Problems a DST/QOF can solve:
Both DSTs and QOFs are structured such that professionals take care of all the maintenance and management issues for us. This means you can sell your property the traditional way through a Realtor, hire a Qualified Intermediary to temporarily hold your proceeds, and then reinvest those proceeds into one or more DSTs or QOFs for both tax deferral & targeted income, as well as no more management burdens.
Delaware Statutory Trusts can eliminate the headaches of “landlording” because they often come with properties leased by Investment Grade tenants which have even proven themselves to be pandemic-resilient. These include supermarkets, pharmacies, discount retailers, medical centers, etc.
DSTs and QOFs also cater to asset classes such as Senior Care facilities, Self-Storage properties, hotels, residential housing communities, etc. In all cases, management responsibilities are eliminated for investors.
The DST and QOF are specifically designed to remove the burdens of management from the shoulders of the investors, while still providing full tax-deferral as well as targeted monthly income. This has been particularly popular over the decades with seniors who wish to enjoy their retirement years without fighting with tenants or fixing leaky toilets.
When we consider capital gains taxes on both the Federal & State levels, the 3.8% Net Investment Income Tax, and the 25% Depreciation Recapture, the total tax consequences from a property sale might be over 40% of the entire sale proceeds.
Both DSTs and QOFs allow for tax deferral, and the QOF also offers investors a tax-free exit upon the ultimate sale of the fund’s assets after the 10-year holding period.
Both DSTs and QOFs offer targeted income to their investors.
DSTs typically pay investors monthly distributions immediately upon the close of the exchange.
QOFs may offer monthly or quarterly preferred distributions, although their income may simply accrue for a period of time as the property is constructed and stabilized.
When the owners of a DST pass away, their heirs (usually the kids) receive the same stepped-up cost basis as they would for directly-owned real estate, which effectively eliminates the capital gain.
With a QOF, there are no gains upon the exit after 10 years, so the proceeds are always without capital gains.
A class of DST exists which target short-term holding periods, as little as 2-3 years.
If the asset that was sold still had a substantial Cost Basis, meaning the property wasn’t fully depreciated yet, then the entire Cost Basis is available to a QOF investor today, tax free. Only the gain itself needs to be reinvested into the QOF.
Otherwise, the cash-out DST option may allow for a substantial portion of the proceeds (up to ~86%) to be withdrawn today, tax free.
No problem. Although you have disqualified yourself from a DST, you may still invest into Qualified Opportunity Zone Funds with the capital gain portion of the sale proceeds. You may keep the entire Cost Basis today, tax free.
Also, note that the 180-day deadline for investing into QOFs begins when the proceeds are actually returned to you by the QI, not from the day the property was sold.
If a Replacement Property in a 1031 Exchange is less expensive than the Relinquished Property was sold for, then there may be some leftover proceeds that are not enough to purchase another property with. In this case, that remaining portion, known as “taxable boot,” may be reinvested into either a DST or a QOF for both tax deferral and targeted income.
Both the DST and the QOF can cover the portion of the sale that came from the real property.
However, only the QOF can defer and eliminate taxes resulting from the sale of the business portion.
In both cases, only the gain portion is required to be reinvested. The business owner can keep their entire Cost Basis from both the building and the business today, tax free.
DSTs — and 1031 exchanges in general — are only permitted for deferral of capital gains resulting from the sale of investment properties.
However, Qualified Opportunity Zone Funds allow for the deferral and elimination of capital gains taxes resulting from the sale of ANY asset at all, including stocks, cryptocurrencies, businesses, artwork, even primary residences (above and beyond the $250k exemption per person).
If you took “constructive receipt” of your sale proceeds (meaning you took possession of the cash from the property sale) then you have eliminated any DST or 1031-related options to defer your gains. However, since the QOF does not require a Qualified Intermediary, you can still reinvest the capital gains portion from the sale within 180 days. You can keep the Cost Basis today, tax free.
Taxes resulting from the sale of Primary Residences (above and beyond the $250k per person exemption) cannot be deferred through a 1031 Exchange, including a DST.
However, QOFs permit us to defer and eliminate such taxes because they do not require those taxes to have come from Investment Properties. Gains from the sale of ANY assets are permitted to be invested into QOFs.
DSTs often come with built-in debt intended to replace mortgages from relinquished properties. Certain “high-leverage” DSTs exist that are specifically designed to replace high LTVs, up to as high as 86%.