1031 exchanges & dsts
Section 1031 of the Internal Revenue Code allows an investor to defer the payment of capital gains taxes that may arise from the sale of a business or investment property. By using the proceeds of the sale of such a property to purchase “like-kind” real estate, taxes may be deferred, as long as the investor satisfies certain conditions.
Basic Steps in a 1031 Exchange
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Step 1
Exchanger sells property, known as relinquished property, and notifies Qualified Intermediary (QI) prior to the close of the sale.
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Step 2
When relinquished property closes, proceeds are transferred to QI and held in escrow.
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Step 3
Within 45 days of sale date, Exchanger identifies replacement property. QI transfers funds for purchase of replacement property.
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Step 4
Within 180 days of sales date, Exchanger closes on new property or receives DST Interest.
1031 Exchange Timeline
Investors must follow a very specific timeline to take advantage of the benefits of a 1031 transaction. The entire 1031 exchange timeline can take no longer than 180 days.
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Sell Relinquished Property
Day 1 - 45-day window to identify replacement property(ies).
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Identify Replacement Property
Day 45 - Close on replacement property within 180 days of the closing date of the sold property.
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Acquire Replacement Property
Day 180
A Delaware Statutory Trust (DST) is a special purpose legal entity in which a sponsor company acquires the property(s), obtains the appropriate financing, holds the title to the properties and acts as the trustee to the trust. The investor (you) are the beneficiaries of the trust.
DSTs allow for fractional ownership with multiple investors who share ownership in a professionally managed portfolio of properties.
Is a DST 1031 Exchange Right for You?
Potential Advantages of a DST 1031 Exchange
- No personal guarantee on the lease or the financing
- Typically, most DST offerings have obtained financing, for which the beneficiaries (investors) do not have to qualify or apply for. The investor does not make loan payments and is not personally responsible or liable for the loan.
- No recourse
- No capital calls
- No corporate, partnership or entity fees
- No day-to-day management headaches
- Lease typically signed with corporate entity
- Properties of the DST have been purchased and are typically cash flowing from Day 1 (No acquisition risk)
- Closing a 1031 utilizing a DST takes significantly less time than acquiring an individual property.
- Creditor Protection - the DST is a special purpose entity (“SPE”) provision that prevents any creditors of the beneficiaries (the investor) from reaching the properties of the DST. The DST owns 100 percent of the fee interest and is the sole borrower. The lender only makes one loan - regardless of the number of properties in the DST.
Potential Disadvantages of a DST 1031 Exchange
- DSTS are illiquid. Liquidity is only available upon disposition of individual properties
- Hold periods are longer than most investments (typically 5 to 10 years)
- Upfront and on-going costs and fees are typically higher than other solutions
- Beneficiaries have no control or involvement in property management decisions
- No public or secondary markets exist for DSTs
- Only minor repairs, requirements and improvements are allowed to maintain the structures - no major upgrades or structural improvements are permitted
Frequently Asked Questions
What are the eligiblity requirements for investors?
The individual investor client must be an Accredited Investor.
- Net worth over $1 million, excluding primary residence (individually or with spouse or partner)
- Income over $200,000 (individually) or $300,000 (with spouse or partner) in each of the prior two years, and reasonably expects the same for the current year.
What are the typical taxes that get deferred?
Capital gains, state tax, Medicare surtax on net investment income and depreciation recapture tax.
What are the timeframes?
- 45 days to document and disclose all replacement property options.
- 180 days to close on all transactions.
What are the requirements for a Qualified Intermediary?
A Qualified Intermediary (QI) is a third-party that serves as your escrow agent. This account must be setup in advance of the closing of your relinquished property. All proceeds after the sale must go to the QI first – no exceptions.
What if my property is titled under an LLC or Partnership?
An exchange can still take place. All taxpayers involved should plan well in advance and coordinate with a qualified tax professional and attorney.
What are the stipulations of vacation homes?
The Internal Revenue Code does provide a Safe Harbor for vacation home exchanges. The IRS may allow it if certain requirements are met.
What if a 1031 exchange is not possible due to timing and other circumstances?
CYNA will provide guidance and advice on other viable and practical alternative solutions.
What are the costs and fees associated with DSTs and 1031 Exchanges?
We will review the various costs and fees in every solution we recommend. We want to make certain that you and your family understand what you are investing in, and the costs involved.
What is the Process – how do you get started?
CYNA encourages all our clients to contact their tax professional and/or attorney as they are important voices in the process. We will help you with all documents, analysis, and investment recommendations.
explore current dst programs
Delaware Statutory Trust (DST) investment programs are constantly changing and availability can be limited. Please request access to current DST programs below or contact us. We can review your specific situation, discuss whether a DST 1031 Exchange is right for you and explore availability and suitability of current programs.
examples of recently closed dst programs
Industrial Fulfillment Center
Multifamily Apartment Complex
Office Government Office Building
Multifamily Apartment Complex
our firm
CYNA 1031 Advisors promotes investment advisory and financial planning solutions focused on tax-efficient and tax-deferred investment strategies, through its relationship with Emerson Equity LLC.
CYNA specializes in collaborating with clients who own Real Estate as an investment or through their business holdings and who may require deferral on the tax implications upon the sale of their property.
We consult and make recommendations that may help monetize their real estate holdings in a tax-efficient manner. Typically, this is accomplished utilizing a like-kind exchange under the Internal Revenue Code (IRC) Section 1031.
We conduct a review and an analysis of our client’s financial lives before recommending solutions to support their tax status, estate planning, investment management and retirement goals.
Our initial discussions will be a review of your personal situation and financial circumstances which will include providing detailed qualitative and quantitative information which will guide us in our consultation.
Consultative Approach and Process
- Understanding your personal and financial circumstances
- Identifying and selecting your goals and objectives
- Analyzing your current investment property and possible replacement properties
- Reviewing alternative courses of action
- Developing recommendations and solutions
- Collaboration with your Tax Professional and/or Attorney
