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Delaware Statutory Trusts (DSTs) can be a powerful tool to help mitigate your tax burden, especially for real estate investors seeking to defer capital gains taxes.
Understanding DST Tax Benefits Through 1031 Exchanges
The primary tax benefit of investing in DSTs is their eligibility for 1031 exchanges, which allow you to defer capital gains taxes when selling a property. By reinvesting the proceeds from the sale of your real estate into a DST, you can defer taxes on the capital gains. The IRS considers fractional ownership in a DST as “like-kind” property, qualifying it for 1031 exchange treatment.
Eliminating "Boot" Through Strategic DST Investment
A common issue in 1031 exchanges is "boot", which refers to any leftover cash or non-like-kind property from a transaction that is subject to taxes. DSTs help avoid this by allowing you to invest any remaining exchange funds (even small amounts), ensuring the entire proceeds are reinvested in qualified properties. This minimizes or eliminates taxable gains on leftover funds.
Maximizing Depreciation Benefits in DST Investments
Furthermore, when you invest in a DST, you may benefit from depreciation deductions associated with the underlying properties. Investors may claim a share of the depreciation allocated to the trust’s properties, which can offset taxable income from rental earnings. These deductions can potentially significantly reduce the taxable income generated by your DST investment, lowering your overall tax liability. Additionally, by using a 1031 exchange into a DST, you defer the depreciation recapture tax along with the capital gains taxes, further reducing your tax burden.
Managing Low Cost Basis Properties Through DSTs
Also, if you own a property with a low cost basis (meaning it has appreciated significantly over time), selling it outright would result in a hefty tax bill. By using a DST through a 1031 exchange, you can defer these taxes indefinitely while reinvesting into income-generating properties.
Comprehensive Tax Benefits of DST Investments
DSTs offer multiple avenues to mitigate your tax burden, from deferring capital gains taxes and depreciation recapture through 1031 exchanges to providing tax-efficient income and estate planning benefits.
Conclusion: Strategic Tax Management with DSTs
By leveraging the DST structure, investors can preserve more wealth, reinvest strategically, and reduce overall tax liabilities. If you're looking for ways to maximize your real estate investment returns while minimizing taxes, DSTs are a highly effective option.
Learn more about how Keystone’s portfolio of DSTs can help you mitigate your tax burden. You can also schedule a call with us anytime using the link below.