Entering a Delaware Statutory Trust (DST) creates opportunities for passive income, heightened diversification, and more. However, you must follow certain rules when investing, especially if you’re using the DST to finish a 1031 exchange.
One rule, which is part of the 180-day timeline, is the 45-day identification period. This crucial timeframe is the only period in which you can select replacement properties to finish the exchange.
In this blog post, let’s look at how the 45-day deadline works if you choose to end the exchange with fractional DST interests.
What Is the 45-day Deadline?
The IRS imposes a 180-day timeline for a 1031 exchange. Failing to follow this guideline will result in the loss of tax-deferral benefits, which is the main reason why investors initiate a 1031 exchange in the first place.
Within the 180-day timeline is the 45-day identification period, which begins on the day you close the sale on the relinquished property. At this phase, you need to officially identify properties that you intend to acquire.
Traditionally, you can identify up to three properties, but the 200% rule lets you identify as many as you would like, as long as the aggregate fair market value of these properties does not exceed 200% of your relinquished property’s value. This rule is particularly significant for DST investing, as it helps increase the number of DSTs you can enter.
DSTs and the 45-day Rule
DSTs are investment vehicles that own underlying income-generating properties. You enter by purchasing fractional interests. In exchange, you earn regular income from the earnings of the properties.
Fractional DST interests qualify as “like-kind,” so you can finish a 1031 exchange by using your proceeds to acquire interests. This also means that DST investing follows the 180-day timeline, including the 45-day period.
You work with your broker-dealer to find DST offerings. Following the 200% rule, you can choose as many as you want. Since DST offerings have a low barrier to entry, requiring as little as $100,000, you can spread out your proceeds and enhance diversification. Plus, DSTs are prepackaged investments, so it’s much easier to learn about considerations like projected income, expense ratios, or annual fees compared to direct property ownership.
To officially identify DST offerings, you’ll need to submit the details of each offering to your qualified intermediary, and the information must be specific enough to avoid ambiguity. After the official submission, the identification period is over, and you may begin the closing process. The identification period doesn’t need to reach 45 days, giving you more time to assess each DST offering before the 180-day timeframe is over.
DST Identification Tips for Investors
Here are some practical tips to follow for a streamlined process and compliance with IRS rules.
- Work with Experts: Your qualified intermediary, tax advisor, and broker-dealer can provide guidance and resources to help you navigate the process with confidence.
- Plan Ahead of Time: Before entering the 1031 exchange, knowing your short-term and long-term financial goals helps you easily narrow down the DSTs that fit your needs.
- Keep Track of the Timeline: While this tip may be obvious enough for some, keeping track of the deadlines can be neglected if you’re focused too much on researching DST offerings.
Wrapping Up: Understanding the DST 45-day Timeline
When completing a 1031 exchange with a DST, adhering to rules and deadlines, such as the 45-day identification period, is critical. Thankfully, the prepackaged structure of DSTs provides ease during selection and evaluation, making them ideal for investors who want a quick resolution of the identification period.
If you choose this strategy, make sure to consult with your qualified intermediary, tax advisor, and other professionals for expert guidance on the DST timeline.
Sources:
https://smartasset.com/investing/delaware-statutory-trusts-dsts
https://www.americanbar.org/groups/real_property_trust_estate/resources/real-estate/1031-exchange/
