1031 Exchanges & Delaware Statutory Trusts
A More Passive Approach to 1031 Replacement Property
A 1031 exchange can allow real estate investors to defer capital gains taxes by reinvesting proceeds from the sale of qualifying investment property into qualifying replacement real estate.
At Lucey Wealth Advisors, we help investors evaluate Delaware Statutory Trust (DST) investments that may qualify as replacement property within a 1031 exchange—providing another option for investors seeking passive real estate ownership or struggling to identify a suitable replacement property.
Understanding the 1031 Exchange
Section 1031 of the Internal Revenue Code allows investors to potentially defer recognition of capital gains when qualifying investment or business real estate is exchanged for other qualifying like-kind real estate.
A properly structured exchange involves several requirements, but two deadlines are particularly important:
45 DAYS -Identify Replacement Property
Generally, investors have 45 calendar days following the sale of their relinquished property to formally identify potential replacement property.
180 DAYS -Complete the Exchange
Generally, investors must acquire their replacement property within 180 days of the sale, or by the applicable tax-return deadline, including extensions, if earlier.
The Problem
Finding the Right Replacement Property Isn't Always Easy
The 45-day identification period can move quickly.
Some investors struggle to find properties that meet their investment objectives. Others may identify a property only to have financing, inspections, negotiations, or the transaction itself fall through.
And some investors simply reach a point where they no longer want the responsibilities that come with owning and managing another property.
That's where a Delaware Statutory Trust may be worth considering.
What Is a Delaware Statutory Trust?
A Delaware Statutory Trust (DST) is a legal structure that allows multiple investors to own beneficial interests in professionally managed real estate.
For qualifying investors, certain DST interests can be used as replacement property in a 1031 exchange.
Instead of purchasing and managing an entire replacement property yourself, a DST can provide fractional ownership in larger commercial real estate that is acquired and professionally managed on behalf of its investors.
DST properties may include:
Multifamily Communities • Industrial Properties • Healthcare Real Estate • Retail Properties • Self-Storage • Other Commercial Real Estate
How Can a DST Fit Into a 1031 Exchange?
Think of the DST as one potential destination for your 1031 exchange proceeds.
Traditional Replacement Property
- Sell Investment Property
- Qualified Intermediary Holds Exchange Funds
- Identify Another Property
- Purchase and Manage the Replacement Property
DST Replacement Property
- Sell Investment Property
- Qualified Intermediary Holds Exchange Funds
- Identify a Qualifying DST
- Acquire a Beneficial Interest in Professionally Managed Real Estate
A DST does not replace the 1031 exchange itself. Rather, an eligible DST investment may serve as the replacement real estate within the exchange.
Potential Benefits of DST Ownership
Why Do Real Estate Investors Consider DSTs?
Passive Ownership
Gain exposure to investment real estate without personally handling tenants, repairs, leasing, or day-to-day property management.
Professional Management
The underlying properties are professionally managed, allowing investors to take a more passive approach to real estate ownership.
Potential Income
Income-producing properties may provide periodic distributions to investors. Distributions are not guaranteed.
Diversification
Depending on the circumstances, investors may be able to spread exchange proceeds among multiple DSTs, properties, sponsors, or property types.
Institutional-Quality Real Estate
DSTs can provide access to larger commercial properties that may be difficult for an individual investor to purchase independently.
Financing Options
Some DST offerings include existing financing, which may help certain investors address debt-replacement considerations within a 1031 exchange without personally obtaining a new property mortgage.
Important Considerations
Understanding the Risks
DSTs are long-term, illiquid real estate investments and are not appropriate for every investor.
Like any real estate investment, DSTs involve risk, including potential loss of principal, fluctuations in property values, changes in rental income or occupancy, economic and market conditions, sponsor-related risks, financing risks, fees and expenses, and limited liquidity.
Investors generally do not have direct control over the management of the underlying property or the timing of its eventual sale. Distributions, income, appreciation, and investment performance are not guaranteed.
How Lucey Wealth Advisors Can Help
Lucey Wealth Advisors helps eligible real estate investors evaluate Delaware Statutory Trust opportunities and determine how a DST may fit within their 1031 exchange and broader financial strategy.
Our team can help investors understand available DST opportunities, compare properties and sponsors, evaluate financing and investment characteristics, and coordinate with their Qualified Intermediary and other tax or legal professionals throughout the process.
We do not act as a Qualified Intermediary or facilitate the 1031 exchange itself. Our role is to help investors evaluate DST investments that may serve as qualifying replacement property within their exchange.
Want to Learn More?
Have additional questions about Delaware Statutory Trusts or how they may fit within a 1031 exchange
Whether you're planning a future 1031 exchange or already exploring replacement property options, our team is here to help. At Lucey Wealth Advisors, we pride ourselves on providing personalized guidance and taking the time to understand each investor’s unique situation and goals.
Give us a call today at (707) 217-0774 or use the link below to schedule a complimentary consultation with our team. We’d be happy to answer your questions, discuss your situation, and help you explore whether a Delaware Statutory Trust may be a good fit for your 1031 exchange.