Maximize Your Real Estate Investment in a Hot Market

A well-known wealth-growth strategy, the 1031 Tax Exchange gives real estate investors the ability to defer payment on their capital gains taxes when selling an investment property and re-investing into a replacement property. It is a prime perk of real estate investing as it optimizes investor ROI on their initial property and enables them to potentially put all profits towards a replacement property with more value. There are many rules that must be followed, including a strict 45-day timeframe in which a replacement property must be identified and a 180-day timeframe for the 1031 Tax Exchange transaction to be completed. Generally, this window is easily navigated with the help of a qualified intermediary who keeps the exchange on track. However, the 45- and 180-day windows can be a challenge in a real estate market with limited inventory. A seller’s market is the optimal time to divest a property at a high price. And if an investor is looking to maximize their profits by deferring capital gains taxes, they will want to do a 1031 Exchange, which means they need a property to buy… and fast! But what if a like-kind property is not available? A real estate investor can still be successful with a 1031 Exchange in a limited supply situation by buying out of state, pursuing an Improvement Exchange, or by buying multiple properties that add up in value to meet the like-kind requirement. However, if time and inventory are not on their side, a Delaware Statutory Trust may be the investor’s answer because it is both a quick and beneficial solution to execute.

What is a Delaware Statutory Trust?

In simple terms, a Delaware Statutory Trust (DST) enables a number of investors to pool their funds together toward the holdings and assets of a trust, while holding fractional interests or shares. Thanks to a 2004 ruling by the Internal Revenue Service and the United States Treasury Department, ownership interests in a Delaware Statutory Trust now qualify as a like-kind property for a 1031 Tax Exchange, making it a widely used strategy for real estate investment. The trust itself directly owns the assets, and like an LLC, all distributions and income are passed through and taxed to the individual owners. And while the life of a trust varies, they can easily span quite a few years in which the property is acquired and sold, with income and capital collected and distributed.

A Solid Strategy for Profit & Opportunity

For the real estate investor, one of the biggest benefits of a DST is the realm of possibilities it opens for like-kind properties in a 1031 exchange. An investor with a single-family home can make the jump into a lucrative new investment class, like office space, industrial buildings, or multi-family housing, where suddenly the earning and property value potential are higher. And as a passive owner, they will not have to handle the day-to-day headaches and issues of hands-on real estate management. Decisions and financing are handled by the trust, and the investor can relax while their money is at work.

In a hot market, like we’re experiencing now, a DST ensures that investors do not miss out on the opportunity to take advantage of high selling prices. The 45-day and 180-day windows of a 1031 Tax Exchange transaction can be problematic when like-kind properties are not available in a desired area. So, to maximize the profits on the initial investment property AND the money available to roll into the replacement property, a DST is a viable strategy to keep their money in the market and defer the payment of capital gains taxes. It is also a quick solution for 1031 replacement properties that fall out of escrow, especially when those replacement properties are hard to come by.

Now is the Time to Act

If you have an investment property, this seller’s market has probably caught your attention. And while you may have already reached out to your favorite realtor, they might not have all the info or available options regarding Delaware Statutory Trusts. If you are interested in taking your real estate investment to this next level, we encourage you to either reach out to a financial advisor who specializes in DSTs, or to us at SCES. As qualified intermediaries, we are equipped with the knowledge and contacts to help you find a DST or a company with one that satisfies your needs and the requirements to successfully complete a 1031 Tax Exchange. This is the time to take advantage of the market to potentially increase your wealth, and we at SCES can help- even if today’s transaction is just the first step toward getting into your ultimate property.

Southern California Exchange Services has been helping clients strategize and optimize their real estate investments through 1031 Tax Deferred Exchanges nationwide for over 20 years. We are committed to helping our clients pursue and realize their financial goals and are ready to help you, too. If you have any questions about the 1031 Tax Exchange, or are ready to take the first step, please visit our website or reach out to us at megan@sces1031.com or 805-738-2599. We look forward to hearing from you!