Statutory Trust comes into play.
this way, each investor owns a “beneficial interest” in the trust which, in turn, owns the underlying property assets. This DST interest entitles the investor to his or her pro-rata share of potential income and appreciation in the DST while avoiding any active management responsibilities. Key takeaways here are that DST ownership not only qualifies as “like-kind” real estate for a 1031 exchange, it also offers the same benefit of a potential step-up in basis while providing some additional generational benefits that other ownership structures don’t. Chief among those advantages is the ability for investors to sell their investment real estate and utilize a 1031 exchange into DSTs to potentially defer taxes, greater flexibility for estate planning, and no active management responsibilities for heirs to assume.
A Delaware Statutory Trust (DST) is an entity that is used to hold title to investment real estate and qualifies as a “like-kind” exchange replacement property for 1031 exchanges according to Revenue Ruling 2004-86. DSTs can be structured as single-property vehicles or have multiple properties in one DST. DSTs are also different types of real estate, like apartments, commercial, industrial/distribution and healthcare/medical. Many DSTs are set up with real estate leased to large national or global companies as well. Much like a REIT (Real Estate Investment Trust), individuals who 1031 exchange into a DST may have partial ownership of multiple properties at one time. In
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