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Navigating Tax Opportunities in 1031 Exchanges | Part IV

Mar 13, 2024
Ling You
Craig Covington
Steven Meier
Jimmy Moy

A Panel Discussion with Delaware Statutory Trust Operators & Advisors

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

EisnerAmper’s recent webinar on Delaware Statutory Trusts (DSTs) brought together a diverse panel including DST operators, brokers, attorneys, and tax advisors. The goal was to shed light on the intricacies of DSTs, provide practical insights, and explore tax-deferral strategies for real estate investors. 

What is a Delaware Statutory Trust (DST) 

The panel kicked off with an overview of DSTs. These investment vehicles allow multiple investors to pool their funds and invest in commercial properties, such as apartment complexes, office buildings, or retail centers. DSTs are structured to comply with Section 1031 of the Internal Revenue Code, which enables tax-deferred exchanges. 

Why Asset Selection Matters with DSTs 

When dealing with DSTs, there are limitations. Unlike traditional partnership structures, DSTs don't allow you to refinance or inject additional equity. Therefore, it's crucial to choose assets that can endure the entire investment period, like Class A multi-family. Unlike value-add platforms, where you can address issues like a failing roof through refinancing, DSTs require assets that can withstand the long term. 

Your asset selection can also help make sure you can provide investors with predictable, steady cashflows.  

Choosing the Right Structure for Delaware Statutory Trusts  

A successful Delaware Statutory Trust depends on its structure. Even if you have an excellent asset, the wrong debt or inadequate capitalization can make it a poor choice for a DST. While it might work well in a partnership structure, DSTs cannot be recapitalized. 

To weather unexpected events (like a roof failure), upfront trust reserves are crucial. These reserves make sure that the DST can handle unforeseen costs without impacting investor returns. When selling the DST, the capital is then returned to investors, so you need to consider how the capital or cash flow can be hurt if the investment is sitting there not being used. If you do choose a trust reserve, it is beneficial to have an interest reserve when closing on a DST since you will have a line of credit or some sort of temporary equity facility that will ultimately be redeemed by the investors that come into the DST. 

Choosing the Right Partners for Delaware Statutory Trusts    

Even with the right selection process and structure, identifying the right partners is a major consideration to keep in mind before launching a DST. Partnerships can include brokers, financial advisors, tax advisors, and legal advisors.  

The right partners help you to understand the pulse of the market before putting down an expensive line of credit on a deal. All sides need to know that it's going to be a success and that comes with being in tune with what the market expects. It's not in the best interest of a sponsor to just launch a DST with a poorly crafted business plan, so before going into an investment, it is recommended to establish a plan from the get-go, especially in the instance of a DST since it cannot be refinanced until the term is ended.  

Most partnerships are created with the goal of a lifetime relationship and multiple future DST deals. Like all industries, relationships are key, and having a strong partnership with sponsors and investors is a fundamental part of continuous success with DST deals.  

At EisnerAmper, our advisors can help you navigate the complexities of DSTs, 1031 exchanges, and potential problems that arise. For more information or to answer any questions please fill out the form below, and an advisor will get back to you. 


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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 II

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.

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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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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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