1031 Exchanges
What to know before you invest.
What is a 1031 exchange?
This IRS-recognized tax deferral strategy allows an investor to sell an investment property and acquire a similar property with the intent to defer capital gains and depreciation recapture taxes. The Internal Revenue Code §1031 summarizes it clearly:
No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like-kind, which is to be held either for productive use in a trade or business or for investment.
Note : 1031 DST programs are not suitable for all investors.
Like-kind properties may include :
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Mutli-Family Apartment Buildings
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Single - Family Rental Homes
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Condominiums and Duplexes
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Office Buildings
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Retail Centers
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Warehouses and Storage Units
But can also include:
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Vacant Lots
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Water, Air, and Mineral Rights
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Development Rights
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Easements
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Tenancy-in-Common (TIC) Interests
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Delaware Statutory Trust (DST) Interests
What are the main objectives
of the DST 1031 Exchange?*
Tax Defferal
Access to Higher Quality Real Estate through Fractional Ownership
Potential Capital Appreciation
Potentially
Tax-Efficient,
Non-Corrolating Income
* There can be no assurance that the investment objectives described herein will be achieved. Investment in securities is sponsored by NexPoint is subject to substantial risks and may result in the loss of principal investment.
What is a DST?
Through IRS Rev Proc 2004-86, DSTs now provide a structure to facilitate a fractional ownership strategy for the purpose of a 1031 exchange. A DST is a legal entity created under Delaware law as a trust that holds title to 100% of the interest in the real property and investors acquire a beneficial interest in the trust, with limited personal liability for the underlying assets.
As illustrated here, you can think of a DST as owning a small piece of a property. Although many 1031 exchanges are completed directly by the property owner acquiring his or her own property, DSTs are an alternative solution providing passive ownership that may be the available solution for some investors. The investment is passive because it does not require active management by the investor and the sponsor of the DST provides all property management duties.
