Chaining Exchanges: Moving From One DST to Another Without Busting Your 1031

As you likely know, Delaware Statutory Trusts (DSTs) offer various advantages, like passive income and diversification. The fact that DSTs have holding periods, however, means a taxable event is always on the horizon. Thankfully, strategies like chaining exchanges are allowed, so you can move from one DST to another through 1031 exchanges, ensuring that you maintain your tax-deferral benefits.

Keep in mind, though, that improper planning and execution can lead to the exchange falling through. To help you avoid such a scenario and ensure the continuation of your DST 1031 cycle, Realized 1031 is here with an in-depth guide.

The Same 1031 Exchange Process Applies

Continuing a 1031 exchange from one DST to another follows the same process as a traditional exchange.

1. The sponsor notifies beneficial interest holders about the impending full-cycle event, where property disposition occurs. You engage with your qualified intermediary to begin planning for the exchange.
2. After the sponsor sells the assets, it will distribute the proceeds to your qualified intermediary. The funds cannot be given to you directly.
3. You identify suitable DSTs within the 45-day identification period.
4. Once you’ve found DSTs that have an aggregate market value that’s equal to or greater than your DST proceeds, you can begin the closing process.
5. Your qualified intermediary transfers the funds to the new sponsor in exchange for beneficial interests. Since no official sale occurred, you maintain your tax-deferral status as you enter this new DST.

Timing Is Everything in DST 1031 Transfers

Given how the transfer is essentially the same, timing remains important. The 180-day timeframe and 45-day identification period can get tricky in this case, especially since the DST won’t follow your preferred schedule. It will sell properties if market conditions are favorable, not at your convenience. As such, it’s important to maintain constant communication between you, your intermediary, and the sponsor.

Many DSTs do provide warnings or notices before a sale closes, so you have time to review new DST offerings and create a robust reinvestment plan.

Avoiding Common Pitfalls and Exchange Busts

Here are some best practices you can follow to avoid common issues and the loss of tax-deferral benefits.

• Direct Access to Proceeds: Make sure your sponsor understands your intent to reinvest into another DST so they don’t accidentally send the proceeds to you instead of the qualified intermediary.

• Not Coordinating Timelines: The IRS is strict with deadlines, and going over by even one day will result in a failed exchange. The tax hit can be significant due to this small mistake. As such, keeping track of the days is critical to ensure that you’re transacting within the allowable period.

• Reinvesting Non-Qualifying Assets: Only like-kind real estate qualifies. You cannot reinvest other types of assets, like REIT shares or stocks. Some investors may attempt this to reach a certain amount required by the DST, but this isn’t allowed.

Wrapping Up: Continuing 1031 DST Transfers

Reinvesting from one DST into another DST is allowed, since DST interests qualify as like-kind assets. This helps you maintain your tax-deferral status and preserve your income for the long term.

The same rules apply as with any other 1031 exchange, so being mindful of the deadlines, restrictions on control of proceeds, and other requirements helps increase the chances of a successful reinvestment. Make sure to work closely with your sponsor, qualified intermediary, and tax advisor to gain the guidance and resources you need.

Sources:

https://www.irs.gov/pub/irs-news/fs-08-18.pdf

https://www.forbes.com/councils/forbesfinancecouncil/2024/04/08/the-power-of-beneficial-ownership-in-delaware-statutory-trusts/

https://www.hellodata.ai/help-articles/how-do-dst-ownership-structures-work-in-real-estate