The importance of 1031 exchanges as a driving force for real estate transactions continues to grow - by Michael Packman

The importance of 1031 exchanges as a major driving force for real estate transactions in recent years continues to grow. A managing director at an active commercial investment sales brokerage recently told me that “almost all” property owners were timing the sales of their building to coincide with the opportunity to purchase a like-kind property within the 180-day exchange window.  Even Hilton Worldwide Holding’s sale of the famous Waldorf-Astoria Hotel to Anbang Insurance Group Co. will be utilizing IRC Section 1031.Hilton will use the 1031 proceeds to purchase five hotels in Florida and California.

While large players like Hilton are able to source and close complex hotel transactions in a matter of months, such an effort is beyond the capacity of the majority of real estate investors and owners. These investors often rely on real estate brokers to identify and offer profitable replacement properties. But real estate brokers can only do so much in a market where demand is sky high and supply is rock bottom. Recent trends show capitalization rates running between 3-4% for investment real estate property in New York City. What is the average real estate investor to do? 

One solution is not to sell at all. While many in the industry speculate that we have reached the peak of the high-end real estate market in this cycle, this option does not often meet their primary goal of cashing out at the top. Another solution is to invest in a property in a neighborhood with potential for appreciation.  But again, the cost in time and money to source and perform due diligence, and to hire competent property managers is extensive.  Matching debt and equity placement for a 1031 exchange is challenging. 

Now, while most real estate investors know how to take advantage of this in the traditional sense, there is another way that many individual investors are not aware of. This is called the Delaware Statutory Trust or (DST). This gives investors another avenue to take advantage of the tax code. If you are a property owner and are tired of dealing with the hassles of management, yet have a low cost basis, know there is still a way to utilize IRC Section 1031 and pass on the day to day management to experienced sponsors. Along with hands on day to day management by these firms, you will receive detailed quarterly reporting on the performance of the asset. One thing to consider is that passing the management responsibilities on to the sponsor of the DST does relinquish control of the assets to them as well and add another layer of illiquidity.  If there is leverage used in one of these programs, it is acquired at the trust level, so it is all non-recourse to the investor. This can be attractive if the current property owned has a personal guarantee, as the investor can exchange the relinquished property proceeds into a DST as replacement property and not be on the hook for the debt.

The DST offers flexibility and can also be used for a partial exchange. For instance, if you are selling a $10 million property and are replacing it with one valued at $8 million, you can invest the remaining $2 million in a DST and still defer 100% of the gain.

Whether you are an investor, residential or commercial broker, CPA or attorney, being educated on the DST structure can be very beneficial. In addition to working with investors directly, we specialize in partnering with other professionals to help their clients as well. If you are an investor and are tired of managing your property, want to remove liability from the debt on your property, or need a property to fall back on because the planned exchange might not close in time, the DST structure may be your answer to avoiding that big tax bill.

Michael Packman  is chief executive officer at PNI Equities, a division of PNI Capital Partners, Westbury, N.Y.

PNI Capital Partners Inc. is a branch office of, and offers securities through Axiom Capital Management, Inc. member FINRA/SIPC. PNI Capital Partners, Inc. and Axiom Capital Management, Inc. are independent of each other. PNI Capital Partners does not offer tax advice. Please consult your tax professional for tax advice.