Using A 1031 Like-Kind Exchange? You Need A Backup Plan

Posted on: 29 June 2020

Are you a real estate investor who wants to sell using a like-kind exchange. Like-kind exchanges are one of the best ways to avoid a huge tax bite and continue to maximize your real estate investment. However, it can be a tricky transaction as well. To avoid problems, a savvy real estate investor should arrange for a backup plan by using what is known as a DST property. Here's why this is important and how to do it.

What Can Go Wrong With Your Exchange

To be valid as a true exchange of properties, your transaction must meet several criteria. These limitations often work out just fine, and the investor can identify and purchase an exchange property within the parameters. However, this is not guaranteed. The most common failures of a like-kind exchange happen in three categories. These include:

  1. Not Identifying a Property. Generally, you must identify a property to replace your current one within a 45-day window. However, if you "put all your eggs in one basket," you may take too long identifying a suitable property and then not have any alternatives if something goes wrong before the purchase completes. 
  2. Losing a Property. Just because you pick out a piece of real estate within the allotted time doesn't mean that it will remain available. Anything can change on the seller's end, and if your property fails to remain a possibility, you might find yourself scrambling at the last minute.
  3. Not Closing on the Property. Along with the 45-day identification window, you must also acquire the property within 6 months. Anyone purchasing real estate knows that delays happen for many reasons. But if you fail to pass this final hurdle, your time may already be up. 

Unfortunately, these failures are generally nearly impossible to forecast. So, without a backup plan, your transaction could come with a surprise bill. The answer, then, is to have a plan B using a DST. 

How a DST Property Can Help

A DST (Delaware Statutory Trust) is a trust set up to provide fractional ownership in properties that qualify for 1031 exchanges. Because it's an investment pool, you don't have to find a property, vet it, or handle the legal matters of buying it. For this reason, an investor working through the exchange process can hold this option as a backup no matter how late in the process their purchase might fall through.

Want to know more about DST 1031 exchanges? Make an appointment with a DST service provider in your area today.