We offer a variety of DST options comprised of institutional-quality properties for investors seeking a passive solution to satisfying their 1031 and/or 721 exchange.
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1031 Exchanges and Delaware Statutory Trusts
Discover impactful tax strategies that enable indefinite deferral of capital gains taxes when selling investment real estate.
Extensive Experience Managing a Multi-Billion Dollar Portfolio of DSTs
1031 Exchanges
When you sell an investment property, you generally must pay taxes on any gain and depreciation recapture. A 1031 exchange may allow you to defer the recognition of certain taxes by reinvesting the sale proceeds in “like kind” property.
A 1031 exchange offers a range of potential benefits, including:*
- Tax deferral
- Diversification
- Tax-advantaged cash flow
- Wealth preservation
*All investments involve risk and the realization of any benefit is dependent on proper structuring and the future investments selected. Not all investments will provide all of these benefits.
Evaluating the Potential Impact of 1031s
Learn how IRC Section 1031 can protect and preserve wealth.
Example
An investor in the highest tax bracket has invested in real estate for years.
She received an offer on an investment property and is deciding whether to pursue a 1031 exchange or pay the taxes.
- Initial Purchase $550,000
- Offer Price $1,500,000
- Depreciation $400,000
- Adjusted Cost Basis $150,000
- Total Tax Liability $1,350,000
| Scenario A Sell and Pay Taxes | Scenario A 1031 Exchange | |
|---|---|---|
| Initial Purchase | $550,000 | $550,000 |
| Depreciation | $400,000 | $400,000 |
| Adjusted Cost Bases | $150,000 | $150,000 |
| Sale Price | $1,500,000 | $1,500,000 |
| Total Tax Liability | $1,350,000 | $1,350,000 |
| Capital Gains Tax (20%) | $190,000 | $0 |
| State Tax (6.2%) | $83,700 | $0 |
| Net Investment Income Tax (3.8%) | $190,000 | $0 |
| Depreciation Recapture Tax (25%) | $83,700 | $0 |
| Total Taxes Due | $51,300 | $0 |
| Net Proceeds | $100,000 | $1,500,000 |
Whether a like-kind exchange is beneficial to a real estate holder is factually specific. Each investor should consult his or her own tax and financial advisors.
Delaware Statutory Trusts (“DSTs”)
The IRS recognizes DSTs as real property, thus qualifying DSTs as replacement property for completing a 1031 exchange. DST investors are not direct owners of the real estate. Instead, the trust holds title to the property for the benefit of investors, each of whom maintain a “beneficial interest” and are treated as owning an undivided fractional interest in the property.
Simply put, DSTs provide a turn-key solution for individuals who may not have the time, energy, or expertise to find and/or manage a replacement property.
DSTs offer many potential benefits,* including:
- Access to institutional-quality real estate
- Professional asset and property management
- Passive ownership
- Non-recourse financing with institutional pricing
- Lower investment minimums
- Portfolio diversification
- Ability to close quickly and certainty of close
* Please note that DST investments involve risks, including a potential lack of return, loss of principal and tax consequences. The performance of a DST will depend on a tenant’s ability to pay rent, among other items. Properties may use leverage and will be liquidated at the discretion of the trustee, which may encounter difficulty in selling. No public market exists nor is likely to develop for DST interests. All investments involve risk, and the realization of any benefits is dependent on proper structuring and the performance of the investments selected. Not all investments will provide all of these benefits.
Frequently Asked Questions
What is a Delaware Statutory Trust (“DST”)?
A DST is a business trust that can be used for real estate ownership of higher-quality, professionally managed commercial properties; provides a passive, turn-key solution for transacting a 1031 exchange.
Which real estate interests qualify for an exchange?
Owners of an investment property are allowed to defer capital gains taxes as long as proceeds from the sale are exchanged into “like-kind” property. To clarify, any property held for productive use in a trade or business, or for investment, can be exchanged for a like-kind property.
The types of real estate that qualify include:
- Rental properties*
- Business properties
- Land (farmland or raw land)
- Fractional (tenancy-in-common) interest
- Leasehold interest, 30-year plus lease
- Oil & gas interests
*Rental homes can qualify, but only if they’re used primarily as an investment, rather than for personal use.
What are the potential tax benefits of a 1031 exchange?
In a 1031 Exchange, capital gains taxes on the sale of a property are deferred.
What are the restrictions of a DST?
For beneficial interests to qualify as direct interests in real estate for Section 1031 purposes, the DST must be limited in its actions.
These limitations, or “seven deadly sins”, are intended to prevent the sponsor of the DST from making significant changes to the structure of the DST after it has been formed. Many aspects of the DST structure are dictated by these seven guidelines.
- Exchange DST property for other property
- Invest cash between distribution dates in anything other than short-term securities
- Accept additional capital (no capital calls)
- Renegotiate terms of debt or enter into new financing
- Renegotiate existing leases*
- Enter into new leases*
- Make repairs or improvements other than minor, non-structural repairs (no development/heavy value add)
*A master lease may be used with shorter term leases to manage the property.
Are there rules regarding the timing of a 1031 exchange?
To successfully complete a 1031 exchange and defer your capital gains liability, you must follow very specific requirements over a strict 45-day and 180-day timeline.
Day 1
Sell your property; proceeds are escrowed with a Qualified Intermediary (“QI”).*
*A QI is an entity that facilitates the 1031 Exchange process, largely by holding net proceeds from the sale of the relinquished property before they are re-invested in the replacement property. Only a QI may hold those funds while completing an exchange.
Day 45
Identify a replacement property within 45 days.
Day 180
Close on your replacement property within 180 days of the sale of the relinquished property.
In addition to the timing considerations, a qualifying exchange requires you to:
- Purchase a replacement property of equal or greater value
- Reinvest all or more equity
Failure to satisfy these requirements may create a tax liability.
Important Disclosures
The information contained herein is not an offer to sell or a solicitation of an offer to buy any securities and is for training and educational purposes only. Such an offer or solicitation can be made only through a confidential private placement memorandum relating to an offering.
Cantor Fitzgerald and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting professionals before engaging in any transaction.
1031 Exchange and DST Risk Factors to Consider
There is no guarantee of success. Investors could incur a loss of all or a portion of any investment.
No public market exists for Delaware Statutory Trust (“DST”) interests, and it is highly unlikely that any such market will develop.
There are typically substantial restrictions on the transfer of DST interests.
There is typically no specified time that properties owned by s DST will be liquidated and the DST may not be able to sell any or all of the properties at a price sufficient to return to investors an amount greater than the purchase price paid by investors for the DST interests.
DSTs are a relatively new vehicle for real estate investment and are inflexible vehicles to own real property.
Investors typically have no voting rights and will have no control over management of a DST or its properties.
There is no guarantee that investors will receive any return.
The performance of a DST will depend on tenants’ ability to pay rent.
The properties will be subject to the risks generally associated with the acquisition, ownership and operation of real estate including, without limitation, environmental concerns, competition, occupancy, easements and restrictions and other real estate related risks.
The properties may be leveraged.
The manager and its affiliates may receive substantial compensation in connection with the offering and in connection with the ongoing management and operation of the properties.
An investment in DST interests involves certain tax risks.
Future legislative or regulatory action could significantly and/or adversely change the tax aspects of an investment in a DST interest, the availability of Section 1031 Exchanges and other tax aspects summarized herein.