How Could A Delaware Statutory Trust And A 1031 Exchange Benefit You?

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The Benefit of A Delaware Statutory Trust And A 1031 Exchange

Over the past decade, several changes to tax laws have created new opportunities for eager investors. One example is the combination of Deleware statutory laws and IRS code Section 1031. The result is a Delaware Statutory Trust(DST), which can be used to avoid excessive tax rates and generate a capital gain. It’s a promising opportunity for many new investors and long-term business owners alike. However, it can be a confusing subject and requires a basic understanding of operation before it can be properly utilized.

What Is IRS Code Section 1031?House building and city construction concept: evening outdoor urban view of modern real estate homes

To begin with, let’s look at IRS Section 1031 and how it can be used to increase capital gains. Also called a 1031 exchange or a like-kind exchange, this IRS code allows property owners to exchange one investment property for another of a like-kind. By making this exchange, the investor can avoid or minimize capital gain taxes on the property. There’s no limit to how many times an exchange like this can be made, which allows investors to continually “roll over” their profits while avoiding capital gain taxes.

The key to qualifying for a 1031 exchange lies in the verbiage “like-kind”. This term is not as straightforward as it may seem. For example, a business can be exchanged for a piece of property. An investor can also exchange their raw land for a strip mall in another area. As long as the investor is willing to sell an asset and then acquire a similar asset during the exchange, then they may qualify for 1031. The new investment property must be of equal or greater value than the original.

There are a few other rules and regulations to the 1031 exchange code. One, the original property that is being sold must be an investment property. This code does not apply to any personal residence. Second, all proceeds from the sale of the original property must be directed towards the purchase of the new property within the allowed time limit of 180 days.

A 1031 exchange is a smart idea for ongoing investment property owners, but how can it help new investors who don’t already have a foothold in the market? That is where the DST comes into play.

What Is A Delaware Statutory Trust?

Despite the name, a DST is not limited to the state of Delaware. A DST is recognized as a legal trust that has been established in the name of a particular business. They are essentially a source of passive investment income for real estate investors who do not want to deal with the hassles of managing properties and tenants.

A DST can be viewed as a type of ownership system. It allows a specific number of investors to purchase ownership of a particular asset. This may sound similar to TIC or single-entity ownership systems but there are some differences. For example, the only real obligation of a DST investor is to enter the trust agreement. That investor then has percentage ownership of that trust but has no physical requirements on the property.

Perhaps the most significant advantage of DST is that it qualifies for IRS Code Section 1031. Investors generate passive income from the DST and eventually can exchange their trust ownership for a DST offer of greater value. Thus, over time, not only will the DST generate income but it will deter capital gain taxes until the investor eventually sells their ownership.

One advantage of a DST qualifying for IRS Code Section 1031 is that it can be used to purchase multiple properties. This makes it an attractive option for investors who want to spread their risk across multiple investments. By pooling their money together, investors can purchase high-value properties that they might not have been able to afford on their own. There are further benefits of a 1031 Exchange that you can utilize as part of your DST investment. 

Is This A Smart Investment Options?

Keep in mind that a DST is not for everyone. However, for those seeking to build a long-term, diversified portfolio with passive income sources, then it is absolutely a great option. The income-generating DSTs could continue to roll over and grow for an investor’s entire life if they choose. That expanding capital can then be passed down to future generations as a safe source of income and opportunity.

A DST is an excellent solution for investors seeking more diversification. There is a great deal of variety and security even among DST options. An investor can place any amount they choose in a specific DST, which allows them to split large capital investments among multiple properties.

Finally, the laws regulating DSTs greatly benefit investors. For example, a DST trust is required to keep a certain amount of cash in reserve for expenses faced on the property. These reserves are documented carefully and any excess of cash is distributed among the trust owners on a regular basis. It’s yet another way that a DST can pump more capital into your income stream.


Play It Safe And Play It Smart

Not every investment needs to come with a huge risk. Some investments are simply smart and reasonable. These are the investments that can provide a source of income for generations to come. They can be used to create new opportunities and allow investors to face higher risks elsewhere. We recommend investors use DSTs and IRS Code 1031 to their advantage before new tax laws make it more difficult.

About the author

Nathan Tarrant

Nathan has worked in financial services, marketing, and strategic business growth for over 30 years. He was the founder and COO of a Queens award-winning financial services company based in the UK.

He operated as a financial & alternative investment advisor to delegates of the UN, World Health Organization, and senior managers of Fortune 500 companies in Geneva, Switzerland, after the 2008 financial crash.

Today he is head of operations and marketing for Alphascend Capital Group based in Virginia.

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