Conducting A Delaware Trust 1031 Exchange: Analyzing Pros And Cons

Do you know that you can invest in multiple properties when doing a 1031 exchange? The prospect of investing in multiple properties comes with multiple benefits like a streamlined flow of passive income and a chance to diversify your investment portfolio. 

Delaware Statutory Trusts (DSTs) are a unique investment opportunity when doing a 1031 exchange. DSTs are managed and operated by sponsors and a third-party maintenance company which allows investors to purchase partial ownership in institutional grade assets. 

However, if you are considering investing in DSTs, there are a lot of things to consider. Starting with, here are some pros and cons of investing in the Delaware trust 1031 exchange. 

Understanding DSTs

Before we dig deep into the prospect of investing in DSTs, let’s understand what exactly it is. DST is a real estate investment option that allows multiple investors to invest in a single institutional-grade property by purchasing fractional ownership. 

And, because DSTs qualify as like-kind investment properties, investors doing a 1031 exchange can complete the process by investing their proceeds in DSTs. 

The co-owners of DSTs earn a regular passive income through rent collection, sale of a part of the property or other operations. 

Pros Of Delaware Trust 1031 Exchange

Here’s a breakdown of all the reasons why you should invest in a DST-

DST qualifies for 1031 exchange. 

According to the IRS 1031 code, you can defer the capital gain taxes on the sale of an investment property if you sell it and invest 100% of the proceeds in a new, like-kind investment property. 

Stating again, DSTs are eligible as like-kind properties. Meaning, if you reinvest the proceeds in a DST, you can successfully complete a 1031 exchange and defer the taxes on your sales proceeds. 

To successfully complete a 1031 exchange with DST, you must identify a DST within 45 days of selling your relinquished property and close on it within 135 days of identifying the property. Moreover, once you sell the relinquished property, the sale proceeds must be transferred to your Qualified Intermediary (QI) to get started with the 1031 exchange process. 

It allows you to defer capital gain taxes.

If you invest 100% of the proceeds in a DST, you can defer the capital gain taxes on your sale proceeds of the relinquished property. 

The property is managed by a third-party maintenance company.

One of the best perks of investing in a DST is that you don’t need to manage or maintain the property independently. Everything from rent collection to property maintenance is done by a third-party maintenance company hired by a sponsor. 

This means you can tackle almost all landlord responsibilities and earn passively. 

DSTs allow you to become co-owners of institutional-grade assets.

DSTs are usually high-end properties that you might not be able to invest in individually. This form of investment allows you to gain partial ownership over institutional properties that comes with assured returns. 

The most common forms of DSTs include multi-family structures, multi-tenant retail properties, self-storage facilities, industrial properties and multi-tenant office buildings. 

This helps you diversify your income and investment portfolio. 

Cons Of Delaware Trust 1031 Exchange

Though DSTs come with a fair share of advantages, there’s no denying that investing in DSTs can come with some drawbacks too. Here are some of them-

You lose control.

Because you would only be a fractional owner of a DST, you would have no decision-making power. In fact, the IRS doesn’t allow co-owners to gain operational control over any DST. 

So, if you are looking for an investment where you can be in full control, DSTs may not be for you. 

DSTs often come with execution risks.

DSTs require you to make full payment within a short amount of time. And, this period is not enough to identify some major errors in the property. 

However, you can rectify this by getting in touch with a registered investment advisor and seeking the right advice. You can also get in touch with our network of registered advisors who carry extensive industry experience up their sleeves and would work with you to help you identify the right DST. 

Illiquidity can be an issue.

Once invested, your funds will no longer be easily accessible. It is a good option for an investor looking for long-term options. But, if you think you might need the funds sooner than later, you won’t be able to access the funds easily if they are invested in a DST. 

Wrapping Up

It is often recommended to keep DST as an option when conducting a 1031 exchange. They are easier to invest in, have a streamlined process and allow you to invest with as low as $100,000. Moreover, if you want to earn passive income and don’t want any role in active decision-making, DST is perhaps the best bet you got.