Despite the best planning and intentions, sometimes 1031 exchanges fail. After all the planning and work that goes into structuring a 1031 exchange, this can be a devastating reality. However, there is an alternative option that you can take advantage of in the event that your 1031 exchange falls through.

Rescuing a Failed 1031 Exchange

Here are a few potential reasons why you may decide that you don’t want the replacement property you have identified in your 1031:

  • The seller over-hyped the property and failed to mention serious drawbacks (maybe there is an infestation or an environmental issue on the property).
  • The finances are different from what you thought they were when you identified.
  • A personal or financial emergency arises that prevents you from purchasing the identified property.

These are just a few examples. Whatever the reason, if you decide to not move forward with the purchase of your replacement property after you have already identified, your 1031 exchange will fail and you will be forced to pay capital gains taxes on the proceeds from your relinquished property. Thankfully, there is an alternative option called a “Deferred Sales Trust” that can help you avoid capital gains taxes even if your 1031 fails.

What is a Deferred Sales Trust?

A Deferred Sales Trust (or DST for short) is an alternative way to defer taxes under IRC Section 453 that does not require you to reinvest your proceeds. Rather than putting your proceeds toward another like-kind investment in a 1031 exchange, a Deferred Sales Trust allows you to take those proceeds and invest them in bonds, annuities, mutual funds, REITs, and conventional real estate.

The Benefits of a Deferred Sales Trust

The greatest benefit of a Deferred Sales Trust is that it allows you to keep your money working for you by deferring capital gains taxes. Your DST can be constructed to pay out slowly over time, grow your wealth via investments, or a combination of the two. Deferred Sales Trusts are a fantastic alternative if your 1031 exchange fails.

If you have any questions about Deferred Sales Trusts, give us a call today at our Minneapolis office - 612.643.1031.