1031 Exchange, DST, Real Estate, Single Member LLC, TIC
DST is not the only 1031 Exchange Solution
When the IRS acknowledged the Delaware Statutory Trust (DST) as a direct investment in real estate as opposed to a security, it became the vehicle of choice for advisors and their clients executing a 1031 exchange. The DST offered relatively small investment minimums, access to institutional type properties, convenient debt financing, and familiar marketing. On the other hand, DSTs are restricted from certain activities: Capital improvements, new or renewed leases, new or refinanced debt.
Kiplinger recently published an article describing the five types of investors that should NOT invest in DSTs. The non-accredited investor is a non-issue: most investors who are executing a 1031 exchange are accredited often by virtue of the property being sold. The others, though, deserve some closer consideration.
The builder/developer presents a complex issue. For this type of firm, the real estate often is considered inventory. a 1031 exchange is only available for properties – both the relinquished and the replacement – that are held for investment.
A more aggressive investor, what the article refers to as a younger investor, a more active investor (the Do-It-Yourselfer), and the investor needing liquidity could still execute a 1031 exchange. They will have to use an entity other than a DST, though, since the DST restrictions will prohibit the pursuit of strategies these investors will typically pursue. Archon Investments has published a chart showing how a single member LLC and a Tenant-In-Common structure compare with the DST in terms of operations, financing, diversification, investor control of the property, closing timelines and costs. We have also reproduced the chart on the landing page of our website.
A 1031 exchange is a powerful tool for retaining accumulated wealth. The DST is an effective tool for passively holding a replacement property acquired through a 1031 exchange. If your client is not so much a passive real estate investor, consider alternative ownership structures.
