DST investors have the potential to obatin predictable and dependable monthly rental income, 10-20% increase in equity potential and the ability to move this money into another DST property using a §1031 exchange. The landowner may have gotten the idea to do a §1031 exchange from his CPA or a real estate agent who assumes the only way to defer taxes is through a §1031 exchange option.
However, if a landowner has a condemnation award coming, we may recommend they use the §1033 exchange option, depending on the particular situation. The IRS wrote the §1033 code to support income from condemnation awards. Based on suitability, we believe the DST may be a better option than purchasing an active real estate investment property for the following reasons:
Preserves Their Equity
In IRS Publication 544, the IRS refers to §1033 exchanges as non-taxable. A properly structured exchange provides real estate investors with the opportunity to defer 100% of both federal and state capital gains taxes. Essentially, this is analogous to an interest-free, no-term loan on taxes due until the property is sold. Capital gains taxes may be deferred indefinitely by exchanging one property for the next under §1031.
Increases Their Cash Flow Potential
Many investors exchange from a property that produces no income into properties that provide a potential stable income stream. This may, over time, increase the investor's return.
Diversifies Their Holdings
Diversification may help investors increase their safety and rate of return. By not putting all their eggs in one basket, investors can own properties in different geographic regions or properties that provide potential rental income.
Reduces Their Annoyance
Under a net lease, the renter pays the lion's share of expenses generated by exchanged property. Net-leased properties are low-maintenance by design. Investment-grade corporate renters desire properties where they are the single tenant and in charge of their maintenance and insurance. It has been proven to save cost for their companies by eliminating hidden management fees.
Better Estate & Legacy Planning
Exchanged property may be eligible to receive a stepped-up cost basis on that property upon the investor’s death. A properly structured exchange helps steward the investor away from unnecessary capital gains taxes, leaving a greater legacy for future generations.