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  • Home
  • About
    • Ronson J. Shamoun, ESQ., LL.M.
    • Chandara Diep, ESQ., LL.M.
    • Devon J. Arabo, ESQ., LL.M.
    • Brian M. Malloy, Esq.
    • Andrea Cisneros Valdez, Esq., LL.M.
    • Sam Imandoust, ESQ., LL.M
    • Lauren Suarez, ESQ., LL.M.
    • John I. Forry, Esq.
    • Martin Schainbaum, ESQ., LL.M.
    • Kaveh Imandoust, JD, MBT, CPA
    • Joseph Cole, ESQ., LL.M.
    • Christopher Engelmann, ESQ., LL.M.
    • Remy Hogan, Esq., LL.M.
    • Steve S. Mattia, Esq.
    • Dod Ghassemkhani, ESQ.
    • Vincent Renda, Esq.
    • Pedro Bernal, Esq.
    • Sabri P. Shamoun 1938-2023
    • Melanie M. Shamoun
    • Renae Arabo
    • Hilary Dargavell
    • Sandie Portilla
    • Lupita C. Torres
    • Jewell Cornejo
    • Kesia Belford
    • Danielle N. Misleh
    • Judith G. Jeremie, JD
    • Rebecca Shuman
    • Michael Lutzky, CPA
    • Gianna Iskander
  • Practices
    • Tax
      • IRS TAX MATTERS
        • IRS Appeals
          • IRS Appeals Process
          • Contesting an IRS Levy
          • Why Retain RJS LAW for IRS Appeals
          • 4 Tips For Navigating The IRS Rapid Appeals Process
        • IRS AUDITS
          • IRS Correspondence Audits
          • What are IRS Field Audits?
          • Initial IRS Compliance Center Audits
          • IRS Office Audits
          • What happens in an IRS Audit?
          • Taxpayer Rights Under IRS Publication 1
          • IRS Warns Taxpayers About Scam
        • NOTICES
          • IRS Notices
          • IRS Letters
          • FTB Notices
          • Avisos en Español
        • IRS Collections
          • Avoiding and Eliminating IRS Tax Liens
          • Collection Due Process Hearing
          • CP 501 – IRS Notice
          • Failure to file a tax return: What happens?
          • How the IRS calculates interest
          • How to get a tax levy released
          • ACS – Automated Collection System
          • IRS Collections Process
          • IRS Interest Abatement
          • IRS Revenue Officers
          • Jeopardy Assessments and Jeopardy Levies
          • National Tax Agencies
          • RJS LAW Approach to Collections
          • IRS Statute of Limitations on Collections
          • Streamlined Installment Agreements
          • Tax Penalty Abatement
          • Taxpayer Assistance Orders TAO
        • IRS Payroll Tax
          • Independent Contractor Reclassification Audits
          • IRS Forms 940 and 941
          • IRS Trust Fund Interviews
          • Payroll Tax Liability Payment Options
          • Trust Fund Recovery Penalties
        • IRS Wealth Squad
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          • OVERVIEW OF OFFER IN COMPROMISE PROCESS
          • The Offer in Compromise Process
          • Appealing an Offer in Compromise to the IRS
          • How does the IRS evaluate an Offer in Compromise
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          • Offer in Compromise Requirements
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          • Offer in Compromise Alternatives
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          • State Tax Practice – Outside of California
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        • Criminal Investigation Division
        • IRS Criminal Investigation Division Tactics
        • Criminal Tax Defense – Tax Crimes
        • Currency Transaction Records & Suspicious Activity Reports
        • IRS Methods of Proof: Tax Fraud and Evasion
        • Methods IRS Agents Use to Locate Assets
        • IRS Special Agent Visits
        • Are You a Criminal Investigation Target?
        • Criminal Tax Attorney vs. White Collar Defense
      • CORPORATE TAXES
      • TAX COURT LITIGATION
      • Innocent Spouse Relief
    • International Tax
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    • Trust Litigation
    • Trust, Estate & Probate Litigation
    • Trust & Estate Administration
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      • Landlord Tenant Law
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  • Tax Institute
    • 10th Annual USD School of Law – RJS LAW Tax Institute
    • 9th Annual USD School of Law – RJS LAW Tax Institute
    • 8th Annual USD School of Law – RJS LAW Tax Controversy Institute – July 28th, 2023
    • 7th Annual USD School of Law – RJS LAW Tax Controversy Institute – July 15th 2022
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Maximizing Your Wealth: Delaware Statutory Trusts (DSTs) and 1031 Exchanges

Delaware Statutory Trusts


Delaware Statutory Trusts and 1031 Exchanges

Are you a real estate investor looking to build your wealth through investments while minimizing your tax liability? If so, then Delaware Statutory Trusts (DSTs) and 1031 Exchanges are two powerful tools to be incorporated into your portfolio.

Overview of 1031 Exchanges

A 1031 exchange (26 U.S.C. § 1031), also known as a “starker” exchange, is a powerful wealth building mechanism that allows an owner of investment property to defer paying capital gains taxes resulting from the sale of property, freeing up funds for reinvestment to maximize the overall return on investment.

Deferring capital gains tax can be achieved by “exchanging” the “Relinquished Property” (i.e., the sold property) for “Replacement Property “of like kind.” The proceeds from the Relinquished Property sale must be held during the exchange period by a “Qualified Intermediary” and must be used to purchase the “Replacement Property” within 180 days from the sale date of the Relinquished Property. The investor must also identify “Replacement Property” within 45 days from the sale date of the Relinquished Property. Failure to identify Replacement Property within 45 days and or purchasing the Replacement Property within 180 days will result in a failed 1031 exchange.  

To qualify for a 1031 exchange, the Relinquished Property must be held for investment, trade, or business. Likewise, the Replacement Property must be “like kind” to the Relinquished Property and intended to be held for investment, trade, or business.

Overview of Delaware Statutory Authority Trusts in 1031 Exchanges

Delaware Statutory Trusts (DSTs) are a widely used ownership structure for holding title to real estate assets. DSTs come in various forms and offer different investment opportunities. There are DSTs focused on residential, commercial, and/or industrial properties, specific geographic areas, or property classes.

REITS vs DST

On the surface, REITs and DSTs appear similar; however, a deeper dive highlights many key differences. REITs are companies that own, operate, or finance income-generating real estate including offices, apartments, shopping centers, hotels, and more. Most REITs are publicly traded and enable investors to earn dividends from real estate without having to buy individual properties but rather a “stock” share in the REIT.

Unlike DSTs, publicly traded REITs provide liquidity for investors. Perhaps the most important distinction between a REIT and a DST is that REITs cannot be used in 1031 exchanges since investors own share(s) of the REIT.

How DSTs and 1031 Exchanges Work Together

In a 1031 exchange involving a DST, the investor sells their Relinquished Property, the proceeds from the sale are directed to a Qualified Intermediary, who holds the funds during the “Exchange Period.” Thereafter during the 45-day identification period, the investor identifies the Replacement Property, including the specific DST investment, and any other property the investor may contemplate purchasing with the Exchange proceeds.  To finalize the exchange investor must purchase the Replacement Property with Exchange proceeds within the 180-day exchange time period. 

There are many benefits to the DST structure which make it an increasingly popular 1031 exchange target property for investors. DSTs are a passive investment allowing investors to hold a beneficial ownership interest in large commercial grade properties while simultaneously not assuming any direct management responsibility. Using a 1031 exchange to obtain a DST allows investors to achieve a level of diversification not necessarily achievable from single property ownership. A diversified portfolio that provides completely passive income is an investor’s dream. They are also pre-packaged for 1031 exchanges, so an investor can close on a property extremely fast. As mentioned, 1031 exchanges have extremely tight timelines, so a rapid turn-around is something investors require. Lastly, the financing typically used for the properties held is non-recourse. In the case of a default, the lender can only pursue the subject property, leaving the investor’s other assets protected from legal recourse.

Structuring Your Holdings

As for all types of investments, investors must do their due diligence prior to investing in Delaware Statutory Trusts (DSTs) and 1031 Exchanges.  Investors should also be mindful of how best to hold title to their various investments to protect themselves and to consider best practices in transferring wealth to current and future generations.

The experienced Estate Planning, Real Estate, and Tax attorneys at RJS LAW are available to discuss the many options available to individual investors. Proper upfront planning and/or a review of existing holdings provides investors the peace of mind to know their financial holdings will serve them and their heirs well into the future. Please call RJS LAW at 619-595-1655 or contact us on the web at RJS LAW for a no-cost consultation.   

Written by Sean Erdman

Filed Under: Uncategorized

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