1031 DST Investments
What is a 1031 Exchange?
- Qualified Intermediary account should be opened prior to close.
- Sale proceeds must go to Qualified Intermediary.
- To qualify for 100% deferral:
- 100% of equity has to be re-invested.
- Assume equal or greater amount of debt in new property.
- Must be a like-kind exchange – i.e. investment property for investment property.
The DST Option
What is a DST - Delaware Statutory Trust?
- Trust created under Delaware Law – considered separate legal entity but does not have separate tax ID.
- Must comply with IRS Rev Ruling 2004-86.
- DST Real Estate Investment is Ownership of Beneficial Interests in the Trust – considered direct R.E. ownership by IRS and taxed accordingly and can therefore be used as replacement property.
- Owners receive proportionate share of income, tax deductions and appreciation.
- Tax reporting for a DST is done on a Schedule E utilizing property operating information provided by the Sponsor.
- The DST can have as many as 499 unrelated Investors
- A DST Owner’s share in the Trust and economic benefits and risks is equal to the percentage of their Trust Beneficial Ownership in the Trust.
Rules To Know
Three Property Rule - Allows for identification of any three properties, of any price, anywhere in the United States.
200% Rule - An option for identifying more than three properties. With the 200% Rule, four or more properties can be identified. However, the combined value of all properties identified cannot exceed 200% of the property sold.
95% Rule - An option for identifying more than three properties if the fair market value of the properties actually received by the end of the exchange period is at least 95% of the potential replacement properties.
|DO advanced planning for the exchange.||DO NOT miss your identification and exchange deadlines.|
|DO keep in mind the three basic rules to |
qualify for complete tax deferral.
|DO NOT try doing a 1031 exchange using your attorney or CPA to hold title or funds.|
|DO attempt to sell before you purchase.||DO NOT dissolve partnerships or change the manner of holding title during the exchange.|
IRS Revenue Ruling 2004-86
- The DST may not purchase additional assets other than short-term obligations.
- All cash from the property is held in liquid money market type accounts.
- The DST may not accept additional contributions of assets.
- There can be no additional capital calls to the DST.
- The DST may not renegotiate the loan terms and/or the loan may not be refinanced.
- The Sponsor has negotiated the loan terms for the property prior to acquiring the property.
- The DST may not renegotiate leases or enter into new leases.
- The investors, through the Trust Agreement, enter into a Master Lease with the Trustee in order to avoid having to renegotiate leases or enter into new leases with the actual tenants.
- The DST may not make major structural changes.
- Any major improvements will be done or have been done by the seller prior to the Sponsor purchasing the property.
- The DST must distribute all cash, other than the necessary reserves, to the beneficiaries.
- The DST may not sell or exchange property and reinvest the proceeds.
- The DST structure does allow for the investors or beneficial owners to conduct their own 1031 tax deferred exchange once the DST has liquidated its assets (i.e. sold the property).
Investing in DST's