Delaware Statutory Trusts
Delaware Statutory Trusts as Replacement Property in a 1031 Exchange
It is well understood that when performing a 1031 Exchange, the taxpayer must acquire new property which is “like-kind” property. Normally, this will mean that the taxpayer cannot purchase an interest in an entity, such as a REIT or a partnership interest in replacement property. The taxpayer must take fee simple interest in real estate. But, there is another product that allows taxpayers to purchase an interest in an entity that the IRS does consider “like-kind” for 1031 treatment. This is the Delaware Statutory Trust (DST).
There are various DST sponsor companies in the market that put together these investments. To qualify for 1031 treatment, the DST investment must be structured following specific rules issued by the IRS through Revenue Ruling 2004-86. The sponsor company will normally follow these guidelines when structuring their investment. The investments are generally sold as securities. As such, the investor will work with a securities representative instead of a licensed real estate professional.
DST proponents believe that the benefits of DST ownership are:
- DSTs offer taxpayers the opportunity to acquire property of higher quality that are normally only available to larger investors
- Investors in DSTs do not have management responsibilities – it is a passive investment
- Investors will receive income from their investment
- Any debt on the property is held by the DST and is non-recourse, meaning that the investor is not personally liable
But, investors who want to be able to manage the property on a daily basis may not see the DST as a viable option. And, most DST sponsors will hold the replacement property for 5 – 7 years. So, if you are just looking for a short-term option, the DST may not be for you.
When considering a DST as a replacement property alternative, you should always consult with your tax professional and financial advisor. Let them guide you through the process. And feel free to contact the specialists here at Security 1st Exchange for assistance.
* This article is for informational purposes only and Security 1st Exchange does not endorse any investment or product.