Creating Tax-Free Liquidity with a Delaware Statutory Trust
The IRS (under the “Step Transaction Doctrine”) can argue that a re-finance either before or after completing an exchange is merely an effort to avoid investing “all” the proceeds from your exchange. There are strict rules that need to be followed to avoid an IRS re-characterization of the exchange.However, the real-estate investor can sell the operating property and complete a 1031 Exchange into a DST holding a passive, bond-like replacement property. Then subsequently a new, non-recourse loan will provide proceeds for asset diversification, and the equity that remains invested in the real-estate produces a safe return for 15-20 years. The investor has complete control of his tax destiny and retains economic alternatives to sell, leverage, or reposition the asset in the future.This is similar in nature to the generally accepted method of diversifying a concentrated stock position without realizing a capital gain. In that scheme, a brokerage firm lends the investor money using the unsold stock as collateral and applies the loan to the acquisition of additional securities in an effort to provide diversification.In this case, though the cash can be used for a number of purposes like gifting, estate planning, and timing of a new property acquisition unencumbered by the constrained timing of exchange rules.