DST 1031 Exchange: What’s the Income Potential?

A DST 1031 exchange is a transaction involving the sale of one property and the purchase of part of another. It combines two different elements: a Delaware Statutory Trust and a 1031 exchange.

The income potential for these types of transactions is vast. For example, you could use these transactions to help you park profits from a different exchange, so you avoid paying capital gains. You could also use these transactions to help you offload a high-maintenance property (like a rental high-rise building) and trade it for something that someone else manages (while you get profits).

Let’s dig deeper into how a DST 1031 exchange works and why you might consider one.

What Is a Delaware Statutory Trust?

A Delaware Statutory Trust (DST) is a key part of a DST 1031 exchange. A DST allows for fractional real estate ownership. In other words, several people pool their money and buy one large investment property.

A DST gets its name from Title 12, Chapter 38 of the Delaware Code. This legal framework allows people to purchase a part of property that is held, managed, and otherwise controlled by a trustee or board of trustees. Investors make money by their participation, but they’re not required to own the item alone or manage its day-to-day operations.

While a DST has a state name in it, anyone can participate in these assets. They’re designed to be accessible to investors across the United States.

What Is a 1031 Exchange?

A 1031 exchange is the other core part of a DST 1031 exchange. This transaction gets its name from Section 1031 of the Internal Revenue Code. With this tool, investors can sell a business property and roll the potential capital gains into a new property they purchase for investment purposes.

Experts explain that the Internal Revenue Code has recognized a 1031 exchange process since 1939. Since then, thousands of investors have used this tool to help them offload underperforming properties, diversify their portfolios, and make beneficial investment decisions.

A legal 1031 exchange requires outside help. The potential tax benefits disappear if you hold titles to an old property and a replacement version at the same time. A qualified intermediary will hold the funds from the sale and use that for the purchase of a new one, so you don’t break the rules.

How Do These Tools Combine in a DST 1031 Exchange?

A DST 1031 exchange is a complex transaction that combines two important tools to deliver big benefits for investors.

In these transactions, you sell a property and park the funds with your qualified intermediary. Then, you buy a portion (or shares) in a DST with the profits.

Benefits of a DST 1031 Exchange

Why should you consider a DST 1031 exchange when you could simply purchase a different property instead? There are several good reasons to consider this option.

Access Properties You Couldn’t Get Alone

By participating in a DST, you could be a partial owner of a huge building you could never buy without help. If you’ve always wanted to have a slice of an iconic building (and its profits), this could be a fantastic way to get started.

Spread the Risk

Experts explain that most people using a DST have invested in real estate for years and have the scars to prove it. These sales opportunities allow you to share potential drawbacks with plenty of other people. If the building doesn’t perform as it should, you won’t take the hit solo.

Avoid Potential Tax

A typical DST requires an investment of about $100,000. For some large investors using a 1031 exchange, this low fee is a big benefit.

If you’re buying a property that’s worth less than the one you sell in a 1031 exchange, the profits could be subject to tax. You could invest the excess in a DST instead, limiting your risk and your potential tax bill.

Speed Up the Deal

A typical DST is designed specifically for the 1031 exchange process. Often, investors can close the deal in days (not months). If you’re involved in a 1031 exchange and your sale deal falls through, you could rescue your investment and avoid a tax hit by using a DST. This is a good option to keep in hand.

Limit Your Work

Some long-time investors feel exhausted by the daily demands of their properties. If you’re constantly called on to fix leaks, draw up new rental agreements, or otherwise keep your building running, a DST 1031 exchange could be an attractive option. You’ll protect your investment while purchasing something another entity will manage.

Drawbacks of a DST 1031 Exchange

While a DST 1031 exchange can be useful for some investors, these transactions aren’t right for everyone.

A large investor might consider a $100,000+ fee both small and worthwhile, but a newer entrepreneur might find that cost a little daunting. If you can’t afford this level of payment, a DST might not be a smart choice.

A DST also involves letting someone else do the day-to-day work. If you like to remain deeply involved in the inner workings of your investments, this hands-off approach could make you very uncomfortable. Take the time to weigh the pros and cons of this investment type in your specific situation. An expert’s guidance can help you determine if it’s the right choice for you.

What’s the Income Potential of a DST 1031 Exchange?

How much money you’ll make via a DST 1031 exchange depends on several factors, including some factors that are out of your control.

Typically, a DST provides potential investors with a projected income based on rent from the underlying properties minus expenses. How much you’ll pay in expenses can vary from one organization to another.

Additional issues that could impact your income include the following:

The real estate market the DSP participates in
The location of the property
The quality of the asset

It’s critical to read any DSP prospectus carefully and do your homework before you invest.

Get Help With Your DST 1031 Exchange

A DST 1031 exchange is a smart tool for experienced investors looking for new opportunities. My 1031 Pros has helped many individuals and businesses with these transactions, and we’re ready to help you. We can act as your qualified intermediary during this process and ensure everything runs smoothly. Contact us to find out more. We’re ready to answer any questions you may have.