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What Is A 1031 Exchange And How Does It Relate To DSTs?

A 1031 exchange, also known as a like-kind exchange, is a tax-deferred transaction allowed under the United States Internal Revenue Code (IRC) Section 1031. This provision allows real estate investors to defer paying capital gains taxes on the sale of one property by using the proceeds to purchase another “like-kind” property.

A Delaware Statutory Trust (DST) is a type of real estate investment vehicle that can be used in a 1031 exchange. DSTs allow multiple investors to pool their money together to invest in a professionally managed real estate property or portfolio of properties. By investing in a DST as part of a 1031 exchange, an investor can defer capital gains taxes on the sale of their relinquished property and potentially increase their cash flow and potential for appreciation through ownership in the DST.

In a 1031 exchange involving a DST, the investor sells their relinquished property and directs the proceeds to a qualified intermediary, who holds the funds until they are used to purchase a beneficial interest in a DST. The investor becomes a beneficial owner of the DST, which holds title to the replacement property. The DST structure allows for fractional ownership of large properties, which can make it easier for investors to diversify their holdings and potentially increase their returns. It’s important to note that the rules surrounding 1031 exchanges and DSTs can be complex, and investors should consult with a qualified tax advisor before pursuing this strategy.