A 1031 Exchange Delaware Statutory Trust, or DST, is an entity that is used to defer capital gains tax from the sale of a rental property into a portfolio of real estate. A 1031 Exchange Delaware Statutory Trust is similar to how a TIC or tenant in common and can invest a fractional interest into real estate; however, unlike a TIC, a DST 1031 property will qualify as “like-kind” exchange replacement property for a 1031 exchange. This qualification as “like-kind” property is pursuant to the Internal Revenue Code Section 2004-86. A 1031 Exchange DST entity can be used to hold title to a wide variety of properties; however, a typical DST 1031 exchange property is a triple net (NNN) leased retail or office property or a multifamily apartment building. A triple net leased property is a property in which the tenant is usually responsible for property taxes, maintenance costs, and insurance. I hope this is a quick explanation of what is a 1031 exchange DST?
Other types of DST 1031 exchange properties that have been available to investors have included multifamily apartment buildings, retail centers, self-storage buildings, or medical offices. These properties typically have long term lease contracts with the tenants. With our 1031 exchange DST portfolios, there are many properties available to our qualified accredited clients, with a typical minimum direct investment of $25,000.
DST 1031 exchange properties also have various financing ratios to satisfy an investor’s exchange requirements of taking on “equal or greater debt,” as defined by the Internal Revenue Code Section 1031. However, some DST 1031 exchange properties are offered all-cash, debt-free in order to mitigate the risk of using financing when purchasing properties. The financing used on DST 1031 properties is typically non-recourse to the investor. Non-recourse financing is typically defined as financing whereby the lender’s only remedy in the case of a default is the subject property itself. The lender is not able to pursue the investor’s other assets beyond the subject property. So, investors could lose their entire principal amount invested in the property in the case of a major tenant bankruptcy, marketwide recession or depression, but their other assets would be protected from a lender. We hope this will help you understand What is a 1031 exchange DST.
The non-recourse financing used on DST 1031 exchange properties is typically longterm (usually seven to 20 years) and already locked and in place with the lender. This can greatly help to reduce 1031 exchange DST closing risk for investors that must be able to identify a property within their 45-day identification period that they know that they are going to be able to close on. The typical loan to cost of a DST 1031 exchange property ranges between 40%-65%. A DST 1031 exchange property with a 50% loan to cost is a property wherein the investors are putting down 50% of the required equity or cash amount to purchase the 1031 exchange DST property and the lender is providing the other 50%, in the form of a loan. As an owner of the DST 1031 exchange property, you will typically receive 100% of your pro-rata portion of any potential principal pay-down from the loan on the real estate, allowing the investor to build equity in the property.
It is important to note that some DST 1031 exchange properties are structured with principal pay-down beginning the first year, others with principal pay-down beginning in year two to five and others that are interest-only financing for the life of the loan. DST 1031 exchange properties are structured whereby the investors in the DST receive 100% of their pro-rata portion of the potential rental income generated by the property’s tenants. 1031 exchange DST investors receive 100% of their pro-rata portion of any potential net appreciation of the real estate over investment timeline. This is an area that truly separates DST 1031 properties from the tenant in common deals. In a tenant in common, the sponsor of the offering is typically entitled to a portion of the potential rental income and potential appreciation of the property. This should help you understand What is a 1031 exchange DST when it comes to financing.
Investors are keenly interested in the fact that when a DST 1031 exchange property is sold, they are allowed to do another 1031 exchange DST into any type of “like-kind” replacement property to defer the capital gains tax. Once invested in a 1031 exchange DST, and the properties you are invested in are sold, there could be more capital gains accumulated from the appreciation. Being able to invest in another portfolio of properties without taking constructive receipt of the proceeds makes a 1031 exchange DST an effective tax savings tool. We hope this explains what is a 1031 exchange DST when the property appreciates and is sold.