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Because federal income taxes are deferred, you have a greater leverage than if the tax liability was paid. The additional equity available for the reinvestment can also assist you in obtaining more financing, if needed.
Exchanges such as a Delaware Statutory Trust (DST), Tenants In Common (TIC), 721 UPREIT, Oil & Gas Royalties and Triple Net NNN offer you the opportunity to exchange from active ownership properties into a passive ownership property allowing you to own income property with little to none of the day-to-day management responsibilities.
Greater Earning Potential
Since more of your capital is reinvested than would be the case if taxes were paid, there is the opportunity for greater earning potential.
Exchange after exchange can be done creating a positive compounding effect by reinvesting the additional deferred taxes on each subsequent exchange. The deferred tax liability can ultimately be forgiven upon your death, giving your heirs a step-up in basis on inherited property.
Often a number of family members inherit one large property and disagree about what they want to do with it. Some family members may want to continue holding the investment property and some may opt to sell. By exchanging from one large relinquished property into several smaller replacement properties while the taxpayer is alive, the taxpayer can designate each heir to receive a different property which he/she can own individually and either hold or sell to his/her needs. A DST, TIC, 721 UPREIT, Oil & Gas Royalties and Triple Net NNN can be a great tool.
The possibility to trade up to larger and higher quality properties by utilizing specific investments may offer opportunities for the investor to trade up to better quality institutional real estate.
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RISKS OF A DST COULD INCLUDE
- Market and property risks: The value of the property held by the DST can fluctuate based on changes in interest rates, supply and demand, economic conditions, environmental conditions, zoning, etc. which means the appreciation generated could vary.
- Lack of liquidity: DSTs are generally illiquid so they may not be easily sold or exchanged.
- Fees and expenses: Investing in a DST can involve high fees and expenses
- Limited control: As an investor in a DST, you have limited control over the property held by the trust, and you may not be able to make decisions regarding the management or operation of the property.
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