Owning investment property, while often lucrative, is a big responsibility. Do you find yourself worrying about any of the following situations?
- Do you dread the day-to-day responsibilities of managing your property?
- Are you concerned about having to pay capital gains taxes when you sell your highly-appreciated property?
- Are you frustrated by the lack of inventory available to upgrade your property and complete a 1031 exchange?
- Are you frustrated by having to pay extra tax (i.e., boot) because your replacement property is not enough to cover your 1031 exchange transaction?
If you answered “yes” to any of the above questions, then we may be able to help you! Consider using DSTs (Delaware Statutory Trusts) in a 1031 exchange. Contact us or read on to find out the details about these tax strategies.
You may have heard about 1031 Exchanges — i.e., one of the strategies to defer capital gains tax on the sale of an investment real estate property.
The 1031 exchange applies specifically to investment real estate, not your personal residence. In essence, this exchange allows you to defer taxes and use the proceeds from the sale of your property towards a similar replacement property.
1031 exchanges can be tricky because there are several specific guidelines that must be followed in order to successfully execute a 1031 Exchange transaction. If you don’t adhere to these guidelines, the entire arrangement can be voided, and you lose the tax deferral. Some of these stipulations include:
- Replacement properties must be identified within 45 days of the sale of your property
- Replacement properties must be acquired within 180 days of the sale of your property
For these reasons, it is highly recommended that you engage with a Qualified Intermediary (often called a QI) to help facilitate this transaction.
Let’s talk about some of the challenges of 1031 exchanges. In this hyper-competitive landscape, with very limited inventory of replacement properties, what do you do? What if you can’t find those replacement properties? Or what if you’re simply done with operating the day-to-day responsibilities of managing a property? What are your options?
One of the creative ways to address the above issues is by executing a 1031 exchange through fractional ownership, through Delaware statutory trusts (DSTs). Are you familiar with DSTs?
A Delaware statutory trust (DST) permits fractional ownership where multiple investors can share ownership in a single property or a portfolio of properties, which qualifies as replacement property as part of an investor’s 1031 exchange transaction. A DST takes all decision-making out of the hands of investors and places it into the hands of an experienced, sponsor-affiliated trustee.
You stay invested in real estate, defer the taxes, and hand off day-to-day responsibilities to professional management. Sounds great, right?
What are the risks? Well, as in any Investment, an investment in a 1031 exchange program is subject to various risks, tax law changes, and economic cycles. In other words, you are subject to all the same real estate investment risks that you encounter as an owner of real estate. But, if done right, this is an effective way to defer your taxes. And if you’re thinking about whether this option is right for you, consult with your tax advisor.
If you’d like to learn more about DSTs and your 1031 exchange options, please contact Virg Cristobal, CFP®, at Virg@MyOpenAdvisors.com, or follow-me on Twitter, @CFP_Virg
ABOUT DANIELLE LAZIER + ASSOCIATES
In 2018, Danielle Lazier + Associates sold over $104,000,000 in SF Bay Area residential real estate selling more homes than any other SF Realtor (per MLS). We specialize in listing marketing and home buyer representation. We work with a diverse clientele in terms of budget, property type, and location, but one thing remains consistent: our clients have a clear goal to maximize their San Francisco real estate investment and want us to help them because we deliver both results and an enjoyable experience.
Are you buying or selling a home in San Francisco? Reach out to us for a consultation!