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Jeffrey Bangerter, president of Bangerter Financial, authored the book Are You Tired of Tenants, Toilets and Trash – Consider the 1031 Exchange to the Delaware Statutory Trust. Bangerter’s goal in writing the book is to provide rental property owners a simplified version of how the 1031 to DST tax-deferred exchange works, while providing enough detail to allow owners to move forward to make this type of investment if it makes sense for their personal financial situation. Q. In brief, please describe (from the property owner’s point of view) the 1031 Exchange to the Delaware Statutory Trust (DST). A. When you do a 1031 to a DST you no longer have the property owner duties, as the DST is a passive property ownership structure. Q. Who should invest in DSTs? A. A DST can be the best solution for the real estate investor who wants to retire from being a property owner without paying a large tax when they sell their property. Q. Describe the tax advantage to rental property owners. The tax advantage of the 1031 Exchange is the deferral of all Federal and State Capital Gains Tax and depreciation recapture tax. Q. Please breakdown (in summary) the role of Sponsors, Realtors, Registered Securities Representatives, and Qualified Intermediaries in a 1031 Exchange. A. The role of the Sponsor is to find, buy, manage, and sell the real estate in a DST. The Realtors’ role is to help the client sell their local property. Then they have no involvement in the DST offering.
The role of the Registered Representative is to help the client understand and purchase the appropriate DST solution.
The Qualified Intermediary (QI) is required to receive the funds from escrow of the property sold and then send the money to purchase the new property. If you do not use a QI you do not qualify for the 1031 Exchange or you have a failed exchange. The QI account must be set up before you close on the property you are selling. Q. What are the advantages of a DST investment and what are the disadvantages? A. The primary advantage of the DST is the passive nature that allows the real estate investor to retire from property owner duties. The disadvantage is the real estate investor is no longer in control and cannot liquidate the real estate when they want; they must wait until the Sponsor sells the property and then they can do whatever they choose at that time.
Q. What do you think is of particular importance in using the Exchange in light of COVID-19 and the newly lifted eviction moratoriums? A. For any owners of rental property that had tenants not able to pay due to COVID, they have learned the value of having a property type that is less impacted by COVID rules. Q. Please share what your personal views are of the value of using the 1031 Exchange? A. I have personally been involved in 1031 Exchanges that have saved my clients millions of dollars in taxes. The money will provide them a better life and leave a bigger legacy for their heirs. It also allows them the time and freedom to enjoy the balance of their lives without the constant headaches that come with actively managed rentals. Q. What do you personally like about the 1031 Exchange for property owners? A. The 1031 Exchange allows real estate owners to defer and ultimately eliminate a significant tax that would occur if they just sold the property. The DST is considered “Like-Kind” property and qualifies for the 1031 Exchange. It provides property owners the option to become a passive owner in a larger real estate while also offering the benefit of keeping professional management in place.
