Exchanges into Delaware Statutory Trusts (DST) 1031 properties can offer several benefits. While these potential benefits should be carefully weighed against the possible risks associated with DST investments, investors should consult with an accountant or tax attorney before investing in DSTs, as with all real estate investments.
Yet, DSTs continue to gain popularity, especially among ageing baby boomers looking to transition into passive income streams rather than managing their properties. Investing in DSTs has the potential to provide investors with passive income and six other benefits.
- 1031 Exchange for Tax Deferral
In recent years, many investors have wanted to sell their commercial and rental properties but have been unable to find a property to exchange into and cannot afford to pay all the taxes resulting from capital gains taxes, state capital gains taxes, depreciation recapture taxes, and Medicare surtax. DST 1031 property solutions allow investors to move from active to passive real estate ownership on a tax-deferred basis.
- Managing properties without headaches
Most DST investors are approaching or are currently in retirement, so they are tired of the hassles of owning and managing real estate. They want to avoid actively working properties because they are tired of tenants, toilets, and trash. By passively holding the DST 1031 property, they can enjoy retirement, grandchildren, travel, and leisure rather than worry about property management.
- Potential for increased cash flow
Due to under-market rents, vacancies, or vacant land sitting idle, many investors receive lower cash flow on their current properties than they could. A tax-deferred 1031 exchange on DST exchange properties may allow investors to increase their cash flow.
- Portfolio Diversification
1031 investors often sell properties that constitute much of their net worth. As a result of this, they decided to purchase properties in different locations, asset classes (property types), and tenants. It would be a better fit for their goals and objectives than investing in one parcel (such as another apartment building) or one NNN building (such as a Walgreens pharmacy or Taco Bell restaurant).
A similar approach is used by investors when they purchase mutual funds (MFs) rather than investing their entire retirement savings in one company’s stock. There are, however, no guarantees that diversification will produce profits or protect against losses.
- Non-recourse financing that is locked in
There must be “equal or greater debt” on the replacement property than the relinquished property (that you are selling). Obtaining non-recourse financing at an acceptable interest rate and terms is often difficult in today’s lending environment. Non-recourse funding is typically available at some of the best times in the marketplace, thanks to the sponsors of DST 1031 properties having strong lending relationships. These financing terms are directly obtained by DST 1031 investors, who might not otherwise have the opportunity to get them.
- Real estate of institutional quality
DST 1031 properties offer investors access to large, institutional-grade properties that would otherwise be out of reach. It is still possible for investors to invest $100,000 and own an interest in large $20 million-plus apartment communities, $5 million-plus pharmacies, or $15 million grocery stores, for example. As a result, investors can exchange into real estate they couldn’t previously exchange into.
However, we have also seen many clients with extensive 1031 exchanges choose to invest in DST 1031 properties rather than purchase one large investment property to put “all their eggs in one basket”.
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