Can I Close My 1031 Exchange Using A DST Investment?

I come across this question quite often. Undoubtedly, a 1031 exchange is a blessing for investors looking to defer capital gain taxes on the sale of an investment property. However, to qualify for a 1031 exchange, you must follow the guidelines established by the IRS. There is a set of rules that every 1031 exchange investor must abide by. For example, you can only trade an investment property for a like-kind property using a 1031 exchange, or you must identify one or more replacement properties within 45 days from the sale of your relinquished property.

Like-kind means more than what you think.

Like-kind, in no way, means two properties to be used in the same way. Instead, they need to be similar in nature. For example, say your old property was a multi-family apartment. Now, your replacement property doesn't need to be a multi-family apartment. It could be any investment property, like a retail shop, an office space, or an industrial property. The only requirement is that both relinquished and replacement properties must be used for business purposes.

A DST 1031 investment is a platform that allows the investor to co-invest with the 1031 exchange investors in single or many institutional-grade properties. DST 1031 investments allow the purchasers to have fractional ownership of debt and equities by meeting all the exchange requirements of the investor. Under DST, an investor receives 1099 for ordinary income,1098 allowing for mortgage interest write-off, and an operating statement or gain and loss statement for depreciation. DST helps the investor to enjoy the advantage of owning real estate without managing the everyday responsibilities of dealing with real estate. Although DSTs are not very new in the market, the current tax laws have made DSTs popular among the 1031 exchange investors.

Minimum investments under DSTs are between $25,000 and $100,000; therefore, a single investor may own a fraction in an entire property and receives a distribution from the operation of the trust. Here we will discuss about the don'ts of DST 1031 investments.

What should you do if you fail to identify a replacement property before the deadline?

There are handsome chances that you may not be able to locate a replacement property in your 45 days. The availability of the property could be a factor for this. Say, you identified a potential replacement property. However, due to some reasons, the seller backed out at the last moment. What would you do then? There are hundreds of cases every year when 1031 exchange investors fail to identify replacement properties before the deadline. If you are stuck in such a situation, you can invest in a DST and close your 1031 exchange.

How a 1031 DST Exchange works?

A Delaware Statutory Trust or DST is a private trust that owns, manages, and sells investment properties. A DST is managed by a board of directors or trustees. DSTs have large investment properties in their portfolio. When you invest in a DST, you invest in one of its properties. A DST can have up to a hundred investors or even more. As a

Beatriz E. Russell is an acclaimed financial writer and blogger with over two decades of experience in writing blogs on finance. he has extensively written on various aspects of blogs on finance.