1031 Exchange Alternative
DSTs Provide More Investment Options Than a 1031 Exchange:
No Like-Kind Reinvestment Conditions
A Deferred Sales Trust (DST) offers an alternative to a 1031 exchange, providing more investment options without the like-kind reinvestment conditions and timeline restrictions. Unlike a 1031 exchange, a DST allows the Trust to diversify into other holdings, including assets or financial instruments that are not typically allowed by other capital gain deferral methods, such as stocks, bonds, or mutual funds. This is especially beneficial if the seller cannot find suitable real estate or if the market is experiencing a slump or is overvalued. The seller can remain in the DST for years while waiting for the market to correct.
Moreover, the DST allows the seller to reinvest back into real estate or even a business while providing a unique opportunity to park the sale proceeds until the market corrects or a more ideal property becomes available. This is a significant benefit that provides peace of mind, especially considering that there are no short deadlines or requirements related to upside acquisition costs or debt replacement.
In summary, using a DST instead of a 1031 Tax Deferred Exchange to reinvest back into real estate may be ideal for those who wish to:
- “Park” their money and wait for the right opportunity to enter back into the real estate market;
- Are selling at a high point in the market and believe that the Real Estate market is about to go through a downturn in values;
- Have sold property that has been subject to at least 15 years of depreciation write-offs or property stemming from one or more prior exchanges with a total amount of time with claimed depreciation write-offs of at least 15 years.
What is a Deferred Sales Trust
A DST is an irrevocable trust that utilizes the installment sale treatment under the Internal Revenue Code (IRC) 453 to defer the taxes due on the sale of a business, real estate, or other taxable assets. The grantor sells the asset to the DST in exchange for a promissory note or deferred installment contract. The DST then owns and controls the asset until it is sold to another third-party for the full sales price. The sale proceeds are then used to pay the grantor under the promissory note or deferred installment contract.
What’s the difference between a Deferred Sales Trust and a Delaware Statutory Trust?
Both kinds of “DSTs” can be used to defer capital gains taxes, but they do so in distinctive ways.
The Deferred Sales Trust can, but is not required to, reinvest the sale proceeds into other investments. There is no timeline or like-kind reinvestment requirement. The grantor only pays capital gains tax on the principal payments received from the Deferred Sales Trust, thus deferring the taxes due by the installment sale.
Delaware Statutory Trusts is used to help investors defer capital gains taxes as part of a 1031 exchange. Given their legal structure, shares in a Delaware Statutory Trust that holds real property can qualify as “like-kind” to real estate owned for investment. This is part of enabling one to use a 1031 exchange by acquiring qualifying shares in a Delaware Statutory Trust.
Deferred Sales Trusts, by contrast, provide an alternative to the 1031 exchange. Deferred Sales Trusts are another method for postponing capital gains taxes. They are not beholden to any timeline rules or property identification rules that constrain 1031 exchanges.
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