If you’re on the fence about DSTs (Delaware Statutory Trusts) and are not sure if it’s the right option for you, remember to factor in how you can use a 1031 exchange to defer taxes before you decide about your DST real estate investment opportunity. Using a 1031 exchange may make a difference when it comes to entering the real estate investment space. Here are 4 things you should consider when utilizing a 1031 exchange for your real estate investments.
1. Don’t Want to Use a 1031 Exchange? Pay the Taxes
When an investor sells a property that has appreciated in value, there are a few different taxes that may apply. These include capital gains taxes, which the investor must pay if they sell the asset at a price higher than they initially paid for it. Depreciation recapture taxes are taxes due when the seller had claimed depreciation expenses on the sold property, plus the Medicare surtax will be charged as well – you will owe these taxes on the spot without a 1031 exchange!
The great part of a 1031 Exchange is that you can defer all these taxes. But if you choose to sell your property without a 1031 exchange, ensure you consult a professional attorney and CPA so you can know what your full tax bill will be when adding up federal capital gains, state capital gains, depreciation recapture, and the Medicare surtax.
2. The 1031 Only Trades Apples for Apples
For you to successfully make a 1031 exchange, you must reinvest the profits from the sale in like-kind property. When you sell an investment or business property in a 1031 exchange, the replacement property must be of the same type. For instance, you might sell an apartment complex and buy a commercial building, or you might sell a rental property and buy a group of properties through a DST 1031 investment.
3. The Early Bird Gets the Tax Benefits
Put plainly, 1031 exchanges have strict deadlines. If you sell a property today, you’re expected to have identified the replacement property within the next 45 days and reinvested the proceeds within 180 days. But if you’ve already identified the replacement property, you can reinvest immediately.
4. The DST Goes Hand in Hand with the 1031 Exchange
Someone interested in utilizing a 1031 exchange could consider purchasing another type of investment property that they would manage on their own. However, if you want to get out of active management and the day-to-day issues of dealing with the terrible Ts of real estate – tenants, toilets, and trash – and are looking to diversify your investments into multiple properties, then a DST 1031 exchange may be your solution.
The DST is a type of property whereby the management is handled by a third-party trustee. So, investors can purchase a diversified portfolio of DST properties that may include a wide variety of properties and property types.
If you are interested in learning more about DSTs and your 1031 exchange options, call us today for a free complimentary review.
Because investor situations and objectives vary this information is not intended to indicate suitability or a recommendation for any individual investor.This is for informational purposes only, does not constitute individual investment advice, and should not be relied upon as tax or legal advice. Please consult the appropriate professional regarding your individual circumstance. Asset Strategy does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstances.
There are material risks associated with investing in DST properties and real estate securities including liquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal.
Advisory services offered through Asset Strategy Advisors, LLC (ASA). Securities offered through representatives licensed with either Concorde Investment Services, LLC (CIS), member FINRA/SIPC, or RCX Capital Group, LLC (RCX), member FINRA. Insurance offered through Asset Strategy Financial Group, Inc. (ASFG). ASFG and ASA are independent of CIS and RCX.
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