1031 Exchange
(also called a tax-deferred exchange, like-kind exchange, LKE, or Starker Trust) is one of the most popular tax strategies available when selling and buying real estate. It refers to the ability of investors and organizations to replace one investment for a similar one instead of keeping the proceeds. Here are some of the potential Pros and Cons of 1031 Exchange:
Pros
● Lower Liability. The DST is the sole owner of the property; each investor has a “beneficial interest” in the trust. You do not have to provide personal documentation for loan approval, personal assets affecting the status of the loan compared to a conventual 1031 Exchange.
● Enhanced cash flow potential. Many have increased their monthly income - often tax advantaged - through professional managed institutional commercial properties.
● Stop being a Landlord. Being a landlord can be time consuming and stressful sometimes, not having those complaints and responsibilities could make life easier.
● Pre-Arranged Financing. There could be challenges for 1031 investors obtaining favorable financing for an individual property to property exchange. With a 1031 DST the national institutional sponsor
● Diversification of Property. Owning fractional shares of institutional properties - varied types and in different parts of the country could bring a diversification aspect to your property holdings that is difficult to achieve in a “conventional” individual property to property exchange.
Cons
● 1031 DST Properties are leveraged. Anyone who is purchasing a 1031 DST must assume that their investment is not liquid. This is a long-term investment with an average holding period, before sale, of often five to ten years.
● Small Offering Size. DST offerings are smaller in nature, $10-$75 million. That is the reason why they have a tendency to fully subscribe and close quickly.
● You do not have control. 1031 DST investors give up control. Some investors want and need to have complete property management control, however with 1031 DST you give up that control and let a national institutional property manager do all of the Landlord duties and the decision for the property sale time-line.
● Cost, Fees and Charges. Different exchange types have similar exchange costs for the Qualified Intermediary (QI), attorney, tax advisor etc. A 1031 DST is a private placement security that is purchased through a FINRA Registered Representative, who is paid a commission on the sale of this investment.
● Tax Deferred, Not Tax Free. It is very important to know and understand that a 1031 exchange does not mean that tax liabilities disappear, it simply means that the liability is deferred until a future point of time.
