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How Does Debt Work in a 1031 Exchange?

What is the issue?

To successfully complete a 1031 exchange and defer 100% of your capital gains tax, you must replace the net sales price of your property.

Property sale price $525,000
Closing Costs $25,000
Net Sales Price $500,000
Relinquished property loan $200,000
Cash received $300,000
Replacement property value: $500,000

Let's say you owed $200,000 on the relinquished property at the time of sale, that amount must be repaid when the property is sold. After, the repayment of the loan your will have $300,000 in cash to purchase a replacement property that costs at least $500,000. You will either have to make up the difference or take out a new loan to follow the 1031 exchange guidelines.

"Can I get debt to meet my 1031 exchange requirements if I invest in a Delaware Statutory Trust (DST)?" YES!
How do I replace debt with a Delaware Statutory Trust (DST)?

DST's secure non-recourse financing backed by the real estate within the trust. The typical DSTs loan to value is between 45-65%. When an investor purchases an interest in a DST, the investor will inherit or be assigned a portion of the loan.

Example of a DST Purchase:
  • Property Value: $60,000,000
  • Offering Proceeds: $30,000,000
  • Debt Proceeds: $30,000,000
  • Loan to Value: 50%
Beneficial Owner
  • Cash investment: $300,000
  • Debt Assumed: $300,000
  • Total Real Estate: $600,000
  • Loan to Value: 50%