As part of the Tax Cuts and Jobs Act enacted in late December 2017, the definition of eligible property for Section 1031 exchanges was changed dramatically. After many decades of allowing exchanges of personal (i.e., non-real) property, Section 1031 treatment is now restricted to real property exchanges. This statutory amendment not only changed what qualifies for tax-deferred exchanges, but it also appears to have had an impact on the entire landscape of the 1031 exchange industry going forward.
Provided that real estate retains its current value, the syndicated 1031 exchange properties market is poised to extend the growth it has realized over the last four years. During that span, we have seen an increasing demand for 1031 solutions by individual investors looking to diversify, minimize risk and realize their specific financial goals. Numerous sponsors have entered the market to try and meet that demand, but 1031 DST (Delaware Statutory Trust) investments have proven to be the industry’s most adaptable solution.
A DST is considered a separate legal entity formed as a trust under Delaware Law. Classified as a grantor trust, which is a disregarded entity under federal income tax law, any investor that purchases an interest in the trust will also acquire an undivided interest in the asset(s) held by the DST, if the DST is structured to comply with IRS guidance. As detailed in Revenue Ruling 2004-86, the DST cannot purchase additional assets, accept additional contributions of assets, renegotiate loan terms, enter in or renegotiate leases, make structural changes or sell or exchange property to reinvest proceeds. This allows for the investor to use the beneficial interest in a DST as replacement property to complete their 1031 exchange.
We’re now fresh off another record year for DST investments, with 2018 totaling $2.52 billion in securitized 1031 sales, compared to a total of $1.97 billion in 2017. Industry leaders Inland, Passco, and Exchange Right have revolutionized the market for DST investments by building a large portfolio of properties to offer as a viable tax-deferral vehicle, paving the way for other real estate investment companies to begin offering DST options.
The private placement investment opportunities offered by these companies provide a solution for investors seeking replacement property to satisfy their exchange as well as for investors seeking a quality, multiple-owner real estate investment. There are a number of requirements that a DST interest must meet to fulfill the qualifications of a 1031 exchange — which is why it’s important to do advanced planning and consulting with your professional advisors prior to exchanging, investing in, or structuring a DST.
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