Are you a real estate investor looking for a change? If you’re looking to simplify your life and diversify your portfolio without incurring capital gains taxes, then a 1031 exchange into a Delaware Statutory Trust may be a good option for you.
First, let’s define some terms and go over the basics.
What Is a 1031 Exchange?
The government taxes income, whether it is earned through working a job or selling an asset for more than you paid for it. Selling appreciated assets can generate quite a tax bill, especially large assets like real estate. This can be detrimental to real estate investors who simply want to diversify their portfolio but keep their money invested.
Section 1031 of the Internal Revenue Code was added to enable real estate investors to sell their property and reinvest the proceeds without having to pay taxes on the gains. To take advantage of Section 1031, the property must be exchanged for like-kind property of greater or equal value for investment use. The investor has 45 days after the sale of the property to identify a new property to put the money into and 180 days to complete the transaction.
What Is a Delaware Statutory Trust?
A Delaware Statutory Trust (DST) is a trust established according to the laws of the state of Delaware. A DST is classified as a grantor trust for federal income tax purposes so the owner of a beneficial interest has an undivided interest in the assets owned by the trust.
DSTs are set up by sponsors to hold investment real estate. The sponsors then sell beneficial interest in the trust to investors. The trust itself holds 100% of the interest in the property and manages it.
How Delaware Statutory Trusts Are Used for 1031 Exchanges
Because an investor has an undivided interest in the assets owned by the trust, ownership qualifies as a like-kind real estate exchange for purposes of Section 1031. That means that a real estate investor can sell a property and, instead of purchasing a new property, invest the proceeds in a DST without incurring taxes.
The Benefits of Delaware Statutory Trust Ownership
The ability to change ownership from real property to a DST offers a number of benefits to investors. First of all, it provides opportunities for greater diversification. Minimum investments are usually $100,000, so investors can have ownership in various properties with smaller cash outlays.
Another benefit is that the trust manages the property, not the investor. Many real estate investors come to a point where they prefer a more hands-off investment than rental real estate. A DST allows them to scale back their involvement without owing capital gains taxes.
Other benefits include simplicity in financing, as the trust is the one that obtains financing instead of the individual investors. Also, transferring a beneficial interest in a DST is easier and faster than buying a property directly.
Is a Delaware Statutory Trust Right for You?
If you’re still not sure if a Delaware Statutory Trust is the best fit for you, don’t worry. We always say, you don’t have to be an expert at financial planning or investing, you just have to know who to ask. Our HBA Wealth team can help evaluate and discuss your options to determine the best step given your unique situation. To get unbiased answers from a team you can trust, contact us at (626) 529-8347 or email Ricky directly at email@example.com.
About Haydel, Biel & Associates
Haydel, Biel & Associates is an independent financial advisory firm serving individuals and families near Pasadena, California. The firm was founded in 2004 by Chris Haydel and Ricky Biel with a desire to provide unbiased, client-centered, community-based financial advice. Together, they have built a practice that has grown into a family of caring, smart professionals committed to blending proven investment methodologies with creative financial technologies that make it easier than ever to accomplish your goals. They strive to keep things simple and fun to give their clients peace of mind and alleviate financial stress. HBA Wealth takes care of their clients’ needs first and foremost and goes the extra mile to make their clients’ finances grow. To meet and see how the HBA Wealth team may be able to help, contact them today at (626) 529-8347 or email Ricky directly at firstname.lastname@example.org.
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