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May 23, 2024 | read

56. How Combining 1031 Exchanges with DSTs Helps Defer Taxes and Grow Your Wealth with Jay McPherson

Ben Isley

In this episode, we speak with Jay McPherson of Great Point Capital to discuss the various aspects of combining 1031 exchanges with Delaware Statutory Trusts to defer the capital gains and depreciation recapture tax on the sale of your investment properties in order to preserve your purchasing power and grow your wealth.

Jay became interested in 1031 exchanges and DSTs after seeing the amounts lost to capital gains tax and depreciation recapture tax upon the sale of properties. DSTs are a great strategy for investors who want to preserve their purchasing power and keep their money working for them without the headache of actively managing property.

How does a DST work and why should you engage in a DST?

Upon sale, a 1031 exchange will allow you to defer the tax into the future and allow you to use the proceeds for an investment into a new property. The tax you would have paid is now available to you for purchase.

Depending on your tax bracket, you would be paying 15-20% in capital gains tax plus the net investment income tax of 3.8%.

If you’re done actively managing real estate, the full amount of your new purchasing power after the 1031 exchange goes into the DST. It gets invested with no fees. Outside of passive estate planning, people use DSTs for portfolio diversification and for a location to invest “the boot”, the difference between the amount invested in new property and the exchange amount.

DSTs can contain one property or multiple properties. DSTs can include any types of property such as multifamily, grocery stores, convenience stores, and pharmacies. Allows you to invest in assets you don’t usually have access to.

Process from A-Z

You must first conduct a 1031 exchange. Upon completion, the proceeds need to go to a qualified intermediary. Directly receiving the proceeds will limit your options, including forfeiting your ability to invest in a DST.

Properties are listed with percentage investment and it’s fairly simple to transition. You have 45 days to identify the asset, and 180 days to close through the DST. Interest will be taken with the percentage of your investment.

Challenges of a DST

DSTs must be held for 5-10 years, the duration of the investment strategy. There is no market for selling stake in a DST and no buyouts. DSTs are equal to holding property under a trust that makes all decisions. Exiting a DST comes with the execution of the exit strategy by the portfolio managers. Upon exiting, proceeds can still be rolled into another DST.

At the end of the show, Jay speaks about the best tax advice he has ever received and gives some insight into his favorite resources that keep his operation running.

To get in touch with Jay, you can contact him directly at (321) 297-3217 or jmcpherson@gpcchi.com

To learn more about Jay’s work visit: https://www.greatpointcapital.com/