Whether you plan to conduct your first 1031 exchange or are an adept exchanger looking to partner with the more experienced and sophisticated Qualified Intermediary, 1031 sponsors are well equipped to help you accomplish your financial and business goals.
So, the question troubles all of us: Can someone invest in a DST along with a Physical Property in the 1031 Exchange process? So, the answer is ‘yes.
There are various ways to structure a 1031 exchange depending upon your needs and the availability and desirability of exchangeable properties. You are always welcome to call and discuss the details of your transaction. Our expert team will help you to complete your 1031 exchange.
Firstly we will discuss what 1031 exchange is?
1031 exchange (IRS Code of Section 1031) is an exchange that allows the investor to defer the capital gain taxes on the exchange of investment property. The exchange can only be done for like-kind properties. Here the term like-kind means the properties that are similar in nature. It provides an option to the investor to reinvest the proceeds from the sale of the relinquished property to buy a new replacement property and defer the capital gain taxes. An investor has a timeline of 180 days to complete the exchange. As a result, the exchanger or investor can use 100% of the proceeds to buy another property and defer the taxes.
Rules to be followed for completing 1031 Exchange are a Qualified Intermediary must be involved in the 1031 exchange without whose involvement the exchange cannot be completed. The value of the replacement property must be equal to or greater than the value of the relinquished property. The property investor is not allowed to touch the proceeds received from the sale of their relinquished property as these are kept in a special type of account known as escrow account handled by the Qualified Intermediary.
Here is the answer to your question: Can someone invest in a DST along with a Physical Property in the 1031 Exchange process?
The investor can invest in a DST along with the Physical property. Suppose the investor identifies the property, and the cost of the replacement property is less than the relinquished property. In this case, the investor can plan to invest the proceeds to buy a new property, and the remaining proceeds can be invested in DST property by having some portion in it.
Let’s discuss an example to understand this point more clearly:
Let’s assume if the investor had an investment property worth $3 million. As per the rules of IRS, 1031 exchange can be done for the properties of the same or greater value. The investor sold the property for $ 3 million and acquired the new replacement property worth $ 2.2 million. After acquiring the property, the investor is leftover with $0.8 million, this amount he can use to invest in DST properties to complete the 1031 exchange.