Understanding DSTs and 1031 Exchanges

In the land industry, there are a variety of ways to turn property into profit, but none are quite as enticing to modern landowners as the DST 1031 exchange. Understanding the basics of a DST or 1031 exchange is necessary for anyone looking to sell their land, as these legal processes can allow for the deferral of capital gains taxes, meaning more money in your pocket at the end of a sale!

What is a 1031 Exchange?

The 1031 exchange is a process that investors use to defer capital gains taxes on the sale of a property. Every seller is faced with capital gain taxes on any property sale, which are based on the amount of appreciation between the initial purchase and final sale prices.

Capital gains tax rates vary by state, but a seller could end up paying up to 35% of their final sale price in capital gains taxes if they aren't careful. This can come to a fairly significant amount of money depending on the size of the sale, so naturally, the 1031 exchange begins to appeal to landowners when they see how much money they may be losing to capital gains taxes.

The 1031 exchange allows an investor to defer the capital gains tax through the purchase of a similar property, known as a "replacement property," thereby turning that money that would've been paid in capital gains taxes into more real estate. The 1031 exchange is great for anyone that wants to sell their property but isn't quite ready to cash out of the real estate sector altogether, especially when that 1031 is performed through a DST.

What Are DSTs?

DSTs, or Delaware Statutory Trusts, are a kind of investment vehicle popular among real estate investors. DSTs allow investors to invest in fractional shares of a real estate project, meaning they can own a smaller portion of a larger piece of property like an apartment complex or office building. DSTs qualify for the 1031 exchange, meaning that they can be sold and the profits reinvested into a like-property in order to defer capital gains taxes in the same way that an individual landowner can defer taxes through a standard 1031 exchange.

There are many benefits associated with DSTs that are not typically found in other traditional forms of property ownership. For example, investing in a DST or multiple DSTs is a great way to diversify your real estate investment portfolio. DSTs offer access to investment opportunities in real estate properties and projects that would be otherwise inaccessible to most everyday investors.

Investing in a DST is also a way of decreasing responsibilities regarding property management since DSTs are managed by a larger company or entity. Investors in DSTs don't have to lift a finger when it comes to managing their properties, they simply collect a check each month.

The other huge upside to the DST 1031 exchange has to do with inheritance. Typically if a person were to sell a property that they received through inheritance, they would have to pay capital gains taxes on the sale of that property. However, if that same person were to receive that same property having been purchased through a 1031, then the inheritor would pay 0 capital gains taxes on the sale of that property. This is because the property is inherited at its current market value, therefore the property has no appreciated value when it changes hands.

In this way, 1031s can be a great way for aging individuals to ensure that their inheritors can benefit to the fullest extent in the event of their passing. This makes the 1031 exchange extremely popular among landowners whose inheritors aren't interested in owning/keeping a property. In this way, the landowner can ensure that they will leave their inheritors with the most money possible without saddling them with the headache of capital gains taxes.

How Can We Help?

National Land Realty has partnered with RCX Capital Group to assist our clients in performing DST 1031 exchanges. RCX Capital Group works with best-in-class DST sponsors to find the perfect replacement properties for their clients and can assist sellers in identifying suitable replacement properties within the required deadline.

The ins and outs of 1031 exchanges can be extremely complicated, and that's why RCX Capital Group goes to great lengths to educate their clients on the intricacies of the process. If you're interested in learning more about what RCX Capital Group can do for you, then click here!