1031 Exchanges and Delaware Statutory Trusts

11 Apr , 2017  

Over the last couple of years, secured equipment finance and asset securitization transactions have been structured using the Delaware Statutory Trust. A Delaware Statutory Trust – or DST – is a legal entity created under the Delaware law for investment purposes. It is a passive, professional type of ownership that allows investors to defer capital gains taxes through an IRC 1031 exchange. In other words, a statutory trust is a real estate investment tool. If you reach the time to sell your business, you should consider a DST as a like-kind exchange.

Use Delaware Statutory Trusts in Like-Kind Exchanges

The DST qualifies as an investment under the section 1031 of the Internal Revenue Code. To put it simply, the statutory trust is classified as an investment fund for tax purposes. Even if the Delaware Statutory Trusts are not something new, it is only recently that they have become relevant. As a taxpayer, you can exchange real estate assets for an interest in the investment fund but no gain or loss is recognized if you meet the 1031 exchange criteria. The Revenue Ruling allows DSTs to own 100% of the interest in the real estate. 

Basics of Like-Kind Exchanges

If you are ready to do a like-kind exchange, you need to learn how Delaware Statutory Trusts work. What happens is that you purchase sell or relinquish qualified property under the statutory trust umbrella, after which you and the other investors purchase beneficial interests. You purchase interest in the Delaware Statutory Trust, which holds title to the property. The simplest type of tax-deferred exchange is a simultaneous swap. Basically, you trade one real estate asset for another on the same day. If you successfully complete the like-kind exchange, you will avoid tax liability, which ultimately leads to wealth creation.

Transactions That Can Be Realized With Delaware Statutory Trusts

When it comes to Delaware Statutory Trust investing, there are endless possibilities. You can for instance buy any type of commercial real estate, like a shopping center with the DST for 1031 transactions. Other examples of properties include retail buildings, apartment communities, and office buildings. As stated previously, there are countless opportunities. It is possible to exchange an apartment complex for a shopping center or a small office for a vacation home. The greatest thing of all is that the real estate assets are professionally managed.

Benefits of Using Delaware Statutory Trusts for Like-Kind Exchanges

Suing Delaware Statutory Trusts is beneficial, as you can see.

  • Limited liability: DSTs offer limited personal liability to their personal assets. The structure protects you from personal liability beyond the amount of your investment.
  • One borrower: The lender makes the loan to a single borrower, which is the DSTs sponsor. Since the investment fund owns 100% of the property, it is easier to get a mortgage loan.
  • High number of investors: DSTs permit a large number of trustees. Up to 100 people can participate as beneficial owners of the property. The great thing is that they do not have to be located in Delaware.



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