In the world of 1031 exchanges, "boot" is a term often used to describe the portion of proceeds from the sale of a relinquished property that is not reinvested in a replacement property. This situation can arise when an investor has a specific need for some of the proceeds or when a suitable replacement property cannot be found to reinvest the entire amount. To fully defer taxes, the 1031 exchange requires the replacement property to be of "equal or greater" value.
Consider a scenario where you sell a property for $1,000,000 but the replacement property you're interested in is only $800,000. The remaining $200,000, known as boot, would typically be subject to capital gains tax since it's not reinvested.
However, there's a solution to mitigate the tax impact of boot: the Delaware Statutory Trust (DST).
Addressing Boot with a DST
A DST is an investment vehicle that qualifies as "like-kind" property for 1031 exchanges. It's becoming a popular choice for investors who want to own income- producing real estate without the direct management responsibilities. In a DST, investors hold fractional shares in one or more professionally managed properties.
The beauty of a DST lies in its flexibility. If you're facing boot in your exchange, you can invest a smaller amount – sometimes as low as $25,000 – in a DST that meets the requirements for a replacement property. This can help you utilize the entire proceeds from your sale and achieve full tax deferral.
Using a DST as a Backup Plan
To safeguard against boot, consider identifying a DST as one of your potential replacement properties during the 45-day identification period. If you end up with boot after closing on your primary replacement property, your backup DST can help you complete a full exchange without incurring taxes.
While some investors may choose to receive cash proceeds and pay taxes, the DST offers a strategic backup plan for those struggling to find suitable properties to reinvest their full proceeds and defer taxes.
Interested in exploring the advantages of a DST further? Contact us or schedule a consultation to discuss how a DST can enhance your 1031 exchange strategy.
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General Disclosure
Please note that this information is for informational purposes only and does not constitute individual investment advice. It should not be relied upon as tax or legal advice. Consult the appropriate professional regarding your individual circumstances.
Diversification does not guarantee profit or protect against loss in a declining market. It is a method used to help manage investment risk.
Investing in DST properties and real estate securities involves material risks such as liquidity, tenant vacancies, market conditions, competition, interest rate risks, and the risk of losing the entire investment principal. DST 1031 properties are available only to accredited investors and accredited entities. Verify your accredited investor status with your CPA and attorney.
Not an offer to buy, nor a solicitation to sell securities. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Any information provided is for informational purposes only. Securities offered through Arkadios Capital, member FINRA/SIPC. Advisory Services offered through Arkadios Wealth. Wealthstone Group and Arkadios are not affiliated through any ownership.
