DST Investment Logistics
The tax deferred exchange of your property completed pursuant to Internal Revenue Code Section 1031 doesn’t have to be difficult. However, when dealing with the transfer of multiple properties and their associated transactional logistics, understanding the 1031 process and having access to a trusted exchanging expert, represents the best strategy for a painless and successful exchange. To be sure, there are a few key ‘rules of the road’ and some select pitfalls which experienced Exchangers always avoid. What are they?
THE PROPERTIES YOU EXPECT TO EXCHANGE MUST BE ‘LIKE KIND’
The Internal Revenue Service requires that the property you sell, as well as the property you buy must be like-kind. And, like kind means one of two things. Either property held for investment, or property held for income. And definitely not your personal residence.
YOU MUST UTILIZE THE SERVICES OF A QUALIFIED INTERMEDIARY
The IRS requires that your exchange be completed with the assistance of a Qualified Intermediary or facilitator. Also, this should be a well-established firm like FYNTEX, so you know your exchange documentation will be correct and that your exchange funds will be safe between the time you buy and the time you sell.
YOU HAVE A TOTAL OF 180 DAYS TO COMPLETE YOUR EXCHANGE
You must complete your sale and purchase within a total of 180 days or whenever your tax return is due. The tax return qualifier means that if you start your exchange late in the year, you might have to file for an extension in order to receive your full 180 days.
YOU MUST IDENTIFY CANDIDATE REPLACEMENT PROPERTIES WITHIN THE FIRST 45 DAYS
Now while you have a total of 180 days to complete your exchange, the IRS requires that you identify some candidate or target Replacement Properties within the first 45 days of your exchange period. Usually this identification is made to your Qualified Intermediary by completing a form which is kept in your exchange file.
YOU MAY SELECT A DELAWARE STATUTORY INVESTMENT BY PROPERTY TYPE AND YOU MAY ACQUIRE MULTIPLE INTERESTS ACROSS SEVERAL DSTS SHOULD YOU DESIRE DIVERSIFICATION
Since investments in Delaware Statutory Trusts are considered securities, they must be acquired through a licensed Broker-Dealer. These are representatives or firms which are appropriated licensed to disclose the underlying specifications of the properties as well as the expected financial performance.
The minimum net worth threshold for acquiring an interest in a Delaware Statutory Trust is an annual income of at least $200,000 or a net worth over $1 million, exclusive of primary residence.
THERE ARE SPECIFIC RULES FOR IDENTIFYING THE PROPERTY OR DST YOU EXPECT TO ACQUIRE
The IRS requires the use of two rules or one exception for identifying potential Replacement Properties. The first is the three property rule, meaning you may identify up to three properties of any value. The second rule is the two hundred percent rule, meaning you may identify more than three properties provided all the properties you identify do not exceed two hundred percent of the value of the property you sold. And the one exception is known as the ninety-five percent exception. Essentially, you may identify more than three properties and more than two hundred percent of total identified property value, provided you acquire at least ninety-five percent of everything you identified.
THERE ARE THREE THINGS YOU MUST DO TO HAVE A 100% TAX DEFERRED EXCHANGE
If you want a completely tax deferred transaction you must do these three things. First, buy Replacement Property which is equal or greater than the net selling price of what you sold. Two, move all your equity from the old property into the new property. And three, replace your debt.
BUY REPLACEMENT PROPERTY AS THE SAME ENTITY IN WHICH YOU SOLD
It is always better if you buy and vest your Replacement Property in the same name and entity as which you sold your Relinquished Property. To do otherwise by changing entities in the middle of your exchange could cause your exchange to fail for lack of meeting the held for investment or held for income requirement of IRC Section 1031.
STILL WITHIN YOUR 45-DAY IDENTIFICATION PERIOD? YOU CAN REVOKE A PREVIOUS IDENTIFICATION AND RE-IDENTIFY NEW REPLACEMENT PROPERTY
If you are still within your 45-day identification period, it is possible to revoke a previous identification, and re-identify new Replacement Property in your exchange. Simply complete your new identification and add revocation language at the top of your form.
THE TYPICAL INVESTMENT TERM FOR A DELAWARE STATUTORY TRUST IS 7-10 YEARS
Most Delaware Statutory Trusts are financed for a ten year period. In addition, the rules underlying the Delaware Statutory Trust structure preclude any refinancing or modification of any loan terms. This is why most Delaware Statutory Trust managers proceed with a management and divestment strategy which includes a sale for the benefit of the owners of DST interests within year 7 -8. It is possible for some Delaware Statutory Trusts to be sold in a shorter timeframe should an excellent offer arise due to equity growth of the properties in the portfolio. In this event, owners of DST interests can 1031 exchange out of the Delaware Statutory Trust into another DST or into any other like kind property.
DON’T FORGET TO REPLACE YOUR DEBT, EVEN WITH A DELAWARE STATUTORY TRUST INVESTMENT
In the event you want a totally tax deferred 1031 exchange transaction which includes a purchase of a Delaware Statutory Trust interest, you may need to have debt from the DST assigned to you for the benefit of your 1031 exchange. Your Broker-Dealer should be willing to assist you as you determine the amount of debt necessary for your particular exchange scenario, and thereby arrange with the DST sponsor to assign such debt to you.
To ensure compliance with requirements imposed by the IRS, we inform you that the information posted at this website does not contain anything that is intended as legal or tax advice, and that nothing herein can be relied upon as legal or tax advice. Further, the IRS wants us to let you know that nothing herein can be used for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any tax-related matter addressed herein. If assisting with your Section 1031 tax-deferred exchange, Safe Harbor Asset Management cannot advise the owner concerning specific tax consequences or the advisability of a tax-deferred exchange for tax purposes. We recommend that anyone contemplating an exchange seek the advice of an accountant and/or attorney.