1031 out of a DST?
Real property only
Real property only
Pursuant to the statutes, the qualifications for like-kind properties can be categorized in two ways:
Substantive qualification: the properties have to be “the same nature or character, even if they differ in grade or quality.” For example, swapping a rental property with a gym space would be allowed. Please note that properties that involve stocks, bonds, notes, securities, and interest in partnerships are excluded.
In addition, further limitations laid out in law are as follows:
For Delaware Statutory Trusts, although you are considered an owner, you will not have control or have any say in the investment decisions. Delaware Statutory Trusts act through its appointed trustees and the trustees may also hire management firms to take care of and handle the properties. These trustees may also hire investment firms to handle the investment decisions or they can make the investment decisions themselves.
On the other hand, Deferred Sales Trusts are created with a specific goal in mind. As such, one is able to draft and negotiate a repayment plan with the trustee that achieves his or her short or long term goals. This could involve deferring payments until retirement or what happens in the event of death or incapacity.
Delaware Statutory Trusts are funded either through direct investments or through 1031 like-kind exchanges in order for the trust to purchase real property for the benefit of the investors. As such, there is a statutory deadline for a specific Delaware Statutory Trust to raise funds through investors. Once this deadline passes, the trust will not be able to collect and deposit additional investments. As a result, any revenue and profits will be limited by the initial investments.
Compared to a Deferred Sales Trust, the trust is designed to sell real property and use the proceeds according to the installment sales contract or installment note. The proceeds from any sale of the real property will be repaid accordingly. Additionally, depending on how the installment sales contract or installment note is drafted, the use and distribution of the proceeds may be modified or changed.
Under a Delaware Statutory Trust, you are considered a fractional owner of the trust and therefore a beneficiary. This means that the trustee and its agents are acting in your best interests by achieving the highest possible rate of return.
Under a Deferred Sales Trust, however, your relationship to the trust is that of a creditor. This is because your interest to the trust is to be repaid according to the installment sales contract or installment note. Like any creditor, your main objective is to ensure that you receive all the amounts you contracted to receive.
Procedural Qualification: any property received by the taxpayer shall not be treated as like-kind property if:
In sum, depending on your business model, investing in real properties through a 1031 DST can be an excellent choice to advance your financial interests with few, if not no, tax obligations.
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