A 1031 exchange is an IRS-recognized tax deferral strategy that allows an investor to sell an investment property and acquire a similar property with the intent to defer capital gains and depreciation recapture taxes.
1031 Exchanges have been part of the tax code since 1921. Section 1031 allows owners to exchange investment assets for other like-kind investment assets without recognizing taxable gain on the sale of the old asset. The taxes which would normally be due are deferred. The transaction is named for Internal Revenue Code §1031, which states:
“No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment, if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment.”
1031 Exchanges Options
Simultaneous Exchange\ Leasehold Improvement Exchange
Forward/ Delayed Exchange (Most Common type of Exchange)
Reverse Exchange
Improvement/ Build-to-Suit Exchange
Agricultural & Farmland
Commercial Property
Investment Property
Vacation Rental Property (Airbnb & Vrbo)
Conservation Property
Timberland Property
DSTs
REITs
Oil
Gas
Mineral
Water & Ditch Rights
Real property –
This includes buildings and land, both commercial and residential
Investment property –
This applies to properties held for generating income, such as rental properties
Personal property –
This includes your primary residence, personal use vacation homes, and other personal belongings
Intangible property –
This includes stocks, bonds, and other financial instruments. This does not apply to DSTs and REITs as these are tied to real property
A Delaware Statutory Trust is a separate legal entity created as a trust under Delaware statutory law. Delaware law provides great flexibility in the design and operation of the entity. Investors with a beneficial interest in the trust are treated as a having a direct interest in real estate for tax purposes.
In a typical DST, the sponsor (usually large real estate company) acquires a property or properties that qualify as a DST. These properties are typically institutional-grade real estate and there are DSTs for virtually every type of commercial real estate
Once the property is acquired, fractional shares of the DST are sold to investors. Investors that purchase shares or equity in the DST are paid distributions based on their beneficial ownership interest (the portion they own).
Accreditation – An accredited investor is defined by the U.S. Securities and Exchange Commission (SEC) under Rule 501 of Regulation D. The key criteria that generally qualifies an investor as accredited:
Income – An individual with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years, and a reasonable expectation of the same income level in the current year.
or
Net Worth – An individual or joint net worth with a spouse exceeding $1 million, excluding the value of the primary residence.
or
Professional Experience – Certain professional certifications, designations, or credentials recognized by the SEC or any state. This includes holders of Series 7, Series 65, or Series 82 licenses.
A Delaware Statutory Trust (DST) offers several potential benefits for real estate investors, particularly those involved in 1031 exchanges:
Under IRS Revenue Ruling 2004-86, DSTs qualify as like-kind property for 1031 exchanges. This allows investors to defer capital gains taxes by reinvesting the sale proceeds from their property into a DST.
