The section contains answers to general questions related to 1031 Exchanges.
1031 DST Exchanges may only be sold to an accredited investor. An accredited investor is an individual having income that exceeds $200,000 singly (or $300,000 with spouse) in each of the last two years, with reasonable expectations of the same income in the current year… or has a net worth of over $1,000,000 alone or with spouse (excluding the equity of that person’s primary residence).
A DST stands for Delaware Statutory Trust and is an entity that is used to hold title to investment real estate. … The typical minimum investment for a DST 1031 Property is $100,000 allowing an investor to diversify his or her exchange proceeds among multiple properties.
A 1031 Delaware Statutory Trust, often referred to as a “DST,” is a separate legal entity created as a trust under Delaware law. Each owner creates a “beneficial interest” in the DST for Federal tax purposes. The investor (you) is called a Beneficiary, and receives a proportionate share of the tax deductions, net income and potential growth from the trust. In order to invest in a DST the entity (owner) must be an Accredited Investor.
This is considered passive ownership-not active-and importantly you have non-recourse debt…meaning your loan is secured by the collateral (property). If the borrower would happen to default the issuer could seize collateral but cannot go to the borrower for any further compensation. Your liability is limited to the underlying collateral. The DST owner does not maintain any management control or dictate any day-to-day property management operations (as a Tenants-in-Common (TIC) exchange usually does) nor any control over the sale of the DST property.
A Qualified Intermediary, as an independent third party, is needed to facilitate a 1031 exchange transaction and hold the funds on behalf of the investor.
When completing a 1031 Exchange transaction you must identify your potential like-kind replacement properties to your Qualified Intermediary no later than midnight of the 45th calendar day following the close of the relinquished property sale transaction. For example, if the sale of your relinquished property closed on October 31st the first day of your 45 calendar day identification period would be November 1 and the 45th calendar day identification deadline would be December 15th.
This 1031 Exchange deadline is exactly 45 calendar days, so if the 45th calendar day lands on a Saturday, Sunday or legal holiday, the 1031 Exchange due date is NOT extended to the next business day.
You must complete your 1031 Exchange transaction, which includes the conveyance (receipt) of title to all of your like-kind replacement properties that you intend to acquire, no later than the earlier of:
(1) midnight of the 180th calendar day following the close of the relinquished property sale transaction, or
(2) the due date of your Federal income tax return for the tax year in which the relinquished property was sold, including any extensions of time to file.
You do not need to be concerned about part (2) above unless the first relinquished property transaction sold and closed on or after October 17th and on or before December 31st of any given tax year, which would mean that the 180th calendar day would fall after April 15.
Internal Revenue Code Section 1031 allows an investor to maximize dollars invested while creating an avenue for estate planning through the continued deferral of gains (or losses) in the real estate investing process.
Types of like-kind properties may include:
- Raw Land
- Multi-Family Rentals
- Single-Family Rentals
- Retail Shopping Centers<
- Office Buildings
- Industrial Facilities
- Storage facilities
A 1031 Tenants-in-Common ownership often referred to as a “TIC” is where the entity that exchanges the property acquires an undivided fractional ownership in other “Like-Kind” property. There can only be up to a maximum of 35 co-owners. The lender may require you to provide personal guarantees. With a TIC you are purchasing an exchanged property where you usually have active management responsibility. You and your co-owners (if any) maintain management control or dictate day-to-day property management operations. You will receive a property deed, but you also have recourse debt that you are held personally liable. In general, recourse debt (loans) allows the lender to collect the debt from you even after they have taken the collateral (property).
One of the biggest differences with these two IRC Section 1031 Exchange strategies is with the DST the trustee is responsible for all the property decisions. With the TIC, the investors (you) are usually responsible for making important property management decisions and unanimous approval is required for a sale, lease or any other new financing from each co-owner. With a DST, the sponsor or an affiliate trustee is the sole borrower and is fully responsible for any loan guarantees and property management decisions.
With a TIC, each investor is a borrower and is responsible for loan liabilities. While the DST Exchange offers less property control to investors, it does remove the challenges faced with many TIC property owners. With a DST there is no need to achieve a consensus, which means that one or two disagreeable investors cannot hold up an important decision…as with a TIC.
The DST property is utilized by having a national institutional sponsor who usually has available different properties diversified by type, geography and value. The big difference is the Tenants-in-Common (TIC) structure usually has active property management. The Delaware Statutory Trust (DST) structure lets the investor play a passive role in ownership.
While many investors like to maintain control over their properties and make every decision about the operation of that property, there may come a time when you want to give those responsibilities up to passively own the properties, and leave the time-consuming property management to someone else. You must be an accredited investor to purchase a 1031 DST.