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Leveraging Delaware Statutory Trusts (DSTs) for a 1031 Exchange can be a highly effective strategy to defer capital gains taxes while reinvesting in institutional-grade real estate.
DSTs meet the "like-kind" property requirements of a 1031 exchange, as the Internal Revenue Service (IRS) considers fractional ownership in a DST to be equivalent to owning physical real estate. This ensures that your reinvestment qualifies for tax deferral under 1031 rules.
DSTs are particularly useful for completing a 1031 exchange due to their flexibility, accessibility, and ability to simplify the process.
Here's how you can use DSTs to help successfully complete your 1031 exchange:
Easy Identification of Replacement Properties
One of the requirements of a 1031 exchange is identifying replacement properties within 45 days of selling your property. DSTs provide access to pre-vetted, institutional-grade real estate properties that are readily available, making it easier to meet this deadline.
Flexible Investment Amounts
Since DSTs are fractional ownership investments, you can use them to diversify your replacement property holdings across multiple locations and asset types. Often, the proceeds from the sale of your property may not align with the price of a single replacement property. This is where DSTs can be a great alternative since you can use them to divide that amount across multiple properties and avoid triggering capital gains taxes.
Access to Institutional-Grade Real Estate Without Active Management Responsibilities
If you're transitioning out of actively managed real estate (e.g., being a landlord), DSTs provide an ideal solution. DSTs provide access to high-quality, income-producing properties, such as multifamily housing, industrial warehouses, or retail buildings, that individual investors may not typically afford or manage directly. This allows you to reinvest your 1031 exchange proceeds into properties that are often more stable and professionally managed. As passive investments, DSTs shift the property management burden to the sponsor, allowing you to enjoy the income without the stress of direct property oversight.
Simplified Exchange Process
DSTs are "pre-packaged" investment opportunities. Their structure, management, and financing are already in place, reducing the time and effort needed to conduct due diligence. This simplifies the exchange process and makes DSTs ideal for investors who need to complete their 1031 exchange quickly.
If your original 1031 exchange plan falls through or you struggle to find replacement properties within the 45-day identification period, DSTs can act as a backup plan. Because DSTs are typically turnkey investments, they can help you complete your exchange without jeopardizing your tax deferral.
In sum, DSTs offer the flexibility and convenience needed to meet 1031 exchange requirements and maximize your investment potential.
It is important to partner with a trusted sponsor to identify DSTs that match your investment goals and invest in the selected DSTs within the timeline to finalize your 1031 exchange. Keystone is passionate about delivering value and positively impacting the world. Our team consists of professionals with a wealth of experience across the real estate acquisition, due diligence, and financial services industries.
Learn more about our DST strategy and portfolio here or schedule a call with us if you are interested in learning more.