Recently we spoke about the strict requirements for identifying replacement properties when completing a 1031 exchange. Today we will discuss how to establish a backup plan to ensure a successful exchange.
We speak with investors daily about how to best navigate the 45 and 180-day timelines. Anyone who has attempted a 1031 exchange knows that 45 days can go by quickly when choosing a replacement property. Additionally, complications within the 180-day deadline, such as getting outbid or delays in closing, are common among 1031 exchange investors. Thirdly, many investors run into the issue of having remaining funds that they cannot invest due to their replacement property being less valuable than the relinquished property. To avoid situations like these, we often suggest establishing a backup plan by identifying a DST as one of your replacement properties.
Using a DST as an Assurance Plan
Delaware Statutory Trusts (“DSTs”) offer 1031 exchange investors a way to ensure (as long as the DST is open) that 100% of their exchange funds are invested in a replacement property rather than taxed for capital gains. Investors can purchase beneficial interests in the identified DST, which qualifies you as owning a direct interest in the DSTs real estate, satisfying the 1031 exchange requirements. DSTs can also take the headache out of the identification process by offering investors numerous properties that can be identified immediately.
Investing in real estate owned by a DST can be acquired for as little as $25,000-$100,000. You may have extra funds from the sale of your relinquished property that does not amount to enough to purchase a second worthwhile replacement property. When you have a DST identified as a potential replacement property, you have a backstop to ensure you can use all of your exchange funds to acquire investment-grade real estate.
Know if a DST is Right for You
Although a DST is a great tool for many 1031 exchange investors, this type of investment is not for everyone. For one, you must be an accredited investor. To qualify, an investor must earn an individual income of more than $200,000 per year, or $300,000 of joint income for the last two years and expects to reasonably maintain the same level of income, or has a net worth (not including the value of their primary residence) exceeding $1 million, either individually or jointly with his or her spouse. Investors who meet these requirements are typically also considered sophisticated, meaning they have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment.
DSTs are considered long-term investments. It's important to understand the specific estimated holding period of the DST you choose to ensure the timeline fits within your investment goals. Typically these periods are on average 5-10 years. Additionally, with a DST structure, the real estate is managed by professionals. While some investors like enjoying the benefits of owning real estate without the management responsibilities, others may want to keep control of the decision-making. All of the information for each DST is located in the private placement memorandum. While these documents may seem intimidating, it's imperative to understand the benefits and risks before choosing the right DST for you.
Online Identification Tools
Put your backup plan in place by identifying a property within a DST as your third potential replacement property during your identification period. This process has never been more straightforward with the identification tools on our platform. Join the Crowd today for access.
Follow the step-by-step guidelines, and your identification form will be populated and emailed directly to your qualified intermediary.
Speak With a 1031 Exchange Expert
Needing assistance finding your next investment opportunity? The experts at 1031 Crowdfunding have the knowledge to help lead you through finding an investment that suits your situation. Register to Join the Crowd today and learn more about why clients rely on us for their investment opportunities.