Why Brokers Recommend DSTs to Their 1031 Exchange Clients


1. DSTs Make Great Back Up Properties You’ve sold a property and you’ve identified a replacement property. Unfortunately, for a variety of reasons, the replacement property can’t settle under the 1031 timeframe guidelines. If/When this happens, your client can still avoid taxes if you have identified a back-up property. A back-up property gives your clients the greatest chance of a successfully executed 1031 exchange. How does it work?

1) You identify the primary replacement property and 2) You identify one or two additional properties owned by DSTs. It costs no extra money to identify additional properties. Taking this precaution insures that you and your client have adequate choices.

2. Avoid Taxable Gains on Boot Matching the exact dollar amount of a replacement property is almost impossible in 1031 transactions. But the intelligent use of DSTs as Boot can help solve the matching problem. For example, if the relinquished property sells for $2.0 million and the replacement property for $1.8 million you have a mismatch. The $200,000 difference is taxable. However, if you have identified a DST as a back-up property you can invest the $200,000 in the identified DST and save your client taxes.

Sale Price of Relinquished Property: $2.0 million
Replacement Property #1: $1.8 million property identified by investor/broker
Replacement Property #2: $200,000 investment in property owned by DST

3. Don’t Get Sidelined Many brokers have clients that will not sell until they either find the “right” property or because they simply don’t want to pay capital gains taxes and depreciation recapture. Having the option to invest in institutional-grade properties owned by professionally managed DSTs may get investors off the sidelines.
This is especially true for clients looking to unwind or reduce their real estate holdings and don’t want to continue purchasing real estate. DSTs allow your clients to defer taxes on their real estate sales, collect tax-advantaged income and receive a stepped-up cost basis in their estate planning. For brokers, one sale is better than no sale.
Sera Capital, A Registered Investment Advisor, has relationships with the industry leaders in offering replacement properties, typically through a Delaware Statutory Trust (DST), for Section 1031 exchange transactions, as well as quality, real estate financing solutions.