What Every Investor Wants in a 1031 Exchange

As an astute real estate investor, you have worked hard to accumulate wealth. Much of your financial net worth may be tied up in investment real estate. Now you are at a stage in life where you want to exchange active day-to-day property management for passive ownership.

The key to a successful 1031 exchange is achieving critical alignment between tax deferral and investment fundamentals. At its core, a 1031 exchange should be an investment strategy first and a tax strategy second. Whatever you do, do not get these out of order. When analyzing a 1031 investment strategy, it is imperative to match the investment objectives with the risk profile of the real estate.

What most investors are looking for

Most investors are looking for five things in their 1031 exchange:

• Access to quality replacement properties. The quality of your replacement property determines the quality of your future income. This is not a decision to rush.
• Immediate identification and certainty of closing. The 45-day identification window is one of the most stressful aspects of a 1031 exchange. Pre-structured DST programs help solve this problem directly.
• Capital preservation. Your 1031 exchange should be a store of capital first. Protecting principal matters more than chasing yield.
• Durable, sustainable, and predictable income. Income from a replacement property should be stable and repeatable. Petra calls this Liability Driven Income: income you can count on to fund ongoing financial obligations.
• Potential for capital appreciation. Not the primary mandate, but a desirable secondary objective when the underlying real estate fundamentals support it.

The importance of professional guidance

It is critical to work with a real estate investment professional who objectively understands your investment goals and risk tolerance, and can align those goals with suitable 1031 replacement properties. This requires both quantitative and qualitative property analysis to stress-test property investments for optimized performance outcomes.

Too many investors focus on the tax benefits of a 1031 exchange at the expense of investment quality. The exchange is a mechanism. The investment is the point.

Why Delaware Statutory Trusts can help

Delaware Statutory Trusts (DSTs) are a pre-structured and professionally managed 1031 replacement property solution that allows investors to quickly and easily analyze properties and sectors that fit their investment criteria.

Because DSTs span multiple asset types, industries, geographies, and sponsors, investors can build well-diversified portfolios of high-quality, income-producing real estate without the headaches of active property management. For investors who want to step away from tenants, trash, and toilets, DSTs offer a direct path from active ownership to passive income.