Here at Realized, we help real estate investors invest in Delaware Statutory Trusts (DSTs) using 1031 exchanges. 1031 exchanges allow investors to legally defer capital gains taxes when buying and selling real estate. DSTs also offer a number of other potential benefits for real estate investors - they allow you to expand your real estate portfolio without having to manage the properties yourself, can provide diversification in a real estate portfolio, and can provide access to commercial-grade real estate an investor may not be able to invest in on their own.
Although DSTs do offer tax benefits for investors, they can be a bit tricky to manage during tax season. DSTs are processed differently from traditional real estate investments. In a recent webinar, Realized covered calculations you can use to manage your DSTs while filing your taxes. We’ve already discussed basis calculations, how to calculate your depreciation schedule, and how to calculate your income tax.
In this article, we’ll talk about how to manage your DSTs when you’re filing taxes in different states. Each state has its own regulations regarding 1031 exchanges and DSTs, so it’s important to be aware of your state’s tax laws and how they affect your investments.
Where Should I File My DST Taxes?
Many DST investors don’t live in the same state as their investment properties. During tax season, you will need to determine where to file taxes for your investments. This is complex because DSTs are considered both securities and direct property. In order to be eligible for a 1031 exchange, you will need to invest in direct property.
This means that you will likely receive a schedule E or grantor tax letter rather than a K1 tax form. K1 tax forms consolidate your income to be reported in your state of residence, but DSTs and other direct property need to be calculated in the states where they are based.
Some states do not charge state income taxes, so if your investment property is in one of these states, you will not have to file there. These states are Alaska, Florida, Nevada, Texas, Wyoming, Tennessee, Washington, and South Dakota. There are also states that have a de minimis income threshold. This means that if your income in that state is less than the de minimis threshold, you will not have to pay state income taxes. Alternatively, there are states that charge taxes on any amount of income, even if it is only $100. Each state will have its own tax forms to fill out. The exact forms you need will depend on your tax structure. For example, an LLC will have different forms to fill out than a C corporation.
What Tax Forms Will I Need?
Tax law can vary widely between states. Ultimately, your tax situation will depend on your specific investments and where they are located. This is why it is so important to work with a trusted CPA who is familiar with your investments and the tax laws in relevant states.
Filing your taxes when you’ve invested in DSTs can be difficult, and every investment situation is unique, so you’ll need to do what makes the most sense for you and your investments. Be sure to consult with your CPA before filing your taxes to determine the right tax strategy for you and your needs. If you don’t have a trusted CPA, feel free to reach out to Realized for recommendations.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. Costs associated with a 1031 transaction may impact investor’s returns and may outweigh the tax benefits. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities. Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.