How 721 Exchanges Can Be Used as an Exit Strategy for Delaware Statutory Trust 1031 Exchanges
July 25, 2022 | Dwight Kay | WealthManagement
This structure allows holders of real estate to exchange real property for economic interest in the REIT in the form of operating partnership units.
One of the most important questions that real estate investors sometimes forget to ask themselves is, “What is my long-term, exit strategy?” This is especially the case for investors who are considering a Delaware Statutory Trust (DST)investment as part of their 1031 Exchange strategy. Most accredited investors understand the holding period for a Delaware Statutory Trust investment is around 5-7 years (although it could be shorter as I have seen offerings go sold within as fast as a year and half and personally, I have been an investor in a DST that was held for over 12 years). After that, the investment will typically go “Full-Cycle”, a term used to describe a DST property that is purchased on behalf of investors and then after a period of time is sold on behalf of investors. Once the investment goes full-cycle, investors need to evaluate what their next investment move should be including one of these common exit strategies:
• Cashing out and triggering a significant taxable event
• Enter into a subsequent 1031 Exchange into a Delaware Statutory Trust or other eligible like-kind property
• If available, effectuate a 721 Exchange into a DST Sponsor’s UPREIT offering
Option One: Cashing Out
Because of tax consequences, this is usually the least appealing option for many investors. However, there are times when investors may want to sell their real estate investments following the DST 1031 Investments and simply cash out, deciding to pay the associated tax liabilities that can quickly add up; Federal Capital Gains (15-20%), State Capital Gains (0-11.3% depending on the state he/she lives in), Depreciation Recapture Tax (25%) and the Medicare Surtax (3.8%) will all be due upon sale. This final tax bill for many investors may be very large, convincing many investors to seriously consider the next two exit strategies: the 1031 exchange or a 721 exchange.
