Given that real estate properties have only gained appreciation over the years and that real estate will continuously grow in value, many investors have ventured in 1031 DST investing (Delaware Statutory Trust). 1031 DST investments have been a solution to the growing demands of investors to diversify their portfolio, minimize risks, and achieve financial prosperity and security among other goals. If you’re an investor who’s also looking for investment opportunities that are safe and have proven to be profitable, you should learn more about 1031 DST investing. Here’s what you need to know.
Before anything else, what are Section 1031 exchanges?
Section 1031 exchange consists of swapping investment properties for like-kind investments. This means it must be similar. These swapping or exchanges are done so you can avoid and defer capital gains taxes. Capital gains taxes are incurred when you sell properties which is why instead of selling, people turn to a Section 1031 exchange.
What is a Delaware Statutory Trust (DST)?
A Delaware Statutory Trust pertains to a legal entity of fractional ownership created under the statutory law of Delaware. Every investor in a DST owns an undivided interest which is treated as a direct interest in real estate for essential tax purposes. It is most commonly used to source replacement properties to complete section 1031 exchanges.
The Benefits of 1031 exchange DST investing
- It passes as a requirement for a 1031 exchange.
A Delaware Statutory Trust is accepted as a debt replacement required by Section 10331 exchanges. You just have to find a DST that acquires like-kind properties to the original one you are exchanging.
- It diversifies your portfolio.
Real estate investments are one of the safest ways investors utilize to diversify their portfolios. It is considered to have minimal risks since real estate has consistently gained a greater value through the years, and is foreseen to do so in the future as well.
- It is a way to gain passive income.
Unlike purchasing a new real estate property like a condominium which you will utilize for rent, residential homes, later on, to be sold, and commercial spaces for lease, DSTs give you minimal, if not none at all, management roles. You don’t have to go through the hassle of finding renters or buyers. DST Managers will accomplish different necessary tasks for you.
- It protects you from liabilities.
Like corporations, it is the DST that will incur liabilities, thus protecting you from any liability issue in the future.
- It allows you to defer taxes and grants the possibility of tax forgiveness.
The main benefit of DST is qualifying you for tax deferral. Instead of selling your real estate property which will cause you to pay capital gains taxes, you can defer these taxes, avoid having to pay now, and allow you to have access and invest in higher quality real estate. This results in higher profitability without tax deductions. More so, potential tax forgiveness to you heirs can be granted at a time of death (step-up in basis on death).