It is quite common. You get an offer on your investment property that is simply too good to pass up. You get it under contract with the intent of using a 1031 exchange to reinvest the proceeds from the sale and defer what would otherwise be a huge capital gains tax obligation.
Because your property has appreciated so much in value, you can now purchase a larger investment property through your exchange and hopefully, increase your monthly income significantly. Everything is looking great. You close on your sale. Congratulations! All you need to do now is find the right replacement property.
But within days, you begin to realize that that is going to be a very challenging task to complete within the 45-day window allotted by 1031 exchange rules.
- The pandemic is limiting your ability to identify, inspect and properly value replacement properties.
- Lenders have made the loan approval process more laborious as they await what many believe will be a wave of defaults.
- And even sellers, skittish about how slowly the economy may rebound, are pulling properties off the market.
All of a sudden, the joy you felt in selling your property at the top of the market, is gone. And now, the IRS is the one that stands to benefit greatly as your tax-deferral benefit vanishes. If only there was a way to save your exchange!
DST as a Backup
Fortunately, there is an investment alternative which complies with 1031 exchange regulations and it has been used to save many investors who have found themselves living the nightmare described above. It is called The Delaware Statutory Trust (DST) and can be used by suitable exchangers up against their 45-day deadline to identify up to three potential replacement properties.
How does the DST enable investors to side-step the challenges they might encounter with a traditional 1031 exchange like those mentioned previously? It does so because it is structured differently. For example:
- The sponsor of a DST has already identified a property that will be held.
- Due diligence work, financial evaluation and inspections have occurred, and the property has been purchased.
- If leverage was needed, loans have already been secured.
- And finally, a professional management team has been selected and is managing the property currently.
So, for 1031 exchange investors, they are able to preview and select a replacement property that is already operating and generating potential revenue. DSTs can also serve as excellent back-up properties should 1031 exchangers be unable to close on the new property within the 180-day period after close on the relinquished property. Investors can often close on a DST in just a few days.
A Few Added Benefits
Beyond the ability of the DST to help investors meet their replacement property identification requirements, DSTs also offer a few additional advantages that 1031 exchangers may not be aware of, including:
- The ability to diversify their portfolio among different property types, in different locations throughout the U.S.
- The ability to offload the headaches of personally managing an active property to a professional management team
- The ability to own fractional interest in a property that can be divided equally among heirs for when an estate is settled
- Exchangers don’t have to go through the qualification process of obtaining a loan
If you are considering a 1031 exchange, we hope this discussion has been helpful on how you can help yourself should you encounter some of the challenges others like you have experienced.
Please feel free to contact me for more information. You can also download my latest Ebook, The Top 11 Misconceptions about 1031 Exchanges.
This is for informational purposes only and does not constitute an offer to buy or sell an investment. Because investors situations and objectives vary this information is not intended to indicate suitability for any particular investor. DST 1031 properties are only available to accredited investors (typically have a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last three years) and accredited entities only. If you are unsure if you are an accredited investor and/or an accredited entity please verify with your CPA and Attorney. There are material risks associated with investing in DST properties and real estate securities including liquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal.
Securities offered through Concorde Investment Services, Inc. (CIS), member FINRA/SIPC. Insurance offered through Concorde Insurance Agency, Inc. (CIA) Halston Pacific is independent of CIS and CIA.