Highlights:
• What is a 1031 exchange?
• Who is a 1031 sponsor?
• DST & role of a DST sponsor
• Difference between DST sponsors and real estate sponsors
You must have come across the word 1031 sponsor while reading about 1031 exchanges. In real estate business, a sponsor can be a person or company responsible for searching, acquiring, and managing properties on behalf of primary investors or property owners. A 1031 sponsor also plays the same role. Only DST sponsors are exceptions. But before you explore about 1031 sponsors, it’s important to understand 1031 exchanges thoroughly.
A 1031 exchange is an arrangement in which an investor can defer paying capital gains tax on exchanging one property for another, but on one condition, the exchanged properties must be ‘like-kind’. In 1031 exchanges, the term like-kind is used to define properties of a similar nature. Therefore, a rental property can only be exchanged for another rental property. As the proceeds obtained from the sale of the relinquished property are reinvested on replacement property, an investor in a 1031 exchange doesn’t recognize any gain or loss. Hence, they aren’t liable for paying any tax. However, don’t forget that 1031 exchanges only allow tax deferment, they aren’t tax-free.
Another thing you should keep in mind is that 1031 exchanges do have deadlines. Upon closing on the sale of the relinquished property, an investor gets a time limit of 45 days, also known as ‘identification period’, for sending a written identification of the potential replacement property to 1031 Corporations. Thereafter, a deadline of 135 days is given for acquiring the identified replacement property. In other words, a 1031 exchange must be completed within a time frame of 180 days, which begins the day when the relinquished property is sold. Upon completion of the exchange, the sponsor transfers the property title to the investor. So, a 1031 exchange sponsor finds, acquires, and holds properties on behalf of primary investors. On the other hand, a DST sponsor owns and manages real estate properties.
Role of a DST Sponsor
DST stands for Delaware Statutory Trust. It’s an entity which is mainly formed for trade or business purposes. A DST sponsor acquires properties under DST umbrella and then opens it up for potential real estate investors, who then buy shares in those properties. Therefore, a single DST property can have many shareholders. In fact, a DST must have at least 100 shareholders. Surprised? Well, it’s normal. DSTs have large structure and that’s what benefits small-sized investors. After all, a small real estate investor can’t think of possessing a large and advanced quality property. However, DSTs can make it possible. Since DSTs can have more than 100 shareholders, sometimes, an investment can be as low as $100,000. DST investors don’t get the title to the property and only enjoy the status of shareholders. Since DST investors directly own shares in a real estate property, they are eligible for deferring capital gains tax.
The biggest difference between DST sponsors and ordinary real estate sponsors is that DST sponsors are owners and real estate sponsors are mediators. However, whether it’s a 1031 exchange sponsor or DST sponsor, both can help investors in deferring capital gains taxes.
