6 Reasons Why 1031 Exchanges are Worth Considering

Written by Nathan Kuhn April 15, 2019

When tax reform passed Congress last year, 1031 exchanges pertaining to real estate were spared major changes in legislation. This often under-looked yet tax-advantaged solution is potentially one of the most powerful tax planning and wealth preservation strategies available to investors.

Here are 6 reasons why completing a 1031 exchange into a Delaware Statutory Trust (DST) is worth considering.

6. Facilitate Estate Planning

A 1031 exchange may be known best as a tax-deferral technique, but it’s also a powerful estate planning tool. A Delaware Statutory Trust (DST) and Tenants in Common (TIC) structure allows for a step up in basis for your heirs equal to its fair market value upon death, removing any previous appreciation in value. This also may facilitate intergenerational planning and protect family interests.

5. Passive Ownership

The benefits of owning an investment property can also bring a burden, including maintenance and landlord responsibilities. The DST structure allows for passive ownership, where investors buy into a trust that holds title while the sponsor manages the property and operations.

4. A Diverse Portfolio

The passive ownership structure of DSTs enable you to diversify your portfolio by property type as well as geographically. Investments may be an exact amount of your choosing with proceeds reinvested into multiple investments.

3. Generate Cash Flow

While this may be dependent on the type of replacement property purchased, the potential for consistent cash flow exists with a DST and TIC 1031 exchange. By completing a 1031 exchange, an investor could potentially generate cash flow on 100% of their sales proceeds, rather than losing a portion of their proceeds to taxes.

2. Preserve Capital

If you sell a property without utilizing a 1031 exchange, you will lose a portion of your gains to taxes. A successfully completed TIC or DST 1031 exchange may provide you with the opportunity to put all capital to work and increase your purchasing power and cash flow.

1. Defer Taxes

The most well-known reason for completing any 1031 exchange is the ability to defer and potentially eliminate taxes on the sale of property. Properly completing an exchange allows an investor to defer the taxes that would be due on the sale. Additionally, an investor could potentially continue exchanging until their death at which time their beneficiaries would receive a step up in basis. DSTs are a unique investment solution for completing 1031 exchanges and are worth evaluating if you are considering a 1031 exchange.

Navigating a 1031 Exchange

The rules and timelines that must be followed for a 1031 exchange are complex and may feel overwhelming to complete without professional guidance. Given the financial magnitude of your investment, take the time to invest with thought and clarity and be sure to understand all of your options. Want help? We’re here to help make sense of the process and guide you through the exchange so you can walk away feeling confident you’ve made the right decision.