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How a DST Can Help You Replace Debt on Your 1031 Exchange

Suppose you are considering using a 1031 exchange to sell an investment property. In that case, you probably know that exchange rules require you to replace the equity proceeds from your transaction with a replacement property of equal or greater value. But you may be unaware that you also need to replace the total value of any debt you have on your relinquished property to qualify for full tax deferral on capital gains from your sale.

Let’s assume you sell your investment property for $1,000,000, and you have a $300,000 mortgage. You need to find a replacement property to invest your net proceeds of $700,000 AND your $300,000 debt requirement. This can often be challenging, leaving exchangers few options. To satisfy the debt replacement requirement, you would need to come up with an additional $300,00 in cash or secure a new loan.

However, there is another option, which many 1031 exchangers have found to be an efficient approach, the Delaware Statutory Trust (DST).

The DST Advantage

In simple terms, a DST is a passive investment structure that satisfies the “like-kind” replacement property rule of a 1031 exchange and provides you with the opportunity to own a fractional interest in investment grade property managed by professional investment management teams.

A DST provides a unique advantage for exchangers because typically, debt is already secured on property held in the trust. For example, a DST you are considering might own a $30 million multifamily property with a 50% loan-to-value ratio (LTV). 

Not only could this DST easily accommodate your debt replacement requirements in the example above, but it also removes all responsibility for you securing debt on your own.

Also, DSTs can differ in the types of properties owned and the amount of leverage placed on those properties. LTV ratios can range from less than 30% to 80% or more, affording you many different options to choose from for your exchange.

Perhaps the most valuable advantage of using a DST for your equity and debt replacement needs is its simplicity and convenience. Since DST property is already owned and debt is already secured, you don’t need to worry about closing on a suitable replacement property within 180 days of your relinquished property sale while also qualifying for a loan or coming up with additional cash.

A DST with leverage not only increases the total nominal value of your investment but also enables you to take a tax write-off each year for your share of the Trust’s loan interest payments. 

Finally, if you acquire a replacement DST with a greater loan to value than the property you are selling, you will acquire more total real estate which will potentially increase depreciation write-offs resulting in greater tax shelter on the income you receive. 

Other Factors to Consider

As with any investment, there are other factors you should consider before making a final decision to use a DST for your exchange. For example, as a passive investor, you have no control over property management decisions, as the sponsor has all decision-making authority. Also, DSTs should generally be considered illiquid investments which may require the investor to hold property for up to ten years or longer. 

Please note that DSTs, like all real estate, have risks and are only suitable for investors that can afford to lose some or all of their investment. Investment returns are not guaranteed.

To better understand the Delaware Statutory Trust and determine if it is an appropriate approach for your 1031 exchange, please contact us for a free, no-obligation consultation. You can also set some time up on my calendar here. 


Help Save 1031 Exchanges
Write to your Member of Congress and Senators urging them to oppose restricting Section 1031 like-kind exchanges. As part of the American Families Plan, the Biden Administration has proposed eliminating the application of Section 1031 for gains greater than $500,000. Like-kind exchanges have been part of the U.S. tax code since 1921 and are one of the tax code’s most powerful economic tools. It is critical that we all vigorously and visibly oppose this proposal. Make your voice heard with a pre-filled letter, which you can customize to add personal anecdotes or powerful client stories to highlight the positive impact of Section 1031 like-kind exchanges. Take action today by clicking HERE.

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Paul Getty

Paul Getty is a licensed real estate broker in the state of California and Texas and has been directly involved in commercial transactions totaling over $3 billion on assets throughout the United States. His experience spans all major asset classes including retail, office, multifamily, and student, and senior housing. Paul’s transaction experience includes buy and sell side representation, sourcing and structuring of debt and equity, workouts, and asset and property management. He has worked closely with nationally prominent real estate brokerage and investment organizations including Marcus Millichap, CB Richard Ellis, JP Morgan, and Morgan Stanley among others on the firm’s numerous transactions. Paul also maintains a broad network of active buyers and sellers of commercial real estate including lenders, institutions, family office managers, and high net worth individuals. Prior to founding First Guardian Group/FGG1031, Paul was a founder and CEO of Venture Navigation, a boutique investment banking firm specializing in structuring equity investments made by institutions and high net worth individuals. He possesses over 35 years of comprehensive worldwide business management experience in environments ranging from early phase start-ups to multi-billion-dollar corporations. His track record includes participation in IPOs and successful M&A activity that has resulted in investor returns of over $700M. Paul holds an MBA in Finance from the University of Michigan, graduating with honors, and a Bachelor’s Degree in Chemistry from Wayne State University. Paul Getty holds Series 22, 62, and 63 securities licenses and is a registered financial representative with LightPath Capital Inc, member FINRA /SIPC. Paul is a noted speaker, author, and actively lectures on investments, sales, and management related topics. He is author of The 12 Magic Slides, Regulation A+: How the JOBS Act Creates Opportunities for Entrepreneurs and Investors, and Tax Deferral Strategies Utilizing the Delaware Statutory Trust (DST), available on Amazon and other retail outlets.

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