How the DST Backup Is Saving 1031 Exchanges

For investors who are considering or in the process of using a 1031 exchange, the pandemic has added layers of complexity to a process which, for many, was already confusing. Just consider a few of the new hurdles that investors face today:

• Ability to find, preview, inspect and value replacement properties when so much of our economy is still shut down
• Ability to secure financing when banks and lending institutions are grappling with volumes of commercial loans that are delinquent or in default
• Ability to secure an appraisal on replacement property at a sufficient value
• Ability to salvage an exchange when the seller gets cold feet

These challenges are in addition to the common requirements exchangers must meet like identifying a replacement property or properties within 45 days of the close on the relinquished property and closing on the new property within 180 days of close on the sold property.

COVID-19 has certainly made the 1031 exchange process more difficult and we hear frequently from clients who are concerned their exchanges are at risk of failing. Fortunately, we have been able to help many of these investors complete their transactions by selecting Delaware Statutory Trust (DST) property or properties for their replacement.

But DSTs not only serve as a last-minute solution for at-risk 1031 exchanges. They can also be used very early in the exchange process as a back-up property selection option that can help protect an exchange if other replacement property choices run into trouble.   

There are several features of the DST which the traditional 1031 exchange does not provide and which enable exchangers to identify a replacement property even during a pandemic. Those include:

• No need to find and conduct full due diligence on a replacement property. The DST property has already been vetted and purchased by the sponsor and is already operating
• No need to secure funding on a replacement property. The DST property already has financing secured (if leverage was used) and loans are considered non-recourse to investors since they own a fractional interest in a passive investment
• No need to secure existing or new tenants since the leasing responsibility is already held by the professional management team which is already in place

Compliant with the 1031 exchange “3-property rule”, the DST can be used to select one or two replacement properties for back-up to compliment an exchanger’s first choice of a traditional 1031 exchange property. There is no cost to selecting a DST back-up property and this action can provided investors with the confidence that their exchanges can be successfully completed, even at a time when the process is more challenging than normal.

Do not hesitate to contact us if you are considering a 1031 exchange in the near future or you would like to learn more about the DST back-up option.