Top 10 Reaons Investors choose DST's for their 1031
1) Potential Better Overall Returns and Cash FlowsMany real estate investors may not be earning the cash flows they think they are. An investor wanting to determine their cash flows can take their net rental income from their Schedule E, add back depreciation, then subtract the principal portion of their payment. Next divide that number into the property market value. For example, if one had net rental receipts of $50K and $10K depreciation, and also $10K of principal payment, then the net number would be $50K. If the property value is $1 million then the investor would have a 5% cash flow. DSTs could potentially offer a better cash flow and risk return profile while at the same time offering an investor a passive alternative.
2) Tax Planning and Preserved Step-Up in BasisDSTs offer the same tax advantages of real estate that an investor would own and manage themselves. Depreciation and amortization are passed along to DST investors by their proportionate share. DSTs can be exchanged again in the future into another DST via a 1031 exchange. Hold times for DSTs average from five to seven years. See your tax adviser for more clarification and for specific tax advice when evaluating DSTs as an option for your 1031 exchange.
3) DiversificationMany DST holdings own multiple assets within one DST structure. For example, an investor might exchange one apartment building for a portfolio of 10 to 15 Walmart stores and/or Walgreens and other single tenant triple net leases inside a DST structure.
4) No More Need to Manage PropertiesSometimes we hear of a client who is aging and no longer has the health, time or desire to manage their own real estate investments. DSTs can offer a great passive option while preserving the desire to be invested in real estate.
5) FreedomPassive investing allows older real estate owners the time and freedom to travel, pursue other endeavors, spend more time with family and/or move to a location that is removed from their current real estate assets.
6) As a Backup StrategyIn a competitive real estate market an investor may not be able to find a suitable replacement property for their 1031 exchange. DSTs make a great option and should be named/identified in an exchange if only for that reason. Once a real estate investor has sold a property, they have 45 days to identify a replacement and 180 days to close or the tax-free exchange will be disallowed by the IRS.
7) Capture Equity in a Hot MarketWhen markets are at all-time highs, investors may want to take their gains off the table and invest again using the leverage inside a DST offering.
8) Protect the FamilyA family can be vulnerable when only one spouse knows how to manage real estate investment assets. With passive DSTs, the management is effectively outsourced, which can protect a family should one spouse no longer have the capacity to take care of his or her own interests.
9) Avoid Ongoing Repairs on Actively Managed Property By Going PassiveReal estate investors know that one day they may have to replace expensive roofs and AC units, do foundation repairs, face potential lawsuits and encounter other surprise expenses that come with investing in real estate. DSTs may protect investors from these types of surprise expenses.
10) Major Part of Retirement and Estate PlanningDSTs can offer many retirement, tax and estate planning options. Passive income, elimination of personal liability, freedom, ability to manage cash flows and wealth transfer are just a few of the opportunities that DSTs can afford investors and their retirement planners.