How To Sell a Commercial Property Using a 1031 DST

A 1031 exchange allows investors to defer capital gains taxes by reinvesting sale proceeds into qualifying like-kind property. When paired with a Delaware Statutory Trust (DST), you can also enjoy passive income and diversification.

How do you begin the 1031 Exchange DST process, anyway? The first step is selling a property, allowing you to access the net proceeds of the asset. If you want to sell commercial real estate, there are a few considerations to keep in mind that you may not encounter with other types of real estate. Realized 1031 has shared a guide detailing how to sell commercial property using a 1031 DST to help you out.

1031 Exchange Rules for Selling Property

The IRS has established specific rules and timelines that taxpayers must follow to defer capital gains taxes under 1031. Here are a few relevant regulations when selling commercial property.

• Like-Kind Requirement: You can only exchange properties that are like-kind. More specifically, these assets must be held for investment or business use. Commercial properties automatically qualify under this requirement, but mixed-use properties will only have their commercial units eligible for the exchange. 

• Exchange Timelines: You must identify replacement property within 45 days of the sale of your relinquished property. Additionally, you only have 180 days to complete the entire exchange, which begins after you sell your commercial property. For reverse exchanges, you must be able to sell the asset within the 180-day timeline. 

• Arm’s Length Transaction: Investors cannot have direct control over the proceeds from the home sale. As such, a qualified intermediary is needed to ensure an arm’s-length transaction. 

Failure to meet these rules—such as missing deadlines or using non-qualifying property—can trigger recognition of gain and capital gains tax liability. It's critical to coordinate closely with a tax advisor and an experienced QI.

Preparing To Sell Commercial Property

Selling a commercial property often involves more steps and regulatory considerations than selling residential real estate, such as a single-family or multi-family home. Here are some key steps to consider: 

1. Engage with a commercial real estate broker specializing in 1031 Exchanges. These professionals can assist with valuation, listing, and buyer coordination specific to commercial assets. 
2. Work with a qualified intermediary early in the process if you're planning to complete a 1031 exchange. The QI will hold proceeds from the sale and help ensure the transaction is structured in accordance with IRS requirements. 
3. Conduct property valuation, assessing factors such as the value of similar buildings, lease terms, operating expenses, and market conditions.
4. Prepare property for marketing and listing. For commercial properties, extra due diligence is needed to help potential buyers gain a full picture of the property. 
5. Market the property on the appropriate platforms. Commercial properties have their own MLS websites that are distinct from residential real estate. Your broker will help you access these platforms.
6. Negotiate with buyers as offers come in. 
7. Closing the transaction is the last step. You may need to work with specialized real estate attorneys, especially ones focusing on 1031 Exchanges.

Where Do the Funds Go?

Upon selling the property, the proceeds must be held by the qualified intermediary to prevent constructive receipt. The intermediary will keep the funds in escrow until you find a suitable DST offering.

Acquiring the Replacement Property

Given your intent to enter a DST, your broker may coordinate with a licensed broker-dealer or registered investment advisor to present DST offerings. These are packages of information and the opportunity presented to potential investors to invest in a specific DST, outlining all the details of this particular investment vehicle. Done correctly and within the timeframe, your 1031 DST acquisition may allow for deferral of capital gains taxes and entry into a passive investment.

Final Thoughts on How To Sell a Commercial Property Using a Delaware Statutory Trust

The process of selling commercial property with the intent to exchange into a DST can be complex. Investors should plan ahead and coordinate with brokers, qualified intermediaries, and other professionals. Plus, you’ll have to follow IRS and SEC requirements to ensure compliance and maintain your tax-deferred status.DSTs may provide certain advantages, such as access to institutional-quality real estate, professional management, and portfolio diversification, but these features must be evaluated in light of the investor’s risk tolerance, financial goals, and liquidity needs. Understanding the process, asking informed questions, and reviewing offering documents carefully can help you make more confident decisions when pursuing a DST strategy as part of a 1031 exchange.

The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.

Article written by: Story Amplify. Story Amplify is a marketing agency that offers services such as copywriting across industries, including financial services, real estate investment services, and miscellaneous small businesses.

Sources:

https://www.investopedia.com/terms/s/section1031.asp 

https://www.investopedia.com/terms/r/reverse-exchange.asp 

https://www.investopedia.com/terms/c/constructive-receipt.asp