Opting for a 1031 exchange into Delaware Statutory Trusts (DSTs) can be a strategic move for investors aiming to defer significant taxes, including the 3.8% Obamacare Medicare surcharge introduced in 2013. In investment real estate sales, where total tax liabilities can soar between 40% and 55%, the 1031 exchange emerges as a compelling option to delay capital gains taxes. One of the foremost challenges in 1031 transactions revolves around the exact value of the replacement property. Consider this scenario: an investor divests a relinquished property for $1,000,000 only to discover a replacement property priced at $825,000—the discrepancy between the two amounts results in a taxable sum of the remaining $175,000. However, by directing a $175,000 investment towards a DST, the investor could defer the entirety of the capital gains taxes, optimizing their tax position and preserving more of their gains.
Addressing Inventory Shortage: Embracing DSTs to Counter Market Challenges
With a limited pool of listings in today’s real estate scenario, the quest for appropriate 1031 exchange replacement properties presents difficulties. Enter DSTs – prearranged options that shine with their ability to finalize transactions in as little as three business days, offering a timely solution.
Real Estate of Institutional Quality
DST investors can access high-quality apartment complexes with 300 units, long-term leases with tenants of high credit scores, and other quality real estate normally unavailable to individual investors. The price of institutional quality properties can exceed $40,000,000 – however, DST investors can access these properties for as little as $100,000.
Identifying replacement properties using DSTs is possible.
Many investors identify replacement properties using the “3 Property Rule”, meaning the investor can identify three replacement properties, regardless of By the 45th day, the purchase price will be paid. Relying on a single replacement property is only sometimes prudent, considering potential stumbling blocks like inspections, due diligence, or financing hurdles that could hinder its successful closure. As a precautionary step, savvy investors might identify a couple of DSTs as backup options, mitigating risks and ensuring a smoother exchange process.
Seamlessly Passive Real Estate Ownership – Say Goodbye to Property Management Worries
Numerous investors have reached their limit with the troublesome aspects of property ownership: Tenants, Toilets, Trash, Termites, and Teenagers. DSTs offer a solution with their integrated professional property management, enabling you to trade the Troublesome T’s for the Thrilling T’s: Travel, Time Off, Tennis, and Teeing Off
Swift Closing Capability
DSTs have the potential for rapid escrow closure, frequently within three business days, facilitating an expedited start to projected cash flow.
Streamlined Non-Recourse Financing via DSTs
In 1031 exchanges, replacing debt with the relinquished property can be tricky. DSTs offer a solution: prearranged obligation. This aids property sellers in avoiding debt boot while sidestepping personal loan guarantees. Especially valuable when facing approval challenges, DSTs secure the needed financing without requiring investor qualifications. With non-recourse debt and potential access to institutional rates, DSTs simplify the financing landscape.
Diversify Your Real Estate Portfolio
Spanning Multifamily, Industrial, Senior Housing, Self-Storage, Leased Retail, and Office spaces across various cities nationwide, DSTs bring substantial portfolio diversification to real estate investors, all within the 45-day identification window.
Unlock Dormant Equity, Boost Cash Flow
Idle equity holds untapped potential for increased cash flow. Consider a property bought for $200,000 in the 1970s, now valued at $1,500,000. While single-family rentals and small apartment complexes yield 2-2.5% net cash-on-cash, DSTs offer around 5% projected equity cash flow, possibly improving income. Note launched cash flow isn’t guaranteed
Revive Depreciation Benefits, Boost After-Tax Returns
Properties owned for 25+ years might lack depreciation benefits, impacting cash flow. Leveraged DSTs can reignite depreciation benefits and elevate after-tax cash returns. For instance, a property with a $30,000 annual net income and no depreciation left could face total tax on net income. Reinvesting in a 50% loan-to-value DST might shield around 50% of revenue, potentially lowering taxable income to $15,000. Consult a tax advisor for confirmation
Estate Planning Advantage with DSTs
DSTs enable continuous property exchanges until the investor’s passing, offering potential heirs a ‘step up’ basis and avoiding original and subsequent property capital gains taxes. DST investments mitigate post-owner property disputes, ensuring heirs receive distributions and maintain flexibility upon DST property sale. One heir can exchange, and another can sell, streamlining the estate transition.
Real estate property owners can exchange into DSTs with as little as $100,000 of equity.
Resolving One-Person Real Estate Experience Dilemma:
In many households, real estate expertise leans toward one spouse, raising concerns about post-passing management for the other. DST’s completely passive ownership can address this issue, alleviating burdens on the surviving spouse. Additionally, suppose one spouse longs for extended travel or leisure without tenant-related interruptions. In that case, DSTs provide a hassle-free solution, ensuring both can enjoy cash flow and freedom from management worries.
Considerations with DST Ownership
- Tax laws are susceptible to change, impacting DST investments negatively.
- These investments are only suitable for some investors’s profiles.
- DSTs are tied to real estate, thus vulnerable to market fluctuations, rental income shifts, tenant concerns, vacancies, taxes, and regulations.
- Investment expenses and fees are tied to DSTs, balancing against tax advantages.
- Management control rests with sponsors, not DST owners.
- IRS regulations and potential conflicts of interest impact DST ownership; understanding is crucial before investment.
- DSTs are speculative, bearing significant risks with no assured public market or easy transferability, lacking guaranteed liquidity.