The Election’s Over…So What Now?

Investment returns are a lot like campaign promises, there is never any guarantee that certain percentages will be met or that promises made will actually come true. But one thing that is certain is that the conversation around tax law changes are sure to be at the forefront of any new administration’s agenda.

For over 100 years, IRS code section 1031 has allowed real estate investors to defer the capital gains taxes that arise from the sale of real estate by reinvesting the proceeds in a “like-kind” property. This part of the tax code has survived 18 different administrations with both republican and democratic presidents each spending 52 years in office. While many investors have been taking a “wait and see” approach until after the election, regardless of who the next President is, it will take a considerable amount of time and debate before any changes to the U.S. tax code will be made.

The guidelines around how 1031 Exchanges work have seen very little change since they were implemented in 1921. The code allows for the exchange of “like-kind” real estate assets such as retail, apartment, or industrial buildings. In 1988, Delaware Statutory Trusts (DSTs) were introduced as part of the Delaware Business Trust Act and began growing in popularity in 2004 when an IRS ruling clarified their tax treatment.

These types of trusts offer investors the opportunity to receive passive income in institutional quality real estate portfolios that were not available prior to 1988. For real estate owners looking to step away from the day-to-day management requirements that come with owning individual properties directly, they can be an ideal solution. Additional benefits of using DSTs as 1031 Exchange replacement properties include:

• DST investments are typically pre-packaged with long-term, non-recourse financing so investors don't have to sign for the loan.

• Proceeds from a 1031 Exchange can be invested in one or multiple DSTs allowing for enhanced diversification into a portfolio of assets across location, asset class, tenant or industry. 

• With only 45 days to identify replacement properties, DSTs save investors time during the selection process and purchases can be completed in as few as 1-3 days.

The first step in considering an investment into a DST is making sure that the offering’s investment objectives and risk tolerances align with an investor’s personal needs and goals. Potential investors must also do their homework on the company managing and sponsoring the DST. This independent research goes beyond reading the company’s website or posted track record, it includes asking questions about the firm’s principals, their professional backgrounds, and history within the real estate or investment industry.  Knowing the full history of the company and the leadership team that includes “the good, the bad and the ugly” may seem like it is asking for too much information, but having this insight is critical to making a well-informed investment decision.

Through 3Q 2024, according to Mountain Dell Consulting, there are currently as many as 47 sponsors offering more than 87 programs to investors. Based on fundraising trends, Mountain Dell is forecasting that these sponsors could raise as much as $5.2 billion in investment proceeds by the end of the year. While this is up slightly from the $5.04 billion raised in 2023, well below the market high of $9.2 billion raised in 2022 when interest rates were at an all-time low.

Because of the significant size of the DST market, working with a financial professional that can help you assess an offering’s investment objectives to make sure it aligns with your personal investment goals, financial situation, liquidity requirements, income needs, and risk profile is of utmost importance. If you are considering an investment in a DST as part of your 1031 exchange strategy, we welcome a conversation with you.