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A 1031 exchange allows an investor to defer certain capital gains taxes by exchanging investment or business real estate for qualifying like-kind replacement property. Specific requirements and deadlines must be followed for the exchange to qualify.
Generally, after the sale of the relinquished property, an investor has 45 calendar days to formally identify potential replacement property. The deadline includes weekends and holidays and generally cannot be extended.
Generally, the replacement property must be acquired within 180 days of the sale of the relinquished property, or by the due date of the applicable tax return (including extensions), whichever comes first.
If suitable traditional replacement property cannot be identified, a Delaware Statutory Trust may be worth considering. Certain DST interests can qualify as replacement property for a 1031 exchange, potentially providing another option before the identification deadline.
In many situations, a DST investment can be completed in as little as 2–3 business days, depending on the investor’s circumstances, the availability of suitable DST offerings, and the requirements of the exchange. If you are approaching your 45-day identification deadline, contact us as soon as possible so we can review your situation and available options.
Generally, yes, provided the identification is completed in accordance with applicable 1031 identification rules. This can allow an investor to consider traditional properties while also identifying one or more DST interests as potential alternatives.
Not necessarily. Depending on the circumstances, a DST may be used for all or a portion of an exchange. For example, an investor may purchase traditional replacement property and use a DST to help invest remaining exchange proceeds.
Potentially, yes. This is one reason some investors consider DSTs during a 1031 exchange. If a traditional acquisition becomes unavailable, a previously and properly identified DST may provide another potential replacement-property option.
Some DST offerings use financing while others are debt-free. For investors selling leveraged property, a DST with existing debt may potentially help address debt-replacement considerations without requiring the investor to personally obtain a new mortgage.
Typically, DST financing is obtained at the trust/property level and is generally non-recourse to individual investors. This can be attractive to investors who want leveraged real estate exposure without personally obtaining a new property mortgage. Terms vary by offering.
DSTs may own a variety of institutional-quality real estate, including multifamily communities, industrial and distribution facilities, healthcare properties, self-storage facilities, retail properties, and other types of income-producing real estate.
Generally, no. DST investments provide passive real estate ownership, with the sponsor and professional property managers handling leasing, tenants, maintenance, repairs, and other day-to-day responsibilities.
Many DST properties are designed to generate rental income and make periodic distributions to investors. However, distributions are not guaranteed and can vary depending on the performance of the underlying property and other factors.
When the underlying property is sold, investors generally receive their proportionate share of the net proceeds. Depending on their circumstances, an investor may potentially complete another 1031 exchange, receive the proceeds and recognize applicable taxes, or explore other available planning strategies.
As early as possible. Whether your property is still listed, under contract, recently sold, or you're already approaching your 45-day identification deadline, additional time generally provides more opportunity to evaluate available DST offerings and determine which options may be appropriate.