The Dynamic Duo: The 1031 Exchange and DST Strategy Asset Strategy

If you’re experiencing some of the common dilemmas real estate investors commonly face, you may feel stuck between two costly decisions: continue to spend time and money upkeeping and managing your property or pay the price of selling your property and struggling to find a commensurate asset to reinvest in.

However, if this dilemma is familiar to you, there’s another strategy to consider. Once you understand how the 1031 Exchange and DST (Delaware Statutory Trust) work, you will then become able to explore how the use of those tools together can potentially help decrease the costly headaches inherent with property management and take full advantage of the potential returns of passive real estate investing.

How the 1031 Exchange and DST Solve the Real Estate Investor’s Conundrums

We’ve covered how these tools work, but how can they be utilized together in a real estate investment strategy that strategically addresses the goals of a real estate investor?

A , also known as a like-kind exchange, is a powerful financial tool used by real estate investors to defer capital gains tax on the sale of an investment property. So, you must be prepared to sell your property to engage in the 1031 exchange and DST strategy. When it comes to the re-investment stage, the DST comes into play, offering a more passive approach to direct real estate investment. So, you must be open to alternative real estate investment options as opposed to buying a new property outright.

Before you decide to engage either of these tools, make sure you have a comprehensive plan and timeline fully set up. This is because timing is key for the 1031 Exchange to work and for you to replace your passive income with a DST in a timely manner.

First, the Like-Kind 1031 Exchange

When you sell a property, instead of taking the proceeds and paying hefty capital gains taxes, the 1031 Exchange allows you to reinvest the money into a like-kind property. The term ‘like-kind’ is broad, it doesn’t necessitate the same exact type of property, but rather any property used for business or investment purposes.

Upon selling the property, you can use the 1031 Exchange to reinvest the principal and proceeds into a DST and defer taxes in doing so. This is because you are selling one investment property and buying another in the form of a DST.

However, as measured from when the relinquished property closes, you have 45 days to identify potential replacement properties and 180 days to acquire the replacement property. Note that the exchange is completed before or by the 180-day mark, not 45 days plus 180 days. So make sure you are ready to find and execute the purchase of a property within that period after the sale, or else you’ll owe capital gains taxes for that tax year.

Then, the DST Purchase

Remember, a DST holds real estate assets, allowing multiple investors to have fractional ownership of properties. Note that this is not a Real Estate Investment Trust (REIT) and while they may seem similar to some investors, it is worth pointing out that one is a percentage owner in the real estate held in a DST, rather than the owner of shares of a trust in a REIT.  Further, a DST is allowable in a 1031 Exchange whereas a REIT is not.

In addition, the DST is held by a sponsor who oversees the professional management of the property or properties. Property overseers handle the day-to-day operations of building management including maintenance, tenant issues, and more.

So, plan ahead and start investigating how a DST investment might help you move from an active role in real estate management to a passive one.  An investor can also easily break up their reinvestment into several DSTs. This can help to mitigate the investment risk associated with the lack of diversification in single-property real estate.

A Powerful Investment Strategy at Your Fingertips

The combination of a 1031 Exchange and Delaware Statutory Trust strategy can potentially allow investors to experience the financial benefits of direct real estate investment without the hassles of direct property management, all while effectively deferring taxes on the sale of their property. While there can be some drawbacks, such as missing the timing for the 1031 Exchange, potential illiquidity, and limited say in the management of the property contained within the DSTs, it’s a strategy that can also provide for the potential of tax efficiency, passive income, greater access to different, professionally managed real estate investment types along with portfolio diversification by investing in non-correlated asset classes.

Please note that there are additional tax strategies other than 1031 Exchanges and DSTs to consider:

Some examples include:

Oil and Gas:

  • Intangible Drilling Costs (IDC): These are costs associated with drilling and preparing a well for production. The U.S. has offered a tax deductionfor intangible drilling costs since 1913 to attract investment capital to the high-risk business of oil and gas exploration. The deduction is allowed only for wells within or offshore of the U.S.
    • According to analysis provided by the Committee for a Responsible Federal Budget, this makes 60% to 80% of total drilling costs tax-deductible.
  • Depletion Allowance: In corporate income tax, the deductions from gross income allow investors in exhaustible mineral deposits (including oil or gas) to account for the depletion of the deposits. The theory behind the allowance is that an incentive is necessary to stimulate investment in this high-risk industry.
  • Tangible Drilling Costs (TDC): These pertain to the actual direct cost of the drilling equipment. When drilling a new well, per IRS tax code, approximately 30% of the drilling costs are considered tangible. These costs can be100% tax-deductible but must be depreciated over 7 years.
  • Passive Activity Losses: Passive activity losses would only be deductible if the investment obtained passive income. Most investors find themselves with significant passive losses that they are unable to deduct. However, whether you own a working interest in an oil or gas property directly or through an entity that does not restrict the taxpayer’s responsibility concerning the interest, it is a non-passive activity, regardless of your participation. What a deal for the taxpayer!

Net Lease:

  • Long-term, historically reliable income with the possibility of capital appreciation of the underlying property is among the perks for investors. Investors are granted the opportunity to invest in high-quality real estate without encountering management issues like vacancies, renovation costs, or lease fees. When the underlying properties are sold, investors can use a 1031 tax-deferred exchange to invest in another triple-net-lease transaction without paying taxes.
  • Interest Deductions: Interest on loans used to acquire or improve the property can be deductible.

Qualified Opportunity Zones (QOZ):

  • Potential tax benefits associated with the QOZ Program fall into two main categories:
    • Deferral: If a taxpayer invests the capital gain from the sale of any property into a QOF within 180 days of recognizing the gain, taxes on such proceeds may be deferred until the earlier of December 31, 2026, or the disposition of the QOF interest.
    • Elimination: Investors who hold their investment for at least ten years receive a step-up in basis, which means they pay no tax on the appreciation of their QOF Investment upon disposition of such QOF Investment, regardless of the size of the potential profit. In addition, the step-up in basis eliminates any depreciation recapture tax that would otherwise be owed upon sale.
    • All investments involve risk, and the realization of the benefits is dependent on proper structuring and the structure and performance of the future investments selected. Not all investments will provide all these benefits. 

UPREITs (Umbrella Partnership Real Estate Investment Trusts):

  • Tax-Deferred Exchange: Property owners can exchange their property for operating partnership (OP) units in the UPREIT without triggering a taxable event. This is similar in spirit to a 1031 exchange.
  • Conversion to REIT Shares: OP units can often be converted into REIT shares, which are more liquid. However, this conversion is a taxable event. This allows an investor to liquidate over time as opposed to all at once.
  • REIT Dividends: Real estate investment trusts (REITs) are a popular method for investors to own real estate that generates income without having to purchase or manage property. Investors favor REITs due to their substantial income sources. The trust must distribute at least 90% of its taxable income to shareholders to qualify as a REIT. Consequently, REITs typically do not pay corporate income taxes because their earnings are distributed as dividends.


Because investor situations and objectives vary this information is not intended to indicate suitability 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.

There are material risks associated with investing in private placements, DST properties and real estate securities including illiquidity, general market conditions, interest rate risks, financing risks, potentially adverse tax consequences, general economic risks, development risks, and potential loss of the entire investment principal.

Investments in securities are not suitable for all investors. Investments in any security may involve a high degree of risk and should only be considered by investors who can withstand the loss of their investment. Prospective investors should perform their own due diligence carefully and review the “Risk Factors” section of any prospectus, private placement memorandum or offering circular before considering any investment.

DST 1031 properties are only available to accredited investors (typically defined as having a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last two years; or have an active Series 7, Series 82, or Series 65). Individuals holding a Series 66 do not fall under this definition) and accredited entities (typically a private business development company or an organization with assets exceeding $5 million; or in some situations if an entity consists of equity owners who are accredited investors, the entity itself is an accredited investor provided the organization was not formed with a sole purpose of purchasing specific securities) only. If you are unsure if you are an accredited investor and/or an accredited entity, please verify with your CPA and Attorney.

There are risks associated with Real Estate Investment Trusts (REITs) and include but are not limited to the following: Typically, no secondary market exists for the security listed above. Potential difficulty discerning between routine interest payments and principal repayment. The redemption price of a REIT may be worth more or less than the original price paid. The value of the shares in the trust will fluctuate with the portfolio of underlying real estate. Involves risks such as refinancing in the real estate industry, interest rates, availability of mortgage funds, operating expenses, cost of insurance, lease terminations, potential economic and regulatory changes. This is neither an offer to sell nor a solicitation or an offer to buy the securities described herein. The offering is made only by Prospectus.

Oil and gas mineral royalty Interests are illiquid investments, are speculative and involve a high degree of risk; investors should be able to bear the complete loss of their investment. In addition, the oil and gas market is affected by many factors, such as general economic conditions, oil and natural gas pricing, financing markets, supply and demand, and other factors that are beyond an Offeror’s control. All these factors could restrict an investor’s ability to sell their mineral/royalty interests.

The rules and regulations of the Qualified Opportunity Zone (QOZ) Program are complex, and compliance with the QOZ Program comes with significant challenges such as appreciation unpredictability, certain neighborhoods may be less accommodating to development, illiquidity for up to ten or more years, availability and cost of construction and development financing uncertainty, development and redevelopment real estate risks, as well as a number of Jobs Act interpretation uncertainty which may impact future risks, if any.

Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.

Advisory services offered through Asset Strategy Advisors, LLC (ASA). Securities offered through representatives licensed with either Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Insurance offered through Asset Strategy Financial Group, Inc. (ASFG). ASFG and ASA are independent of CIS.


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