Seller looking for 1031 into REITS (DSTs)?

12 Replies

Does anyone have any experience with doing a 1031 exchange into a Delaware Statutory Trust?

Background: I found a potential off market seller. Older couple thinking of selling there duplex. One thing holding them back are the potential capital gains. He asked if he could 1031 into a REIT. A quick google search looks like you can essentially do this with a DST.

Looking for some basic guidance I can provide him on how to go about this if possible

Thanks in advance.

Lots of DST folks on here. Just tell them to careful, there can be very high costs (>10-15%) involved that inflate the cost of the offering. Returns are minimaLe so they're fine if your ready to retire.

Your sellers should talk to their tax pro and financial advisor. 

You CAN 1031 into a DST- but you have to be an accredited investor. They are considered reg D offering, higher risk.

@Avery Robertson , You've hit on a winning strategy to dislodge those entrenched sellers.  There's a lot of older investors looking to simplify but unable to because of the potential capital gains (and even worse the depreciation recapture) hit.  Many times you can solve this with them by doing an owner carry.  But that will only defer the tax temporarily and leave the seller still feeling somewhat wed to their property.  

However executing a 1031 exchange is a very strong option for them. The goal is to simplify their life and eliminate management. That can come from a move into a DST or TIC product as you suggest. Or it could be into a NNN asset where the tenant self manages. Or a vacation rental they get to enjoy and generate rent from. Or with a little bit of runway they could even do a 1031 into a replacement property that they later move into and then sell their old primary residence and take those profits tax free while still maintaining the tax deferred gains inside their former investment turned primary residence.

In all of those cases the 1031 exchange is the same mechanism.  They're just moving the investment into a different sector.

Originally posted by @Avery Robertson :

@Dave Foster I had talked to them about seller financing. The replacement property could be a good option. I’ll talk with them.

 Dave foster is a wealth of info. And easy to deal with

@Avery Robertson Good info in this post. You can also 1031 a DST into a REIT (via 721 exchange I believe?) RealEstateCPA did a podcast on it recently. Also note that in general if you do a DST through a financial advisor associated with a broker-dealer the fees/commissions are usually higher. Financial Advisors that are Independent RIA's will often do it significantly cheaper. (Typical Broker Dealer Advisor charges around 6%? I generally charge 2% for my ongoing clients and 3-4% for non-ongoing clients.)

@Avery Robertson you got some great replies here. What happened with this transaction? I agree that doing a 1031 into a DST (Delaware Statutory Trust) is a great way to defer capital gains and enjoy hands-off income and appreciation. But as a few above have stated, there is often a heavy fee-load with these products. There are a few direct DSTs that can be acquired straight from the operator/syndicator that have no 3rd party fees. I would recommend you find one of those. I am involved in one like that now.

Well, there are private syndications also that qualify for 1031 exchanges.  SHouldn't be hard to do a search.

On DSTs, those qualify but are sold by licensed stock guys, not real estate guys - Hence the accreditation which a private syndicator should ask for also.  Plenty out there.  My main suggestion would be to diversify and buy a bunch of smaller ones instead of one big one.  You can find ones in different locations and product types also.

@Avery Robertson , You may not have to give up hope yet. There actually is a way to make owner financing work with a 1031 exchange if the seller has enough cash (or ability access cash) to replace the note in the exchange account with cash. If they can do that then they can complete a full 1031 exchange into whatever property or DST they want. And they'll have the note from you that will then be tax free (other than interest) and against the property. In the right situations that can be a very elegant solution.