1031 Exchange and Delaware Statutory Trust

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Section 1031 allows you to avoid taxes on new property investments when you immediately reinvest capital gains into another property. You can keep doing this until you die, and then your heirs receive the properties.

The good news is that your heirs receive the property at the stepped-up market value on the day you die. So if they sell the property right away, they may pay little to no taxes.

That sounds great, but if you want to stop being a landlord? Then what?

You have a few options, including a UPREIT, investing in an opportunity zone fund, or investing in a Delaware statutory trust.

We’ll focus on the Delaware statutory trust in this email.

What’s a 1031 Exchange?

If you aren’t familiar, a 1031 exchange allows you to ‘swap’ investments without incurring a tax liability.

To make it work, you must take these steps:

  • Before selling the original property, you must enter a contract with a qualified intermediary
  • Within 45 days of the contract, you must list up to three assets you will replace the existing property with
  • Within 180 days, you must close on one of the replacements
  • To completely defer taxes, you must buy a property that’s worth more than the property you sell

If you hold the new property as an investment, there’s no capital gain because you are holding the new investment in place of the old one.

Possible 1031 assets include:

  • Residential or commercial real estate
  • Raw land
  • Tenant-in-common held real estate
  • Delaware statutory trust interests

However, you cannot use the 1031 exchange for stocks, bonds, partnership interests, real estate used for personal use, or foreign real estate.

Understanding the Delaware Statutory Trust

A Delaware Statutory Trust allows investors to purchase a fractional interest in institution-quality commercial real estate with other investors. You become part owner of the property, which is how it’s allowed as a part of the 1031 exchange.

The Good and Bad Sides of the Delaware Statutory Trust

Like any investment, the Delaware Statutory Trust has good and bad sides. Here’s what to consider.

  • There isn’t a secondary market to sell your shares. You could lock your money up for 10+ years.
  • You must be an accredited investor, which means you have an annual income of $200,000 or more and/or a net worth of $1 million

You don’t have a say in how they operate the property. But, on the good side, you don’t have any landlord responsibilities. 

Another good thing about Delaware Statutory Trusts is they can be a great backup. If the properties you named in your 1031 contract don’t work, you can immediately invest in a Delaware Statutory Trust to avoid taxation.

If you’re ready to get off the landlord bandwagon and have something just as lucrative but with less work and stress, contact me today to learn more.