If you’re thinking about doing a 1031 exchange of investment real estate or a business, or have already started the process, you know that the stringent time frames required by a 1031 exchange can be challenging at best and impossible to meet at worst. You have only 45 days from the sale of your property to identify “like kind” property to buy. You have only 180 days from the sale of your property to close on the purchase of the “like kind” property.
Deferred Sales Trusts (DSTs) have been in existence for years, but nevertheless remain relatively unknown today. We here at Reef Point, therefore, thought it would be a good idea to give you a brief overview of the three main pillars of a DST, namely:
If you have invested in real estate in the past, you likely have also done a 1031 exchange. As you undoubtedly learned, however, 1031s have numerous risks and disadvantages. While they defer your capital gains tax liability when you sell a piece of appreciated real estate, the rules and regulations that apply to them can make them unappealing at best and downright dangerous at worst. Why? Because they often fail, leaving you with an enormous capital gains tax to pay.
The DST can be used as a vehicle that does what a 1031 exchange does, without the problematic timelines and other stringent requirements, but it also can do so much more. In order to understand the pros and cons of a DST and a 1031 exchange and the benefit they give you, you must first understand 1031 exchanges themselves.
An IRS 1031 exchange is a fantastic tool for an investor to transfer a real estate asset into another without recognizing a taxable capital gain. However, there are limitations of its use and strict rules governing its use: like-kind limitations, time windows and asset type restrictions. If you wish to diversify your real estate asset into other investments or if your asset is not real property to begin with, then you need a 1031 exchange alternative like a Deferred Sales Trust.