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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10131
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Delaware Statutory Trust: 1031 Exchange Robin, I need your

Customer Question

Delaware Statutory Trust: 1031 ExchangeHi Robin,Good morning,I need your help with this, I have a client that wants to do a "Delaware Statutory Trust: 1031 Exchange". How does it work? How soon do the client get their money, etc? I try researching it online but its a lot of information to grasp so can you assist me with figuring out how this "Delaware Statutory Trust: 1031 Exchange" works?
Submitted: 5 months ago.
Category: Tax
Expert:  Robin D. replied 5 months ago.

Hello

While I appreciate your asking me about this, the subject is really more complex than you or your client may think.

The trust could be seen either as a partnership or a corporation.

I will release your post to others. Perhaps someone has already dealt with this subject and will be able to provide the detailed information required.

Customer: replied 5 months ago.
I cannot wait 24 hours. Please disregard. Do not proceed with the research. I don't want to be billed for something I have to wait 24 hours for. PLEASE CANCEL MY ORDER.
Expert:  Lane replied 5 months ago.

Hi,

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I can help here.

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The rules for a DE Statutory trust (DST) doing a 1031 exchange are no different from any other entity doing a 1031 exchange.

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All the trust does is allow for a smaller individual investor to hold real-estate that normally must be an accredited investor.

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DST Investments are offered as replacement property for accredited investorsseeking to defer their capital gains taxes through the use of a 1031 exchange and as straight cash investments for those wishing to diversify their real estate holdings.

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The DST property ownership structure allows the smaller investor to own a fractional interest in large, institutional qualityy and professionally managed commercial property along with other investors, not as limited partners, but as individual owners within a Trust.

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Each owner receives their percentage share of the cash flow income, tax benefits, and appreciation, if any, of the entire property. DSTs provide the investor the potential for annual appreciation and depreciation (tax shelter), and most have minimum investments as low as $100,000, allowing some investors the benefit of diversification into several properties

Expert:  Lane replied 5 months ago.

The rest of this is simply that you must follow the 1031 rules (with the DST being the replacement property)

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From here: https://www.irs.gov/uac/like-kind-exchanges-under-irc-code-section-1031

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YOU can see the primary rules:

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To qualify as a Section 1031 exchange, a deferred exchange must be distinguished from the case of a taxpayer simply selling one property and using the proceeds to purchase another property (which is a taxable transaction).

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Rather, in a deferred exchange, the disposition of the relinquished property and acquisition of the replacement property must be mutually dependent parts of an integrated transaction constituting an exchange of property.

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Taxpayers engaging in deferred exchanges generally use exchange facilitators under exchange agreements pursuant to rules provided in the Income Tax Regulations.

Expert:  Lane replied 5 months ago.
  • Both properties must be held for use in a trade or business or for investment. Property used primarily for personal use, like a primary residence or a second home or vacation home, does not qualify for like-kind exchange treatment.
  • Both properties must be similar enough to qualify as "like-kind." Like-kind property is property of the same nature, character or class. Quality or grade does not matter. Most real estate will be like-kind to other real estate. For example, real property that is improved with a residential rental house is like-kind to vacant land
  • You have 45 days from the date you sell the relinquished property to identify potential replacement properties.
  • The replacement property must be received and the exchange completed no later than 180 days after the sale of the exchanged property or the due date (with extensions) of the income tax return for the tax year in which the relinquished property was sold, whichever is earlier, AND
  • You must use a Qualified Intermediary (someone that you have never done business with) as a "Qualified Intermediary," to handles the exchange (sale and buy).
Expert:  Lane replied 5 months ago.

That's theessence of it ... and again, a DST 1031 exchange is used anecdotally simply to mean that you used a DST as the replacement property to factilitate a 1031 exchange to sell your property with the gain deferred into the replacement property.

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There is no requirement that a DST (or DST units) must be used as the replacement property.

Expert:  Lane replied 5 months ago.

Please let me know if you have any questions at all.

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If this HAS helped, and you DON’T have other questions … I'd appreciate a positive rating (using the faces or stars on your screen, and then clicking “submit")

JustAnswer will not credit me for the work unless you do.

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Thank you!

Lane

I have a law degree, (Juris Doctorate), with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in financial accounting & tax, a BBA, and CFP & CRPS designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice, since 1986.

Customer: replied 5 months ago.
My client is doing the Delaware Statutory Trust 1031 Exchange, he said he'll be getting all of his money from the 1031 exchange after the first year. with all the info I read online, I don't see that happening. Is that how it works? When does the (my client) in this case if he does the DST 1031, get paid? is that something that is worked out with the DST at time of transaction?
Expert:  Lane replied 5 months ago.

It's all worked out with the Qualified Intermediary (QI) ... the funds are typically available shortly after the closing where the proceeds of sale from you client's property are invested in the replacement property (Here a DST).

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Again, there is no such thing (although sometimes marketed that way) as a DST 1031.

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This is likely one of those arrangements where the QI has made these DST units available as the replacement property and is marketing it as if it's a bundled, turn-key transaction.

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But again, all that's heppening here is the QI is both serving AS the QI AND is also marketing DST's

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(And that's OK as long as the QI has had no other business dealings with your client - MUST be an arms length transaction where the proceeds of sale are reinvested by the QI, with your client never taking constructive receipt

Expert:  Lane replied 5 months ago.

To successfully complete an IRC Section 1031 tax deferred exchange, Treasury Regulation §1031.1031(k)-1(g)(4)(iii) refers to the entity that facilitates an exchange as a “Qualified Intermediary” (sometimes referred to as an accommodator or facilitator), which it defines as follows:

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A Qualified Intermediary (QI) is a person who:

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1. Is not the taxpayer or a disqualified person;

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2. Enters into a written agreement with the taxpayer (the Exchange Agreement) under which the QI:

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  • Acquires the relinquished property from the taxpayer;
  • Transfers the relinquished property;
  • Acquires the replacement property;
  • Transfers the replacement property to the taxpayer.

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3. The Exchange Agreement must expressly limit the taxpayer’s rights to receive, pledge, borrow, or otherwise obtain benefits of money or other property held by the QI. (See Treasury Regulations §1031.1031(k)-1(g)(4)(i).)

Customer: replied 5 months ago.
Do you have any actual case where the client gets their money from the DST within a year?
Customer: replied 5 months ago.
Is that something that would be written in the agreement? between my client and the QI for DST?
Expert:  Lane replied 5 months ago.

In the case where a local attorney, CPA or other professional (not assocailted with the client, of course) dollars are usually received withing a month after closing of the buy into the replacement property.

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With these larger, institutional, bundled Q.I.'s that are selling something too, the time line can be longer.

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Yes, this can be included in the contract

Expert:  Lane replied 5 months ago.

(between the Q.I. and the seller/buyer)

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Again the DST is just what's being bought (the replacement property)

Expert:  Lane replied 5 months ago.

As an example, here's what Realty Exchangers, Inc. (a prominent 1031 accomodator - Q.I.) says:

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How soon can I get my proceeds back after my 1031 Exchange closes?

Your 1031 Exchange proceeds are available to you at any time. The fact that we are holding your money as your Qualified Intermediary does not mean you cannot have access to it. But in order to take advantage of deferring your Capital Gains tax, there are only a couple of times when you can access your proceeds without danger of collapsing your 1031 Exchange. When you close sale on your Relinquished Property (the property you are selling) you may take back proceeds known as "boot received". These funds may be used however you see fit, just know that they will be subject to Capital Gains Tax. The other time you may access yourproceeds without putting your 1031 Exchange in danger is after the sale closes on your final identified replacement property. As with "boot receivable" your remaining unspent proceeds are also subject to the capital gains tax.

Expert:  Lane replied 5 months ago.

If this HAS helped, and you DON’T have other questions … I'd appreciate a positive rating (using the faces or stars on your screen, and then clicking “submit")

JustAnswer will not credit me for the work unless you do.

...

Thank you!

Lane

I have a law degree, (Juris Doctorate), with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in financial accounting & tax, a BBA, and CFP & CRPS designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice, since 1986.