If you've developed an interest in real estate as an investment, you've also likely encountered the concept of DST 1031 exchanges. There is a growing industry of DST 1031 service providers that work with folks who want to invest in real estate. You would, rightly, have some questions about what the process is and who the ideal investor is, so let's take a look at those potential concerns.
What is a DST 1031?
In the strictest sense, a DST and a 1031 are two separate things. DST refers to a Delaware Statutory Trust, a type of investment vehicle that's set up under the laws of the state of Delaware. 1031 refers to a section of the federal tax code pertaining to what are called like-kind exchanges. A DST 1031 is a type of trust that allows investors to do 1031 exchanges with properties.
Now you're wondering, "What is a like-kind exchange?" Under current IRS rules, so-called "like-kind" properties can be transferred without incurring a current capital gains tax bill under certain circumstances. The idea of like-kind refers to the notion that one property is of a similar type to the other.
For example, a business that invests in franchise restaurants could transfer a similar set of properties to another business in exchange for similar properties. Suppose a holding company owned 10 Burger King franchises. They could exchange those for McDonald's franchises. Similar transfers can be done with rental properties, college housing, and virtually any other types of properties or businesses you might invest in on a location-by-location basis.
Who is the ideal investor?
Under the DST 1031 rules, investors must put at least $100,000 of their own money into a property. Multiple investors are allowed to come into a single trust on a single property. For example, eight people could split interests in an $800,000 property evenly among themselves.
DST 1031 services have emerged to connect investors and to deal with compliance issues. Bookkeeping on these kinds of properties has to be tight because there is a risk that mismanaging an exchange can accelerate taxes that investors are trying to push down the road.
Using a DST is a good choice for an investor who wants to diversify. If you're interested in just buying one property, even with other investors, you may want to look at starting an LLC instead. If you'd like to spread your risk out, a DST 1031 might be for you.