If you’re like a lot of the people we work with, you’ve probably owned your Property for a long time and have gone through the full range of emotions with it. The Good Times, when everything worked like a charm and the money was effortlessly rolling in. To the more challenging periods of Real Estate Ownership when it looked like all the wheels were falling off and there seemed to be an endless period of sleepless nights.
As an experienced Real Estate Person you know the Tax Benefits available through a Section 1031 Real Estate Exchange (if you need refresher in Section 1031 Real Estate Exchanges take a look at our Blog Article “Just the Facts Ma’am”. And you’re most likely familiar with the “Three Property Rule”.
What you may not be familiar with is the alternatives that are available today for the 1031 investor that is getting ”too tired” to do it all again on his own. What’s available out there for the Real Estate Investor that understands that he needs to complete a 1031 Tax Deferred Exchange, but just doesn’t want the day-to-day hassle of individual property management?
What’s available for a Section 1031 Exchange Investor who wants to be strictly a PASSIVE Investor?
For the Real Estate Investor seeking a Section 1031 Exchange Replacement Property but has reached the point in their life where they no longer want to be actively involved in the day-to-day operations, there is a vehicle called the Delaware Statutory Trust or DST that may just be the answer.
The Delaware Statutory Trust (DST) simply defined is a separate legal entity that owns investment real estate and whereby each owner is treated as having an undivided fractional interest in the property. The use of a DST as a 1031 Replacement Property was provided for under IRS released Revenue Ruling 2004-86.
So what’s that all mean? Essentially a DST is a “packaged real estate product” offered by a real estate sponsor with management and financing already in place. Simply put, a DST 1031 Replacement Property allows for:
- 1031 Tax Deferral of Capital Gains Tax and Depreciation Re-Capture
- Broader Diversification because of Lower Minimum Investment (usually $100,000)
- Institutional Quality Commercial Real Estate
- Completely Passive Investment with Non-Recourse Financing Already in Place
- All-Cash to High Leverage to Meet your Debt Replacement Need
A DST allows the “small investor” to buy into a “piece” of a much larger, institutional quality real estate with full time professional management and financing already in place. For example, DST’s have been offered that invest in single or multiple Triple Net Lease Retail Stores, or “Class A” multi-family apartments.
By taking advantage of the diversification aspect of DST, a 1031 Investor with $587,000 in equity could invest $100,000 into a Drug Store, invest another $150,000 into a mini-Dollar Store Portfolio and invest the final $337,000 piece into a “Class A” Multi-Family project, and so on. A DST allows for broader diversification by type of real estate as well as geographical diversification. And, because of the lower minimum investment, a 1031 DST Investor can diversify by Product Sponsor as well.
If you’re looking at completing a 1031 Tax Deferred Exchange, and you’re just a little weary of going through the hassle of being an Active Property Owner, you owe it to yourself to look into the Advantages and Risks associated with using a DST as your 1031 Tax Deferred Exchange Replacement Property. A DST is offered as a Security, and as such comes with a full Private Placement Memorandum (prospectus) outlining in great detail the terms and risks of the particular offering. We’d be happy to refer you to providers of DST 1031 Replacement Product.