The Delaware Statutory Trust, often called a DST for short, is classified as a trust under the laws of the state of Delaware. The Delaware Statutory Trust is also known as a Delaware Business Trust.  The Delaware Statutory Trust is considered to be an investment trust that will be classified as a trust for federal tax purposes.  Therefore, DSTs is classified as a "pass-thru" entity and a "disregarded entity" so that any and all income tax consequences will "pass-thru" to the investor's individual income tax return.

Trustee Holds Legal Title to Investment Real Estate  

The individual investors no longer hold fee simple title, commonly referred to as legal title, to the rental or investment real estate like they did pursuant to the Tenant-In-Common or TIC investment structure.  Individual investors will now instead purchase a beneficial interest in a Delaware Statutory Trust or DST, which will qualify as a purchase of a real estate interest for income tax purposes.  They are now considered a beneficiary of the Delaware Statutory Trust of DST. Legal title to the investment property is now held in the name of the Trustee of the Delaware Statutory Trust.

Delaware Statutory Trust Satisfies 1031 Exchange Requirements

Buying or selling a beneficial interest in a Delaware Statutory Trust or DST qualifies for 1031 Exchange treatment. Investors can sell their existing rental property or investment real estate and then 1031 Exchange into a beneficial interest in a Delaware Statutory Trusts or DSTs. The investor can later sell the beneficial interest in the Delaware Statutory Trust or DST and then 1031 Exchange again into another Delaware Statutory Trust or into any other rental or investment property.

IRS Issues Revenue Ruling 2004-86

The IRS validated the use of Delaware Statutory Trusts for 1031 Exchange use when they issued Rev. Rul. 2004-86.

William L. Exeter announced today that Brent Bonine has joined The Exeter Group of Companies, which includes Exeter 1031 Exchange Services, LLC, Exeter Fiduciary Services, LLC and Exeter IRA Services, LLC as Senior Vice President and Director of National Sales and Marketing.

National Sales and Marketing Group

"Brent Bonine will be based in the company's national corporate headquarters office located in San Diego, California, and will be responsible for all day-to-day operations and long-term strategic planning for our national Sales and Marketing Services Group," said William L. Exeter, President and Chief Executive Officer, The Exeter Group, LLC.

Mr. Bonine is a veteran sales and marketing leader with a breadth of industry experience. For more than 20 years, he has held senior executive level marketing positions in several organizations operating in a variety of industries including: fiduciary and financial services, information technology, construction, technical services, training organizations and marketing service firms.

Read full press release here.

Forward 1031 Exchanges 

Generally, investors list and sell their current property (relinquished property) first when they structure a 1031 Exchange.  This is referred to as a Forward 1031 Exchange transaction because the investor is selling their relinquished property first.  Once sold, they then begin the stressful task of finding and identifying their replacement property.  

Their 1031 Tax Deferred Exchange fails if they are unable to locate, identify and acquire suitable like-kind replacement property or properties within the required timelines.  The problem is that they have already sold (and closed) on their relinquished property, so their taxable gains have been triggered since they were not able to locate, identify and acquire suitable replacement property within the required timelines.

Reverse 1031 Exchange 

One way to reduce if not eliminate the risk involved with 1031 Tax Deferred Exchange transactions is to consider using the Reverse 1031 Exchange.  The Reverse 1031 Exchange allows the investor to take all the time they want to locate, identify and ultimately acquire replacement property since there are no deadlines running yet.  Investors are permitted to acquire their replacement property first and then sell their replacement property later (within the 180 day deadline) through the Reverse Exchange.  

One of the most important benefits of using a Reverse Exchange is the fact that if the investor is not able to sell his or her relinquished property and the Reverse Exchange fails there is no taxable gain to worry about since nothing has been sold.  The Reverse Exchange fails and is terminated and the investor ends up owning both of the properties.  

Reverse Exchange Webinar 

Reverse 1031 Exchanges are complex tax-deferred exchange strategies and should only be entered into with a knowledgeable and experienced exchange company.  You are invited to participate in the next Reverse 1031 Exchange Webinar.  You will learn how to properly structure a Reverse Exchange and how the basic steps work.  You can ask all the questions that you like. 

Take Control With a Self-Directed IRA 

These specialized IRAs are most commonly called Self-Directed IRAs or SDIRAs.  The Self-Directed IRA is an Individual Retirement Account that is managed or directed by the investor or owner of the IRA.  The investor makes all of the investment decisions for the IRA.  They choose what to buy, hold and sell and when to do so.  They can choose to do their own research or work with professional advisors.

Not All Self-Directed IRAs are Equal

Technically, all IRAs are Self-Directed IRAs.  There are many that would disagree with me regarding that statement.  However, each individual investor (owner) can decide which IRA Custodian to use.  They can choose to transfer their IRA to a bank, savings bank, credit union, brokerage firm, life insurance company or trust company.  It's their choice; therefore the IRAs are all self-directed. 

The real issue is the scope of investments permitted by the IRA Custodian that is selected.  Banks, savings banks and credit unions are generally limited to depository accounts such as money market demand deposit accounts, savings accounts or certificates of deposit.  Certain custodians, generally independent trust companies, allow investors to buy real estate related investments inside of their Individual Retirement Account.

Alternative Investments 

IRA Custodians that have a broader scope of permissible investment options, often referred to as Alternative Investments, generally permit investors to buy, hold and sell the following investments within their Self-Directed IRAs:

• Real Estate Investment Trusts (“REITs”)
• Umbrella Partnership Real Estate Investment Trusts (“upREITs”)
• Limited Partnerships (“LPs”)
• Limited Liability Companies (“LLCs”)
• Co-ownership or fractional ownership of real estate related assets such as Tenants-In-Common investment properties (“TICs”) or Delaware Statutory Trusts (“DSTs”)
• Closely held businesses
• Real estate
• Promissory Notes secured by Deeds of Trust
• Promissory Notes secured by Mortgages
• Tax Lien Certificates
• Timberland investments
• Precious Metals
• Other commodities
• Hedge funds
• MLPs
• Oil & gas funds
• Venture capital funds

As you can see, IRA Custodians that permit Alternative Investments give investors a much broader selection of asset classes to choose from.  

Self-Directed IRA Webinar 

Self-Directed IRAs are complex retirement accounts, so investors should be careful before jumping into the world of Self-Directed IRAs.  Learn as much as you can before you decide to proceed thru free Self-Directed IRA Webinars, and make sure that you do a thorough due diligence before selecting your final IRA Custodian.  

Section 1031 if a Federal Tax Code

The 1031 Exchange is a great tax-deferral strategy (see "1031 Exchange Quick Facts") for owners of investment property who wish to defer the payment of their capital gains and depreciation recapture taxes.  It allows investors to indefinitely defer their tax liability if they continue to 1031 Exchange throughout their lifetime.  However, it is important to note that Section 1031 is a Federal Tax Code, and not all states administer or recognize the 1031 Exchange strategy precisely the same as the Federal government does.

Most States Conform to Federal Tax Code

The majority of states with in the U.S. conform to the Federal income tax treatment of Section 1031 of the Internal Revenue Code ("1031 Exchanges") in that all capital gains and depreciation recapture taxes are deferred until ultimate sale or disposition of the property.

Common sense would lead you to believe this would mean investors are only subject to capital gain and depreciation recapture taxes in the state where the investment property is actually sold (i.e. the investor stops structuring 1031 Exchanges).  For example, if the investor 1031 Exchanges out of California property and into Florida property, where Florida has no state income taxes, one would assume that when the Florida property was sold there would be no state income taxes dues.

The California Claw-Back

However, the State of California is a notable exception to this, and takes the position that any increase in fair market value of investment property in California is subject to California income taxes.  They take this position regardless of whether or not that property was exchanged for another property located in another state before its ultimate sale. This means that California investment property owners cannot escape State of California income taxes, even if they 1031 Exchange out of California real estate and into replacement property located in another state.

The State of California employs what is referred to as a "claw-back" provision, entitling California to tax any gain on property that occurs in California, regardless of where the property is eventually sold.  So, the sale of the Florida property mentioned above would be taxable in California to the extent that any of the gain was realized in the State of California.

Case Study

Say Mr. Jones bought a California investment real estate for $200,000.  After appreciating to $300,000, Mr. Jones 1031 Exchanges the investment real estate for one in the State of Arizona.  While in Arizona, the investment property continues to appreciate in value to $500,000.  Feeling that he has had enough of investment real estate headaches, he sells the real estate for $500,000, equating to a total capital gain of $300,000.  Mr. Jones would not only be liable for capital gain taxes on the $300,000 in capital gains in the State of Arizona, but would also owe capital gain taxes on $100,000 of capital gains taxes that appreciated in California.

So, beware of the California Claw-Back.

Mr. Exeter joins Silver Stream Advisors’ President Gregg Wood and his team of real estate experts to bring you a brief education on buying real estate using 1031 Exchange strategies.  Mr. Exeter will provide you a greater understanding of what 1031 Exchanges are all about and how to invest using 1031 Exchanges, while Mr. Wood will discuss how Silver Stream Advisors’ trademarked Real Estate Money Machine™ investment model will grow your retirement and take advantage of the incredible investment opportunity in real estate.

Both Mr. Exeter and Mr. Wood are committed to providing investors the highest levels of experience, expertise and security of funds in the industry.

Join us for this on demand webinar. 

>>>>Watch Now<<<< 

This webinar will teach you:

• What a 1031 exchange is
• How to sell & reinvest using a 1031 exchange
• 1031 exchange strategies and requirements
• How to regain control of your retirement using Silver
  Stream Advisors investment opportunities
• Tax strategies of the wealthy

For those prepared with the right tools, there has never been a better time to invest in real estate. Learn the secrets of the rich to control their financial future. We look forward to seeing you there. 

>>>>Watch Now<<<< 

Mr. Exeter, president and chief executive officer, The Exeter Group of Companies, including Exeter 1031 Exchange Services, LLC, stated today that Mrs. Amy Sotereanos joined its 1031 Exchange Services Operation as an Affiliate/1031 Exchange Consultant.  Amy offices will be in the Pittsburgh, Pennsylvania Affiliate Office.

Amy Sotereanos has more than 10 years of in depth professional experience and expertise in the real estate fields of commercial 1031 Exchanges and real estate settlement services.

Mrs. Sotereanos was formerly the Operations Manager with U.S. National 1031 Exchange, Inc. (formerly Mid-Exchange, Inc.).  Amy assisted client's with complex 1031 Exchanges for both real and personal property tax-deferred exchange transactions.

Over fourteen (14) speakers will cover topics such as:

• Keynote Speaker: Which Way is Our Economy Really Headed
• Using self-directed IRAs to buy real estate and real estate related assets
• Acquire real estate confidentially and privately through Land Trusts
• Exchange traded funds (ETFs)
• The benefits of demographic investing
• 7 legal ways to reduce your tax bill
• Estate taxes in 2011 and beyond
• Creative real estate strategies  for today's real estate market
• Enhanced strategies for investing in multi-family real estate
• Long-term care
• High dividend quality stock strategy
• Seeking cash flow & cash flow alternatives
• Long term cash flow with sale-leasebacks
• and more, much more...

Click Here for Details

However, not all Individual Retirement Accounts, or more accurately, IRA Custodians, are created equal.  The IRA Custodian selected will, for the most part, determine what investment options will be available for self-directed Individual Retirement Account owners. Certain IRA Custodians will permit a much greater variety of investment options, including non-traditional, non-publicly traded  assets that are often referred to as alternative investments, such as real estate and real estate related assets.  While other IRA Custodians will permit only traditional, publicly traded securities. 

Prohibited Investments

The Internal Revenue Code prohibits certain types of investments inside of an individual retirement account.  The prohibited investments or assets are:

• Life Insurance Contracts
• Collectibles

In addition, although it is not a prohibited investment inside of an IRA, IRAs can not acquire stock in a Sub-S Corporation because it would cause the Sub-S Corporation to lose its classification as a Sub-S Corporation.

Permitted Investments

So, as you can see, very few investments options are prohibited by the tax code, which leaves virtually everything else on the table.  The more common alternative investments inside self-directed IRAs include, but are not limited to, the following:

• Real estate
• Fractional ownership in real estate
• Real Estate Options
• Loans secured by Deeds of Trust
• Promissory Notes secured by Mortgages
• Tax Lien Certificates
• Limited Partnerships
• Limited Liability Companies
• Sub-C Corporations

Prohibited Transactions

There are also prohibited transactions in addition to prohibited investments.  The prohibited transactions usually involve self-dealing and will be discussed in a later blog post on The Self-Directed IRA Blog.