When you’re considering the purchase of a Delaware Statutory Trust property for an exchange under 1031 it is essential to have a solid understanding of the possible tax implications that may apply to DST properties. In 2004, the IRS in Revenue Ruling 2004-86 deemed DST with the status of Delaware Statutory Trust (DST) as a “Like the Kind” properties for exchange for reasons of a 1031 swap.
This article offers a concise outline of the different Delaware Statutory Trust Tax Treatment that you should be aware of prior to buying an DST property. If you’re thinking of buying you can schedule a no-cost consultation with us.
Delaware Statutory Tax Return For Trusts For Year End Financial Reporting And Accounting
The main reason for real estate investors who want to sell their rental properties and make the 1031 exchange, this is the tax benefit it gives. It is a simple way to avoid tax on capital gains. But how do you get you going to get your Delaware Statutory Trust transactions tax return handled?
If you decide to dispose of the rental property you own and turn it into the DST property and you’re sure to be able to receive a rent income each month. If you earn the monthly earnings through your property rental they will be reported on the Schedule E on your return to tax. It is the same for DST. Delaware Statutory Trust Tax Reporting for the DST is the identical.
The rental income you earn every month through the DST sponsor will be disclosed to IRS at the close in the calendar year. You will be issued an income tax form 1099 as well as your CPA will include this amount in your tax return, on Schedule E. Be aware that the income you receive from your Delaware Statutory Trust Tax treatment is taxed as normal income.
Depreciation Delaware Statutory Trust Tax Treatment
Like an ordinary 1031 exchange the depreciation you pay on your tax return for the year is carried over to the Delaware Statutory Trust exchange. If you’ve completed the depreciation of your property that you relinquished The basis will be moved to the newly purchased DST property you bought.
If, however, you have a surplus basis in the property you sold, or you bought a property with a greater value property in these new DST properties than what you paid in the property you previously sold, you’re qualified to claim deductions for depreciation.
Delaware Statutory Trust State Tax Treatment
If you own a property that isn’t in the state where you reside If you live outside of your state, then you’ll need to pay the state income tax with the state. The same applies to DST properties, excluding states where there is no requirements for filing income tax, such as Texas as well as Florida.
Purchasing Equal Or Of Greater Value DST Property Taxation Concerning The 1031 Exchange Rules
One of the regulations of the exchange 1031 requires that those who participate in the exchange acquire a replacement property that is comparable or more valuable as their old or surrendered property. So, if you’ve paid off your previous mortgage on your property in full, the best option is often recommended to buy DST property or properties that are all cash or debt-free.
If you buy DST homes that’re cash-only or debt-free that you can avoid the risks associated when you use loans to fund an investment. For example, if own $1 million in equity in a property you have sold for free and clear buys an DST that is 50 percent loan to value and you’re now buying $2 million worth of DST ($1 million equity in the property plus $1 million in debt due to the property, which is at a 50 percent LTV is the total cost of purchase in the amount of $2.5 million).
If the DST property is sold, the investor must purchase the property at a higher or equal value as per the IRS 1031 exchange regulations and the buyer will need to continue to borrow in order to receive a tax-deferred exchange However, the buyer is capable of depreciating their property again and getting tax-advantaged earnings.
If you’re interested in finding out the details about Delaware Statutory Trusts and 1031 Exchanges, and also why we suggest properties that are debt-free or not, schedule your free consultation today..
If you’re already familiar with DSTs, you’re looking to know the details concerning Delaware Statutory Trust Commissions and Fees.
Disclosure
This website is not an offer to buy or sell any security, nor an invitation to offer to purchase any security, which can only be done through an offering memorandum that has been registered or filed with the appropriate state or federal regulatory agencies. Securities can be only sold by registered broker dealers and investment advisors licensed to make such offers.
