Learn about trusts and 1031 exchanges

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Trusts are often used with Internal Revenue Code section 1031 exchanges. Assets being relinquished can be held in an irrevocable investment fund that was created as an estate planning tool. Alternatively, the relinquished qualified property can be transferred through a Delaware Statutory Trust . Can a trust do a 1031 exchange ? Of course. Even though the DST is not new, it has only recently become venture capitalists’ preferred investment vehicle for section 1031 exchanges. Delaware Statutory Trusts have much in common with general investment funds and business trusts, but they have a different impact on like-kind exchanges. Continue to read how a Delaware Statutory Trust can impact your tax-deferred exchange.

What is Delaware Statutory Trust

A DST is a legal entity under the Delaware law that is commonly used to hold title to invest in real estate. The structure is very much alike to how a Limited Liability Company (LLC) holds title on real estate property. Each party in the entity holds a legal title to the real estate, but they are treated as grantors for tax purposes. Real estate property is purchased under the Delaware Statutory Trust’s protective shield and opens up for venture capitalists who wish to purchase a beneficial interest. Simply put, DSTs are used to facilitate ownership of property by many investors.

Delaware Statutory Trust for 1031 exchange

People looking forward to getting into real estate investment opportunities with a section 1031 exchange should consider investing in the DST. This cash-flow trust provides the opportunity to defer capital gains tax upon the transfer of the real estate property. The DST 1031 property is distinguished as a like-kind exchange replacement property. As a result, it is exempted from capital gains tax. The money saved is used to acquire a new property and defer taxes later on. The Internal Revenue Code allows DSTs to buy real estate where beneficial interests are treated as direct interests for the purpose of section 1031. It is also important for managers/trustees to have limited powers.

Completing section 1031 exchange

To complete a 1031 exchange, it is necessary to find a proper replacement property, meaning a like-kind one. The property used in the trade has to be of the same kind, class or character. For instance, a residential property can be swapped for a similar kind of real estate.  DST 1031 real estate properties that are available to investors are shopping centers, office buildings, storage facilities, etc. it is important to identify the replacement property in about 45 days and close the purchase within 180 days.

Owners of DST 1031 property

The owner of a Delaware Statutory Trust 1031 property generally receives 100% of the proportionate allocation of any pay-down from the loan on the real estate. This means that owners build equity in the property.  Investors receive their fair share of the financial returns, tax benefits and, most importantly, real estate. Some real estate properties are structured so to speak that pay-down beings in the first year. There is also the possibility to transfer ownership.

August 2022