In layman’s language, ‘Boot’ is defined as anything given in addition to. When it comes to 1031 exchanges, Boot is the cash or money saved at the end of the exchange. For example, say you sold your investment property for $500K. Now, to qualify for a 1031 exchange, you must reinvest $500K into another like-kind property. But what if the replacement property you identified doesn’t cost that much? Say, it costs only $350K. In such a situation, you will have to pay tax on $150K (Boot), or your entire exchange will get invalid.

What should you do to avoid Boot?

Find a replacement property of the same value.  

If you don’t want to be penalized for Boot, the basic thing you could do is find a replacement property that costs as much as your relinquished property. It could be challenging. However, it isn’t impossible. Talk to your advisor or consult a local real estate broker. Look out for a 1031 exchange properties list. Compare different properties, and choose the one that costs as much as your relinquished property.

Invest In DSTs.  

Another way to avoid Boot is through a DST investment. A Delaware Statutory Trust or DST is a private governing trust that owns, manages, and sells investment properties. When you invest in a DST, you actually invest in one of its properties. The IRS sees it as a valid real estate investment, which means it qualifies for a 1031 exchange. You can either reinvest your entire 1031 exchange proceeds into a DST or invest the remaining amount. Take the example mentioned above. Say, you sold your relinquished property for $500K, and your replacement property costs $350K. Now, you can invest the remaining $150K into a DST and complete your 1031 exchange. By doing so, not only will you be able to defer taxes, but you will diversify your portfolio by investing in two different kinds of properties. When you mix a DST investment with a 1031 exchange, it becomes a DST 1031 Exchange or 1031 DST Exchange.

Not one, but there are several benefits of a 1031 DST Exchange.

  • Regular flow of income – A DST investment offers consistent monthly income for a long time. DSTs distribute profit among its beneficiaries as dividends.
  • Low Investment – A DST can have up to a hundred investors or even more. DSTs’ large structure enables them to accept even small investments. You can become a DST member by investing as less as $100K.
  • Freedom from property management – What bothers most investors is the amount of effort and time they have to put in managing their investment properties. However, with a DST investment, you set yourself free from this worry. As DST properties come with pre-attached property managers, investors don’t need to interfere in property management.
  • Tax Deferral Opportunity – When you invest in a DST as part of your 1031 exchange, you are allowed to defer capital gain tax on the transaction.

These are some most significant benefits of a 1031 DST Exchange. However, whether you invest in a DST or just do a 1031 exchange, you must seek the assistance of an expert or advisor. Speaking to a 1031 exchange expert can minimize all financial threats that you might encounter in the future.

 

 

 

 

 

 

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