In a 1031 exchange completed through a Delaware Statutory Trust (DST), two entities matter: the qualified intermediary and the DST sponsor. Seamless coordination must happen between the two to ensure compliance with IRS rules and increase the chances of a successful exchange. There are various key areas where these parties will need to work together. Let’s take a look at what you need to know as an investor.
Entering a DST doesn’t always require a qualified intermediary or accommodator. These individuals are only necessary if you’re investing through a 1031 exchange. The primary role of the intermediary is to ensure that you don’t have direct control of the funds from the sale of the relinquished property, as this would result in a constructive receipt. Aside from holding the proceeds, the qualified intermediary is the entity that oversees the entire exchange and ensures that you remain compliant.
Meanwhile, the DST sponsor is the entity that structures, finances, and markets the DST. The sponsor ensures your DST investment is correctly set up and executed, but they rely on the intermediary to handle the IRS rules and cash flow.
Various types of documentation are necessary to successfully execute a 1031 DST transaction. Here’s how the intermediary and the sponsor should work through the paperwork.
After the sale of the relinquished property, the funds will be sent to your qualified intermediary, who puts them in escrow. This step is crucial as it prevents the creation of a constructive receipt. Once you’re ready to purchase DST interests, the accommodator will send the required funds to the DST sponsor. After, both the intermediary and sponsor must confirm the transfer and issue documentation showing your funds were used to acquire the DST interest. Their communication and coordination are crucial here to avoid delays that may cause you to miss the 180-day deadline.
We’ve mentioned how the qualified intermediary must be formally assigned your rights in the contracts. This assignment is critical as it ties the accommodator to your transactions. In other words, the assignment makes it so that the intermediary is the one who completes the transaction. Otherwise, the IRS could claim that you conducted the transaction yourself, making you liable for capital gains taxes.
This assignment raises several considerations for DST investments.
Seamless coordination between your qualified intermediary and DST sponsor is crucial for a successful exchange. You avoid delayed closings, ensure that paperwork is complete, and conduct the process properly to maintain your tax-deferred status when these two work together for your best interests. By ensuring your intermediary and sponsor are in sync from the start, you protect both your investment and your tax-deferral strategy.
Sources:
https://www.hellodata.ai/help-articles/how-do-dst-ownership-structures-work-in-real-estate
https://www.ftb.ca.gov/pay/withholding/qualified-intermediary.html