Section 1031 of the Internal Revenue Code is an important tool that allows real estate investors and property owners to exchange one business or investment property for another without immediately incurring taxes. This transaction, often referred to as a “1031 exchange” or “like-kind” exchange, allows an investor to reinvest the full amount of net sale proceeds into new investments while deferring capital gain taxes until the investor eventually cashes out. In recent years, Delaware statutory trusts (DSTs) have grown in popularity as replacement properties for real estate owners seeking to reinvest sale proceeds into net-leased properties producing a steady stream of income. The DST’s structure also permits investors to engage in a subsequent 1031 exchange if they decide to sell their beneficial interest in the trust or when the trust terminates. However, in order to receive such tax-deferred treatment, DST investors should be aware of several important restrictions and limitations.
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