Insights by Fortitude Investment Group

1031 Exchangers Might Consider DSTs as July 15th Deadline Nears

Written by Daniel Raupp | Jul 9, 2020 3:57:17 PM

With about a week remaining before the extended U.S. Treasury and IRS 1031 Exchange deadlines expire on both 45-day identification period and 180-day exchange period requirements, we are hearing that there are still many 1031 exchangers who have not been able to satisfy their requirements.

Despite the fact that many areas of the country have started to reopen following the initial stay-at home restrictions from the COIVID-19 pandemic, and even with New York City beginning a phased reopening, challenges still abound for investment property owners hoping to find a suitable replacement property and/or close on their property within the defined 1031 Exchange extended deadlines of July 15, 2020.  

Those challenges include:

  • Some shelter-in-place orders remain in effect and many areas that have reopened are considering imposing earlier restrictions as the number of coronavirus cases continue to occur.
  • Business and government entities vital to real estate transactions remain closed or are operating on a very limited basis.
  • Valuations of properties and income streams is difficult with tenants continuing to seek rent relief and with cash-strapped landlords struggling to meet debt obligations.
  • Hard-hit lenders have tightened loan approval requirements and the application process has slowed to a crawl in many instances.
  • Viewing and inspecting properties remains challenging, which disrupts and delays the critical due diligence process on purchasing and selling of properties.

If any of these situations apply to you, there may be another option to potentially save your exchange and retain your tax-deferral benefits. 

Backup Your Exchange with a Delaware Statutory Trust 

If you have already chosen the properties that you wish to purchase, it may be a practical idea to backup your potential properties, with a few Delaware Statutory Trusts. The Delaware Statutory Trust (DST) is a securitized real estate investment structure that meets the “like-kind property” requirements of a 1031 Exchange and allows for smaller chunks of equity to be purchased.

There are several compelling reasons why investors like DSTs, including their passive management structure and ability to diversify among a variety of different institutional-quality properties in different geographies. But, at this moment in time, if you are a 1031 exchanger and don’t know if you’ll complete your exchange requirements on time, the biggest advantage is your ability to select a DST as a backup plan for your exchange and preserve your tax deferral benefits. Should your property not be able to close, or leaves you delayed, the option to purchase one or more of your backed-up DST’s instead, presents an alternative solution and a possible safety net should your direct property purchase go wrong.

Boot Relief

If you’re an investor who has identified your replacement property and you believe you can close on schedule, but the property doesn’t meet the “equal or greater value” requirement of your exchange, a significant amount of your equity may be subject to taxation or, as is commonly referred to, “boot.” Selecting a DST enables you to meet the full investment requirements for your 1031 exchange. Your relinquished property and the one you look to purchase may not be equivalent in equity or debt. Here’s where the DST may come in handy for those odd amounts.

For more information, please feel free to download our helpful document, Understanding the New IRS Deadline Extensions for 1031 Exchanges.

Please contact our team so we can assist in helping you get your exchange over the finish line!

This is for informational purposes only and is not an offer to buy/sell an investment. Examples are for illustration purpose only – individual circumstances may vary. There are material risks associated with investing in DST properties and real estate securities including liquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal.  Diversification does not guarantee profits or guarantee protection against losses. Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated. DST 1031 properties are only available to accredited investors (typically have a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last three years) and accredited entities only.  If you are unsure if you are an accredited investor and/or an accredited entity please verify with your CPA and Attorney. Because investors' situations and objectives vary this information is not intended to indicate suitability for any particular investor. Fortitude Investment Group does not offer tax or legal advice. Please speak with your legal and tax advisors for guidance regarding your particular situation.

Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services offered through Concorde Asset Management, LLC (CAM), an SEC registered investment adviser. Insurance products offered through Concorde Insurance Agency, Inc. (CIA) Fortitude Investment Group is independent of CIS, CAM, and CIA.