You can enter a Delaware Statutory Trust (DST) through a 1031 exchange, helping you access passive cash flow and income from institutional-grade assets, all while enjoying deferred capital gains taxes. However, like with traditional 1031 exchanges, you’re still subject to the 180-day timeframe imposed by the IRS.
Before you begin the transaction, understanding the timeline helps you prepare ahead and ensure that you follow each deadline so you maintain your tax-deferral benefits and avoid issues with the IRS.
In this article, Realized 1031 has shared the definitive DST 1031 exchange timeline to help you visualize the process.
Day 0: Closing the Sale of the Relinquished Property
The 1031 exchange deadline officially begins on the day you finalize the sale of your relinquished property. The sale proceeds would now be in the hands of your qualified intermediary, as you’re not allowed to have direct control of the funds to prevent constructive receipt.
At this point, the clock starts ticking. You have 180 days to find a DST offering and close the sale. The first 45 days will be dedicated to the identification of the offerings, and the rest will be for the closing period.
Day 1 to 45: Identification of DSTs
You’ll need to work with your broker-dealer or 1031 exchange real estate agent to find DST offerings and identify them within the first 45 days. DST offerings are the official pre-packaged investments that allow you to enter a DST — professionally managed entities that own underlying, income-generating properties. Sponsors market these DST offerings across various platforms to find suitable investors.
Upon finding the listings and evaluating them, you can officially identify them by submitting the details to your qualified intermediary. Usually, you’re allowed to identify up to three assets. However, to maximize diversification, you can identify as many DST offerings as you want, provided that their total value doesn’t exceed 200% of the proceeds from your relinquished property.
Day 46 to 180: The Closing Period
Once you’ve identified the DSTs, the next step is completing the investment. This step doesn’t have to start at day 46 since you can start closing as soon as you finish identifying assets. Key steps during the closing period include the following.
- Due Diligence: Assess each DST offering, evaluating aspects like financials, risk, and projected returns. This step ensures that you’ll choose a DST that brings you closer to your financial goals.
- Coordinating With Your Qualified Intermediary: After making a choice, you’ll need to work with your intermediary to transfer the funds to the sponsor.
- Completing Paperwork: This is where the subscription documents apply. These include agreements that confirm your ownership interest in the trust.
Day 180: Exchange Deadline
By day 180, the subscription agreements must be signed, and the funds must already be transferred to the sponsor. You’re now a DST investor. If you miss this deadline, even by just a day, then the IRS will treat the exchange as taxable. Working closely with your qualified intermediary, broker-dealer, and tax advisor is critical to avoid any missed deadlines that could result in a tax hit.
Wrapping Up: 1031 Exchange Timeline for DSTs
The IRS imposes strict timelines for 1031 exchanges, and those that end with DSTs are no exception. By understanding the structured process and deadlines outlined above, you’ll ensure a compliant exchange and be able to preserve your tax-deferred status.
Sources:
https://www.investopedia.com/terms/s/subscriptionagreement.asp
https://smartasset.com/investing/delaware-statutory-trusts-dsts
https://www.investopedia.com/financial-edge/0110/10-things-to-know-about-1031-exchanges.aspx
