Understanding the potential of Section 1031 exchanges and Delaware statutory trusts
Navigating the complex tax rules of a Section 1031 exchange can be a complicated experience. We simplify and streamline the process so that more investors can enjoy the benefits of Section 1031 and DST ownership.
![Tapestry West Apartments](/wp-content/uploads/2023/07/Tapestry-West-1024x591.jpg)
With properties across the nation, Capital Square sponsors quality Delaware statutory trust (DST) real estate investments with low investment minimums to provide investors:
- Access to real estate they would not otherwise be able to afford on their own
- A largely automated, simplified exchange process
- The ability to diversify their investment into multiple properties to reduce risk
- A pipeline of qualifying replacement properties where due diligence has been completed
![Aerial view of Asheville NC Apartment Portfolio](/wp-content/uploads/2023/08/RealEstateInvestments_1031Exchanges_LikeKindExchange.jpg)
What is a “like-kind exchange”?
Section 1031 of the Internal Revenue Code, commonly referred to as a “like-kind exchange,” allows for the complete deferral of all federal and state taxes on the sale of investment real estate. The seller of a relinquished property must reinvest sale proceeds into a “like-kind” property, which can be any type of real estate (personal property does not qualify).
The gain that would have been recognized in a taxable sale is deferred until the replacement property is sold in a taxable transaction. Taxpayers may also structure a series of exchanges, compounding the benefits of tax deferral, thereby building wealth over time.
Read more about like-kind exchanges
- In most deferred exchanges, taxpayers engage a “qualified intermediary” to prepare an exchange agreement and hold the net sales proceeds in an exchange escrow account pending acquisition of the replacement property.
What is a Delaware Statutory Trust (DST)?
A Delaware statutory trust (DST) is a private real estate investment vehicle that allows investors to participate in a Section 1031 exchange and receive passive income as well as potential for appreciation from real estate ownership. This equation provides the potential for superior risk-adjusted returns.
The DST owns 100% of the real estate, and the investors own the beneficial interests in the DST.
Read more about DSTs
- Investors have no personal liability.
- Investors do not provide tax returns to lenders or sign loan documents because the lender does not underwrite investors; the sponsor signs any carve-out guaranty.
- Lower investment minimums mean that a greater number of investors can participate.
- The simple investment process allows access to more investors.
- The sponsor manages the property and makes decisions when necessary.
A DST is a distinct legal entity created as a trust under the statutory law of Delaware. In a DST, each owner is treated as owning an undivided interest in the real estate for tax purposes. Capital Square’s DST offerings comply with the requirements of IRS Revenue Ruling 2004-86. Each owner’s beneficial interest is treated as a direct interest in real estate for tax purposes.
![Poolside view of Williamsburg Apartments](/wp-content/uploads/2023/08/RealEstateInvestments_1031Exchanges_DST2.jpg)