Delaware Statutory Trusts: A Replacement Property Option for 1031 Exchangors

We all know that finding suitable replacement property for a 1031 Exchange can be challenging. Also, some 1031 Exchangors are looking for a way out of managing properties daily. For individuals who fall into these categories, a Delaware Statutory Trust (DST) may be the answer.

A DST is a structure allowed per Revenue Procedure 2004-86 and is designed to allow investors to acquire a fractional interest in commercial real estate. The DST may own one or multiple properties and can be anyplace throughout the United States. This structure allows individual investors access to ownership of commercial real estate, which they may not normally have had access to due to the expense.

These assets are professionally managed by various sponsor companies. It allows the investor to be a passive partner in the asset while the sponsor company performs all management responsibilities. It can provide a steady cash flow to the investor based off of the type of investment.

However, there are some challenges in this structure. They are normally long-term investments, normally held 5-7 years, and there is not an exit strategy for a single investor to sell their percentage ownership. You need to plan on being a part of this investment for a while.

A DST is not just advantageous when the Exchangor is looking for replacement property that is easier to manage. There are a number of situations when DSTs can be beneficial:

• DSTs can be a great solution when you cannot find desirable replacement property and your 45-Day Identification deadline is quickly approaching.
• There are usually multiple DST offerings available and they can be identified the same day.
• Most DSTs close very quickly so you can wrap up your exchange swiftly.
• DSTs provide a great backup when you are only identifying one replacement property and you want to give yourself a fallback in case your deal falls through. Once the 45-Day Identification Period ends, you cannot change your identification.
• If your desired replacement property is less expensive than your relinquished property and you need to buy additional property to maximize the benefits of the 1031 exchange, you can identify a DST to make up the difference.

The benefits of a DST might just be enough for you to consider selling that investment property and moving into a new type of investment.

For more information, please reach out to your tax professional for specific questions or contact the specialists here at Security 1^st Exchange for assistance.