As you probably already know, real estate investors can use the effective tax-deferral strategy known as a 1031 exchange by reinvesting the proceeds from selling one property into another “like-kind” property (replacement property).
If you are doing a 1031 exchange to help defer your taxes, you may have a few paths when it comes to the actual replacement properties. You could always exchange into a physical property and continue to be an active landlord – multi, office, retail, triple-net lease (NNN), for example. However, you should also familiarize yourself with a passive approach. There are various passive strategies such as NNN, Tenant-in-Common (TICs) and Delaware Statutory Trusts (DSTs). To ensure a strategy fits your financial goals and plans, you must conduct research and work with a team of skilled professionals to ensure suitability and in some cases accreditation.
Many investors use a DST to execute their exchange, and the 1031 exchange process can be difficult and time-consuming. Today’s discussion will focus on educating you on how a DST can be used in a 1031 exchange to help defer your property taxes, as well as the potential pros and cons.
What exactly is a DST (Delaware Statutory Trust)?
A DST is an ownership structure under Delaware law that lets multiple investors pool their money and invest in a single property or portfolio. It allows investors to own fractional interests in the trust which owns commercial real estate holdings. DSTs are often used in 1031 exchanges to give investors a passive, turnkey option for reinvesting the money from selling a property. The DST structure has become more prevalent recently, especially among investors who want to do a 1031 exchange, because employing a DST for your 1031 exchange has several potential benefits:
Portfolio Diversification in Real Estate
Investors can diversify their real estate assets by employing a DST to carry out a 1031 exchange,…