Investors use 1031 exchanges to swap non-performing assets with another income-producing property without being taxed. After selling the old property, you need to hunt for replacement properties one after another. A 1031 properties list can help you find a replacement property easily. However, you must also check different investment options that qualify for a 1031 exchange. Depending upon location, Cap Rate, NOI, etc., you can choose one of these investment options and complete your 1031 exchange. If you want, you may also split your 1031 proceeds and invest in multiple properties. For investors who are in their identification period, investing in DSTs can be a wise decision.
DSTs are the most affordable passive investment options.
It might be possible that you may not want to own property all alone. Buying an investment property doesn’t only mean a regular flow of monthly income, but it also invites the liability of property management. With a DST investment, you don’t need to interfere in property management as such properties are managed by professionals. A DST owns multiple assets in its portfolio, which means you can invest in several DST properties at once. You may find a DST having a hundred investors or even more. You can also exchange a non-performing asset with a DST property using a 1031 exchange.
Understanding DST Investment Structure –
A Delaware Statutory Trust or DST is an independent entity that owns manages and sells investment properties. A DST is formed by filing a Certificate of Trust with Delaware Division of Corporations. You can find large income-producing properties in the DST portfolio. When you buy DST shares, you get fractional ownership in one of the DST properties. Several investors invest in one DST asset, and you can find up to a hundred or even more investors in a DST. You may need the help of a real estate broker or agent to purchase DST shares.
Major Benefits of A DST Investment –
- Stree-Free Asset – DST properties are managed by professional asset managers. As a DST investor, you don’t need to look after your property.
- Low investment – As DSTs usually have several beneficiaries, you don’t need to have a huge capital to begin a DST investment. In fact, you may co-own a DST property for an amount as less as $100K.
- Diversification – DSTs allow you to invest in several assets at a time. You can split your 1031 proceeds and invest in multiple DST assets. It’s a unique way to diversify your portfolio by adding different grades of assets.
In addition, a DST investment also benefits like increased cash flow, tax advantages, pre-arranged and non-recourse financing, etc.
You must abide by 1031 exchange rules if you’re planning a 1031 Exchange or searching 1031 exchange properties for sale.
You may not be able to exchange two different property types as only like-kind assets qualify for a 1031 exchange.
Two properties are considered like-kind if used for the same purpose, i.e., generating revenue, irrespective of grade or quality. So, if you were using your old property for business purposes, you must use the new asset in the same manner.
Hunt for properties from the first day.
After selling the old property, you get 45 days to identify new property or properties. This tenure is known as the Identification Period. No extension shall be given if you fail to come up with replacement property in the given time. You can identify as many investment properties as you like (the price of the new asset should be equal to or greater than the selling price of the old property).
Close your 1031 exchange in 180 days to avoid disqualification
It’s time to purchase all the identified properties. You must complete the transaction and close your 1031 exchange within 180 days (including the identification period).
Hire a Qualified Intermediary (QI) in the beginning.
A Qualified Intermediary is an individual who completes your 1031 exchange. He is the one who keeps your sale proceeds from the old property, helps in property identification, and purchases the replacement property on the closing day. Your QI stays with you throughout your 1031 exchange.
Both properties must have the same owner.
Since you were the owner of your old property, the title of the new property must also be in your name. You are not allowed to transfer the property title to anyone else.
Try to purchase a property that costs the same as your old property.
You are allowed to purchase replacement property of higher value than your old property, but that will complicate the situation a bit. You may have to find a lender or invest cash from your account if the new property’s price exceeds the value of the old property.
You can’t keep both properties simultaneously.
No matter what, you cannot keep both properties (new and old) together during your 1031 exchange. In case you find an investment opportunity that you must act on before selling your relinquished property, ask one of your relatives or your QI to purchase the property on your behalf. Such transactions are known as ‘qualified parking arrangements.’