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.
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
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.
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- 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.
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- 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.