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Navigating Tax Opportunities in 1031 Exchanges | Part II

Feb 27, 2024
Ling You
Nate Ahlberg
Jeff Hertz

Tax Deferral Alternatives to 1031 Exchanges: Delaware Statutory Trusts

This webinar will provide an overview of Delaware Statutory Trusts (DSTs) and how they can be used successfully in 1031 exchange transactions.

1031 exchanges have become a powerful tool for deferring capital gain taxes for real estate investors. We’ve covered the basics of 1031 exchanges in part one of this series, and in part two our panel covers how Delaware Statutory Trusts (DSTs) can support your 1031 exchange strategy. 

What is a Delaware Statutory Trust? 

The Delaware Statutory Trust was created two decades ago, offering real estate investors a streamlined 1031 exchange solution that allowed investment in institutional real estate without the burden of active management. 

DSTs are intended for somebody who is looking for a passive real estate solution, whether it’s for the rest of their investment life or to leverage for a 1031 exchange in the near or long-term. DSTs allow investors to reap the benefits of getting access to an institutional quality real estate investment at a lower minimum investment. 

DSTs can be used as part of a traditional 1031 exchange transaction, sometimes as an add-on as part of a transaction. For instance, in the sale of a million-dollar duplex, where you have identified most of your equity in another duplex but there is a little bit left and you want to fully defer, you may add on a DST as additional component to your traditional 1031 exchange transaction.

Limitations of Delaware Statutory Trusts 

In exchange for the benefits of a DST, there are also limitations and restrictions you should be aware of, including: 

  • Once invested into a DST, the owner may need to hold until the property is sold.
  • Investors have no control or involvement in property management.
  • Higher fees may apply based on additional due diligence, reserves, and underwriting costs.

Delaware Statutory Trust Tax Reporting 

DSTs are treated as grantor trusts for federal tax purposes. The DST files Form 1041, which is the Income Tax Return for Estates and Trusts. They do not issue 1099s or K-1s to investors. 

The state filing requirement depend on two factors: 

  • The residency of the trustee
  • Property location 

Investors receive income from rent revenue net operating expenses and debt service. The allocation is based on investor’s ownership percentage of the DST. 

The grantor trust letter will contain footnotes on each investor's ownership of each type of the fixed assets such as land and building to facilitate investors' depreciation calculation.  

Qualified Opportunity Zone Investments 

There are similarities and differences in qualified opportunity zone (QOZ) and DST investments, the main difference being the application. Opportunity zone investments apply to capital gains from the sale of any asset such as capital gains from the sale of businesses, stocks, bonds, machinery, collectibles, and real estate assets. The other important distinction is you are only able to, and only need to, invest gain into an opportunity zone investment. In a 1031 exchange, you’re investing both basis and gain.

Individuals or entities that invest capital gains into QOZs may receive multiple tax benefits, including: 

  1. Deferring gain recognition till the earlier of December 31, 2026, or the disposition of the QOF interest; and
  2. Elimination of tax on the appreciation of their QOF investment if the investors hold their investment for at least ten years.

Learn More About DSTs and 1031 Exchanges 

To learn more about Delaware Statutory Trusts and how they can be used successfully in 1031 exchange transactions, watch EisnerAmper’s on-demand webinar now. 


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Navigating Tax Opportunities in 1031 Exchanges | Part I

The Basics of 1031 Exchanges

This webinar details the basics of 1031 exchanges, including forward and reverse 1031 exchanges, diving into different 1031 exchange concepts, and the key players involved in 1031 exchanges. 

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Navigating Tax Opportunities in 1031 Exchanges | Part III

Advanced 1031 Topics Including Exchange Considerations for Partnerships

This session delves deeper into advanced 1031 exchange topics including carryover basis, boot, and deferred vs. recognized gain calculations, depreciation matters, cost segregation relevance, and methods for existing partners in partnerships to not continue in 1031 exchanges.

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Navigating Tax Opportunities in 1031 Exchanges | Part IV

In this webinar, our speakers covered practical tips on DSTs from operators, brokers, attorneys and tax advisors.

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Ling You

Ling You is a Tax Partner in the Real Estate and Financial Services Groups, with nearly 20 years in public accounting.

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