Delaware Statutory Trusts for a 1031 Exchange

This is our presentation on Delaware Statutory Trusts as replacement property in a 1031 exchange, for property owners who are weighing a sale and want to understand the option before the exchange clock starts.

The basic idea is simple. When you sell investment real estate, a 1031 exchange lets you defer the capital gains tax by reinvesting the proceeds in like-kind property: you have 45 days to identify it and 180 days to close. Under IRS Revenue Ruling 2004-86, a beneficial interest in a properly structured DST qualifies as that replacement property. Instead of buying and running another building yourself, you own a fractional interest in institutional-grade real estate that a professional sponsor acquires, finances and manages.

What the basic idea leaves out is where the risk sits. DST interests are illiquid and are usually held five to ten years. The trust cannot raise new capital or renegotiate its loan once the offering closes. And the outcome depends heavily on the sponsor, and on how the offering has been structured to produce its projected income. Those are the questions an independent adviser is there to answer.

Further reading: Anatomy of a Delaware Statutory Trust, Delaware Statutory Trust Sponsors: Does It Matter? and Yield Tricks DST Sponsors Play.