Delaware Statutory Trusts

1031 Exchange

What is a1031 like-kind exchange?

A 1031 like-kind exchange allows an investor or business owner to sell an investment property and replace it with another property (passive or active ownership) of equal or greater value within a timeframe of 180 days from the date of close using a qualified intermediary. If all the criteria are met the investor can defer taxes on up to 100% of capital gains created from the sale of the original property. Some form of 1031 like-kind exchanges has been around since 1921.

Are there Certain Timelines or Guidelines I must follow when conducting a 1031 like-kind exchange?

Yes, the IRS has strict timeframes and guidelines when it comes to conducting and completing 1031 like-kind exchanges. If you are contemplating a 1031 like-kind exchange we recommend to start speaking with a qualified intermediary (QI) sooner rather than later before the close. The timeframe starts on the day you close on your relinquished property. You have 45 days to identify potential replacement properties and another 135 days to acquire the replacement property. So the total time frame is 180 days to complete the whole exchange from start to finish. Again, a good qi will guide you through the process.

A QI will also need to receive and transfer the funds. You as the exchanger cannot take constructive receipt of the sale proceeds. If you do the exchange is null and void.

DELAWARE STATUTORY TRUST (DST)

Delaware Statutory Trusts or DSTs were created in 1988 under the Delaware Statutory Trust Act (DSTA). A DST is a separate legal entity formed as a trust under Delaware law. Revenue Ruling 2004-86 provided further guidance from the Internal Revenue Services (IRS) and Treasury Department for use in an exchange. If properly structured, the DST will be classified as a grantor trust for federal income tax purposes and, as a result, the purchaser of a beneficial interest in the trust will acquire an undivided interest in the asset(s) held by the DST.

What is a Delaware Statutory Trust?

A Delaware Statutory Trust is a separate legal entity formed as a trust under Delaware law. If properly structured, the DST will be classified as a grantor trust for federal income tax purposes and, as a result, the purchaser of a beneficial interest in the trust will acquire an undivided interest in the asset(s) held by the DST. DSTs may qualify for 1031 exchanges.

What are some of the Benefits of a DST?

A DST may offer potential benefits that could be attractive to someone selling appreciated investment real estate. In addition to allowing the individual to defer taxes, a DST may offer the following:

• Lower minimum investment amount

  A lender only needs to make one loan because the DST owns 100% of the real estate

(for non-tax purposes)

  The lender does not underwrite each investor

  Sponsor makes decisions on behalf of the investors

  Investors cannot cause a default on the entire loan

How does it work?

A Delaware Statutory Trust is a separate legal entity formed as a trust under Delaware law. If properly structured,

1) Exchanger sells property and proceeds are

escrowed with a Qualified Intermediary (QI).

2) QI, through a written agreement with the investor,

transfer funds for purchase of replacement property.

 3) Exchanger receives new property or DST interest.

 

Why Consider a DST?

  Potential to own institutional quality real estate

  Ability to diversify by property type and location Turnkey solution: Sponsor is responsible for sourcing, due diligence, structuring and financing of debt, property and program management

  The fast and efficient closing process to meet timing requirements in the certainty of closing on the acquisition of replacement property

  Elimination of property management responsibilities

  Potential for monthly income

  Long-term, non-recourse financing in place

  Potential for Competitive income yields

Potential Benefits to Utilizing Delaware Statutory Trusts in a 1031 Exchange Situation:

NO INDIVIDUAL GUARANTY - The Delaware Statutory Trust "DST" is the single owner of the real estate and borrower under the loan secured by the real estate; the lender usually underwrites the DST (and the sponsor of the DST) and not each investor. The loan is typically non-recourse to the investor (the investor is not required to sign-on guarantees for non-recourse carve-outs on the loan and there are no credit requirements). However, each investor must be an accredited investor under applicable securities laws.

REDUCED PAPERWORK - Investor owns beneficial interests in the DST rather than a direct real property interest, which would require deeds, etc., providing for a simpler paperwork process.

SMALL MINIMUMS - The typical $100k minimum investment allows more flexibility for investors to not only purchase interests in larger commercial real estate, which would otherwise require more capital, but also diversify their exchange into several properties.

BACK-UP IDENTIFICATION - Considering a DST in a 1031 exchange situation is a great way to save an exchange when used as a backup to another potential property that falls through and/ or taxable boot situation.

PASSIVE INVESTMENT - The Trustee/Administrative Manager of the DST is responsible for the day-to-day management, relieving the active management burden from the investor

OPTIONS - DST offerings may vary by:

a. Locations

b. Property types

c. Debt Options - Choose from highly leveraged, moderately leveraged, or no leverage offerings

d. Single asset or Portfolio offerings