What To Know About A DST 1031 Exchange

A 1031 exchange is known as a "like kind" exchange, which lets you swap one type of asset for another. Usually, that means that you can swap an investment property for an investment property. With a DST (Delaware Statutory Trust) 1031 exchange, you're swapping an investment in real estate for another investment in real estate. Here's what you need to know.

What Is a "Like Kind" Property?

A 1031 exchange happens if, say, someone decides to sell a condominium and purchase a different condominium. This is treated as a transfer of value rather than a sale and a purchase. Without a 1031 exchange, you would need to pay capital gains tax on the initial condominium sale. With a 1031 exchange, you don't need to; the only thing that changes is the basis of your investment.

Like kind property exchanges protect you from paying too much for taxes, but they generally involve real property being transferred. A DST 1031 exchange makes it possible to trade property investments in a similar way. A DST investment is usually more than $100,000 that is invested in multiple properties. It's a way to invest in real estate while also diversifying.

How Do You Complete a DST 1031 Exchange?

With any type of exchange, the important thing is that the transfer is constructed with the exchange in mind. You don't want to take control of the money yourself at any time. An escrow company is going to have to take control of your exchange money when the first DST 1031 exchange asset is sold and then will transfer that money directly to the purchase of another DST 1031 exchange asset.

If, at any time, you are in control of the proceeds of the initial sale, you no longer qualify for an exchange. That's true even for the average 1031 exchange, and it's because the benefits of this are predicated upon the idea that money is just being shifted from asset to asset without any interference on your part. 

If you have assets within a DST 1031 property, you should consider the merits of this type of exchange. It's a way that individuals can get rid of lower-performing investments and find a higher-performing investment without having to pay a significant amount of taxes during the transition.

A real estate professional or a financial professional can give you more information. A real estate attorney is usually the best option for a DST 1031 exchange.