1031 Exchange Alternative
DSTs Provide More Investment Options Than a 1031 Exchange:
No Like-Kind Reinvestment Conditions
A DST does not require the taxpayer to reinvest in like-kind replacement property and is not subject to a 1031 exchange’s timeline restrictions.
More investment options. A Deferred Sales Trust can be a useful tool for those who are planning for retirement and are looking to diversify into other holdings. Unlike a 1031 exchange, the seller has more investment options with a Deferred Sales Trust.
A 1031 exchange restricts the seller to like-kind property, which is typically limited to real estate, while a Deferred Sales Trust can be used to acquire assets or financial instruments that are disallowed by other capital gain deferral methods. This can include investments such as stocks, bonds, or mutual funds, among others. This is especially beneficial if the seller cannot find any suitable real estate or the real estate market is experiencing a slump or is currently overvalued. The investor can remain in the Deferred Sales Trust for years while waiting for the market to correct.
Seller may still reinvest back into Real Estate, or even a business. The DST also provides a unique opportunity to park the proceeds of your sale until such time as the market corrects or you find a more ideal property to reinvest into. It can be a huge benefit to you, not to mention the peace of mind knowing you are not at the mercy of short deadlines or requirements related to upside acquisition cost or debt replacement.
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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