What Investors Should Know About 1031 Sponsors

Key characteristics:

• What is the 1031 Exchange?

• Who is the 1031 sponsor?

• Daylight saving time and; dST Sponsor Role

• Differences between DST sponsors and real estate sponsors

When reading 1031 exchanges, you will surely encounter the word 1031 sponsors. In a real estate project, a guarantor can be an individual or company that is responsible for real estate search, acquisition and management on behalf of a major investor or real estate owner. 1031 sponsors play the same role. Only DST sponsors are excluded. However, before understanding 1031 sponsors, you must thoroughly understand 1031 exchanges.

1031 Exchange is a kind of configuration, in which investors can postpone paying capital profits and taxes and exchange with other properties, but the properties exchanged must be “similar” under one condition. In 1031 exchanges, the term “like” is used to define attributes of a similar nature. Therefore, the leased real estate can only be exchanged for other leased real estate. The investors of 1031 Exchange will not recognize any gains or losses because the proceeds from giving up the sale of property will be reinvested in the replacement property. So they don’t have to pay taxes. But don’t forget that 1031 exchanges only allow tax deferral, not tax exemption.

Another thing to remember is that 1031 deals have all deadlines. After the sale of the abandoned property, the investor will accept a 45 day “identification period” in order to send a written identification of potential replacement property to 1031 companies. The time for obtaining the replacement property determined thereafter is 135 days. In other words, the 1031 transaction should take place 180 days from the date of giving up the sale of the property. After the completion of the transaction, the guarantor transfers the property right to the investor. As a result, 1031 Exchange sponsors discover, acquire and hold real estate on behalf of major investors. In addition, DST sponsors own and manage real estate.

DST Sponsor Role

DST represents the Delaware Statutory Trust. It is an entity established primarily for trade or commercial purposes. DST sponsors will acquire real estate under the umbrella of DST, then open it to potential real estate investors, and then purchase shares of these real estate. Therefore, DST property may have many shareholders. In fact, DST should have at least 100 shareholders. I’m scared. Well, it’s normal. The huge structure of DST is the reason why small investors benefit. After all, small real estate investors cannot own large and high-quality real estate. But DST can do this. DST can have more than 100 shareholders, so sometimes an investment may be as low as $100000. DST investors have no property ownership and only enjoy the status of shareholders. DST investors directly hold real estate stocks, so they are eligible to defer the payment of capital gains tax.

The biggest difference between DST sponsors and ordinary real estate sponsors is that DST sponsors are owners and real estate sponsors are mediators. However, both 1031 Exchange sponsors and DST sponsors can help investors delay capital gains tax.