Typically, selling an investment property like a rental home or an office building will trigger taxes on the amount of gain. This may stop people unaware there is a way to defer these taxes.
The IRS allows a property seller who reinvests all the proceeds into one or more new properties (known as replacement properties) to defer taxes on the gain. This process is called a 1031 exchange, named for the section of tax code that allows it. This process is currently repeatable and you can also quit being a landlord!
The IRS allows reinvestment into passive investment vehicles known as Delaware Statutory Trusts (DSTs) which can also reduce risk versus owning individual buildings and provide monthly income.
There are several reasons investors consider a DST for their 1031 exchanges.
Because DSTs are professionally managed, you can quit dealing with tenants, maintenance, etc. These passive vehicles may also provide diversification across property types and regions of the country. The investor may also consider their heirs, who may inherit these investments tax-free. It is also easier for heirs to receive interests in a DST than negotiating to liquidate a physical property.
The 1031 exchange rules are complex. We recommend speaking with a knowledgeable financial advisor and tax professional well before an investment property is sold.
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