How A 1031 DST Exchange Is Different From Buying A Commercial Property

When you are considering investing in commercial real estate, you may feel that purchasing a property as a whole is more than you bargained for. You might not want to go through the trouble of maintaining a large property. Fortunately, there is another alternative available: the 1031 DST exchange. Through this exchange, you might see some tax benefits.

DST stands for Delaware Statutory Trust co-ownership. This type of arrangement allows for a smaller investor to own a partial interest in a large commercial property that is professionally managed. You'll be able to enjoy the benefits of investing in a commercial property without having to manage it yourself.

The Minimum Investment Required

One of the advantages of a DST is that it has much lower minimum investment required. You will only have to invest $100,000. This allows you to diversify your portfolio among multiple properties. You may be able to receive a loan to cover half of the investment. However, many properties are offered as cash all to eliminate any financing risks.

1031 Exchanges

With a DST 1031 property, each investor has an ownership interest in a trust. This trust owns the property. The security owned by the DST investor is treated as a direct property ownership. Therefore, it qualifies for a 1031 exchange. 

DST and Your Taxes

If the DST investment is structured properly, it will be considered a direct investment in real estate and will be eligible for the 1031 tax deferral treatment when you perform a 1031 exchange. To perform an exchange, the exchanger must identify a replacement property within 45 calendar days. An exchanger must follow one of three rules:

  • The Three Property Rule. The easiest and most common rule is the three property rule. You will be able to identify up to three properties without considering the value of these properties.
  • The 200 Percent Rule. If you would like to identify more than three, you may apply the 200% rule and identify as many properties as you like as long as total value of the properties identified is not more than 200% of the value of the properties being relinquished.
  • The 95 Percent Rule. Under this rule, you are allowed to acquire as much property as you would like as long as they acquire 95% of the value of the identified property.

If you are not sure which approach is right for you, make sure to speak with an investment advisor. For more information about DST 1031 properties, talk to your financial planner.