DST (Delaware Statutory Trust) 1031 exchanges are increasingly popular ways of co-investing in commercial real estate while receiving deferred tax advantages. Because the fractional ownership structure provides more diversification opportunities, you can also lower your investment risk.
The following are ways you can minimize your risk while maximizing your returns with a DST 1031 exchange.
Maximizing Tax Advantages
Through a DST 1031 exchange, an investor can exchange a commercial rental property for an investment in a pooled investment fund of like-kind commercial real estate. You could, for example, exchange an investment in a multi-family dwelling or office building for a co-investment in one or more similar properties. The main advantage of the DST exchange is that taxes are deferred on the disposal of the first property.
The fractional investment structure of a DST 1031 provides more diversification and tax savings opportunities. The original investment continues to benefit from tax deferral as long as it is rolled over into other DST exchanges. Because you can invest smaller amounts in a wider choice of properties, you can maximize tax advantages.
Diversifying Across Assets
DST 1031 services, or brokers, provide investments across diverse asset classes, geographies, and risk profiles. A young millennial may be seeking multi-dwelling residential property in a gentrifying chic, urban neighborhood in Miami — whereas a retired couple may want to invest in established office buildings or gated communities in mid-America.
No matter what your risk profile, you can invest across the real estate investment risk spectrum: core, core plus, value add, and opportunistic. Through fractional ownership, you can invest in slices of many different types of institutional-quality commercial real estate.
Lowering Debt Burden Risk
If you are a core investor, you will want to take on lower debt when investing in DST 1031s. In other words, you will seek a lower loan-to-value (LTV) ratio. The LTV is the amount of the mortgage divided by the value of the property. If the DST invests in a property with a 50 percent mortgage, for example, your fractional share will determine your proportional share of both the cash distributions and debt.
Here, too, the ability to make fractional investments can lower risk. An investor wishing to maintain a lower debt burden can diversify across commercial properties with lower LTV ratios.
Broader diversification through a DST 1031 minimizes conventional real estate investment risks, including unstable cashflow distributions, asset value fluctuations, and excessive leverage.
To learn more, contact a resource that offers DST 1031 services.