Incorporating trusts in Delaware is attractive for many investors. Delaware is supportive of businesses incorporated in there, providing them advantages like great tax administration, friendly business climate, and refined business environment. There is no denying that the state is attractive from many points of view.
Owning interests in a DST (Delaware Statutory Trust) is what should be on your mind. You can use the DST to participate in like-kind exchanges and defer taxes upon the transfer. Not only do you receive passive income, but also you can transfer the wealth to your family on a tax advantage basis. Are you curious to learn more about thins form of investing? If the answer is yes, continue to read.
What is a DST?
A DST structure is a pooled investment fund. What the Delaware Statutory Trust does is allow investors to put large sums of money into a fund of significant size, that is spread across many investments and is managed by experts. Simply put, a Delaware Statutory trust is a legal entity, created as a trust under the Delaware law, that qualifies for a like-kind exchange.
Using a DST in a like-kind exchange
If you are looking to sell a property for more than you paid for, you can use the Delaware Statutory Trust to defer paying capital gains tax. You do not have to wait for the real estate prices to go up before selling. If you are no longer willing to be a hands-on property owner, sell the real estate and relocate to warmer climates. Section 1031 of the IRC allows any investor to impede the payment of capital gains taxes that can arise from the trade of a business property. There are 3 steps to a like-kind exchange:
- Selling the property, that is the relinquished property and finding a Qualified Intermediary.
- Entering into an exchange agreement with the Qualified Intermediary.
- Receiving new property, in other words DST interest.
Like-kind exchange challenges
When using a DST to complete a like-kind exchange, you will come across some challenges. One of the hardest things is finding a replacement property. The replacement property has to be a like-kid one, which means that it has to be of a similar nature or character. It does not matter what grade or quality the replacement asset is. You do not have all the time in the world to identify the property. You have exactly 45 days to do so.
Another great challenge is successfully closing the purchase. If you are not able purchase a replacement property from a third party within 180 days, you will lose the opportunity to defer capital gains taxes. The like-kind exchange is therefore null. Keep in mind that it is not necessary to find an exact replacement. If the Delaware Statutory Trust owns a warehouse, you do not have to look for a warehouse. The replacement property can be anything from a factory to a vacant land. Do not waste your time searching for something that looks alike.