If you’re an investor looking to diversify your portfolio and defer capital gains taxes, 1031 exchange advisors near me might be worth considering. While they may sound intimidating at first, they are both relatively simple to understand and can provide investors with many benefits. In this blog post, we’ll cover the basics of what DSTs and 1031 exchanges are and how they work.
What is a Delaware Statutory Trust?
A DST is a legal structure that allows multiple investors to own an undivided interest in a single, large asset. This asset is typically a commercial property, such as an office building, shopping center, or apartment complex. Every investor in the DST receives a proportional share of the rental income and capital gains generated by the property, without the hassle of managing it themselves. DSTs are commonly used in 1031 exchanges (more on that later), but can also be bought and sold like other investments on the secondary market.
How do DSTs differ from REITs?
DSTs are often compared to Real Estate Investment Trusts (REITs), which are also a passive way to invest in real estate. However, there are some distinct differences between the two. For one, DSTs are typically created for a single property, whereas REITs may own dozens or hundreds of properties. Secondly, DSTs are not publicly traded like REITs, which means they are not subject to the same market volatility. Finally, DST investors have the potential to receive more tax benefits than REIT investors, which we’ll discuss further in the next section.
What is a 1031 exchange?
A 1031 exchange, also known as a Like-Kind Exchange, is a method of deferring capital gains taxes on the sale of an investment property. The idea is that by exchanging one investment property for another like-kind property, the investor can postpone the taxes they would have paid on the original property. DSTs are commonly used in 1031 exchanges because they qualify as like-kind properties. Essentially, by investing in a DST through a 1031 exchange, the investor can defer their capital gains taxes and keep their money invested in a passive real estate vehicle.
What are the benefits of using DSTs and 1031 exchanges?
There are several benefits to using DSTs and 1031 exchanges, including:
Diversification: By investing in a DST, you can diversify your portfolio and reduce your risk by owning a share of a large commercial property.
Passive income: You can earn rental income from the DST without the hassle of managing the property yourself.
Capital gains tax deferral: By using a 1031 exchange to invest in a DST, you can defer your capital gains taxes and keep more money invested.
Estate planning: DSTs can also be used in estate planning to transfer ownership of a property to heirs without incurring a large tax bill.
What are the potential drawbacks of using DSTs and 1031 exchanges?
As with any investment, there are some potential drawbacks to using DSTs and 1031 exchanges, including:
Limited liquidity: DSTs are not as liquid as other investments, which means it may be difficult to sell your shares if you need to access your money quickly.
Regulatory risks: DSTs are subject to regulatory risks, such as changes in tax laws or securities regulations.
Fees: DSTs may come with fees, such as management fees or legal fees, which can eat into your returns.
Conclusion:
Delaware Statutory Trusts and 1031 exchanges are powerful tools that can provide investors with many benefits, including diversification, passive income, and tax deferral. However, it’s important to understand the potential drawbacks as well, and to consult with a financial advisor before investing. With the right guidance, DSTs and 1031 exchanges can be a valuable addition to any investor’s portfolio.
