By: Maya Thompson

Navigating the world of real estate investments can be tricky, but DST 1031 exchanges offer a viable path forward. If you’ve ever worried about capital gains taxes eating into your profits, you’re not alone. Maximizing your investments while deferring those taxes is a big deal for many intelligent real estate investors. Delaware Statutory Trusts (DSTs) can come into play here, providing a passive and efficient solution for completing a 1031 exchange. DST offerings can allow investors to receive potential monthly distributions, all while the heavy lifting of active property management, as this is taken care of by a professional sponsor or trustee who oversees the day-to-day operations of the property on behalf of the investors. 

DST 1031 exchanges can offer investors a streamlined strategy for their 1031 exchange. For example, a typical DST property can be closed within three to five business days. The reason DST properties can be closed on this quickly is that, typically, all the appraisals, environmental reports, property condition reports, financing, tenant estoppels, etc., have already been completed. In this way, DST properties are “pre-packaged” for replacement properties. Many investors love DSTs because they make investing less about stress and more about enjoying life—on the golf course or spending quality time with family. Chay Lapin, President of Kay Properties & Investments, explores how DSTs can transform your approach to real estate investing.

Understanding 1031 Exchanges

Experienced investors may find it difficult to navigate the investment landscape for tax-smart real estate options. In line with long-term financial objectives, the 1031 Exchange may provide investors with a path that lessens their tax obligations. Let’s examine this tool’s operation and the reasons it could be a good addition to your real estate holdings.

A 1031 Exchange gets its name from Section 1031 of the Internal Revenue Code. This provision allows property owners to defer paying capital gains taxes when they sell one investment property and use the proceeds to purchase another similar property. By “similar,” the IRS means properties that are alike in nature or character despite differences in quality or grade.

Notes Chay Lapin, “This tax-deferral strategy can potentially save investors a significant amount of money. Instead of watching a chunk of their profits disappear into tax payments, they can reinvest every dollar into a new property with the 1031 exchange tax deferral strategy.” 

Keep in mind that while taxes may be deferred, they aren’t eliminated. This gives investors a chance to possibly grow their investment for many more years. When you sell an investment property, the profit you make is considered a capital gain. Understanding how these taxes are calculated is crucial to any real estate transaction, and investors are always encouraged to speak to their CPA and tax attorney before making any decisions. 

The tax rate varies and can be influenced by multiple factors, like where your property is located and your taxable income. High capital gains can take a significant bite out of profits, reinforcing why deferring them with a 1031 Exchange can be so beneficial to consider.

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The 180-Day Timeline

The 1031 Exchange comes with some critical deadlines. Missing these timelines can make you ineligible for the tax-deferred status. It’s somewhat like a delicate dance, with each step needing careful execution within specific windows. From the day your property sells, you have 45 days to identify up to three potential new properties you want to purchase. Alternatively, you can name more than three properties if they meet specific valuation criteria (using the 200% and the 95% rule).

From the same starting point, you need to complete the purchase of your chosen property within 180 days. This clock starts ticking the moment the sale of your original property is complete. Thinking of this timeline as a sprint rather than a marathon isn’t a stretch. 

The tight deadlines leave little room for error,” says Chay Lapin. “Acting decisively with professional property guidance is crucial to completing the exchange successfully while enjoying the tax-deferral advantage.”

When navigating these timelines, it’s wise to have everything lined up in advance. Real estate transactions can be unpredictable, and the more proactive you are, the less likely you are to run into issues. Understanding these fundamental aspects of a 1031 Exchange can turn what initially seems like a complex maze into a clear path worth considering for real estate investors.

Navigating the DST 1031 Exchange Investment Process

There are many potential advantages for investors looking to make a passive real estate investment by following the DST 1031 exchange approach. A growing number of investors are learning about this option, and an increasing number of asset managers are choosing to launch their own DST investing programs due to the potential for returns and the hassle-free management experience. Selecting suitable DST properties is crucial for maximizing your investment. The goal is to identify DST properties that align with your financial objectives and risk tolerance. As always, please consult your CPA or real estate attorney before investing in any real estate.

“Focus on properties that have historically proven to be risk tolerant during economic downturns or “black swan” events such as COVID-19 – as always, past performance is no guarantee of future results. For example, we believe in asset classes such as multifamily, essential businesses with long-term net leases, and industrial and distribution assets,” says Lapin.

Another area for consideration is the reputation of the DST sponsor. Research their past performance and ensure they have a successful management and distribution history. Again, a DST sponsor’s past track record performance is in no way a guarantee of future positive returns or performance.  For investors wanting to see 20-40 different DST investment offerings from over 20 different DST asset managers (aka DST sponsor companies), they are encouraged to request free access by registering at www.kpi1031.com for a password to log in and view much of the DST market inventory.

Working with Qualified Intermediaries

The 1031 exchange process relies heavily on qualified intermediaries (QIs). Their primary duty is to help investors navigate complex tax obligations while making sure they adhere to IRS laws. You cannot claim constructive receipt, which would otherwise result in capital gains taxes, because QIs keep the money from your original transaction. 

They make care to remind you of all the due dates for finding and closing on replacement homes, adhering to stringent IRS guidelines. QIs take care of all the paperwork, from finding properties to final closings, giving you the assurance that your exchange is carried out correctly as long as you abide by the IRS’s guidelines. Engaging a knowledgeable QI can be the key to a successful and stress-free 1031 exchange.  For a list of qualified intermediaries, click here: www.kpi1031.com.

Navigating the world of investments isn’t always easy, but understanding the nuances of DST 1031 Exchanges can open up new possibilities for investors. These structured options combine simplicity and potential, making them appealing to both seasoned and new investors. 

Imagine a life where you enjoy the benefits of property investment without the constant demands of property management. DSTs allow investors to focus on what they truly love in life, whether that be their children, grandkids, travel, hobbies, or other endeavors (NO MORE 3 T’s—tenants, Toilets, and Trash!).  

Potential monthly distributions can be deposited directly into your bank account via ACH. With DSTs, end-of-year tax reports are made simple with substitute 1099 forms, helping you keep your financial life organized, which are then plugged into Schedule E on your tax return (similar to your other real estate investments you own).

Every investment comes with risk, and while DSTs offer convenience, they aren’t without challenges. Just like any property investment, market conditions can affect returns. Despite stabilized properties, there’s no absolute appreciation or steady distribution promise. It’s crucial to weigh the risks carefully and for each investor to read the Private Placement Memorandum (PPM).  This PPM will go over the property, location, plan for managing the asset, the risk factors, and the fees in the DST in detail.  Investors are always encouraged to read each PPM thoroughly before making a DST investment.

Finding a suitable investment in a competitive property market can feel like searching for a needle in a haystack. With DST 1031 options, investors can eliminate certain last-minute surprises, reducing the closing risks that might come with individual property transactions. Consider these exchanges if you’re looking to simplify your investments while still enjoying potential benefits. DST 1031 Exchanges offer a strategic path for those wanting less hassle yet still desiring the potential rewards of 1031 exchange tax deferral.  

About Kay Properties and www.kpi1031.com: 

Kay Properties helps investors choose 1031 exchange investments that help them focus on what they truly love in life, whether that be their children, grandkids, travel, hobbies, or other endeavors (NO MORE 3 T’s – Tenants, Toilets and Trash!). We have helped 1031 exchange investors for nearly two decades exchange into over 9,100 – 1031 exchange investments. Please visit www.kpi1031.com for access to our team’s experience, educational library and our full 1031 exchange investment menu.

This material is not tax or legal advice. Please consult your CPA/attorney for guidance. Past performance does not guarantee or indicate the likelihood of future results. Diversification does not guarantee returns and does not protect against loss. Potential cash flow, potential returns and potential appreciation are not guaranteed. There is a risk of loss of the entire investment principal. Please read the Private Placement Memorandum (PPM) for the offerings business plan and risk factors before investing. Securities offered through FNEX Capital LLC member FINRA, SIPC.

Published by: Holy Minoza