When planning a 1031 Exchange, understanding leverage in DSTs can make a big difference. Tom Moore, co-founder and President of Equity Advantage, points out that many investors focus on monthly distributions, but sometimes the bigger priority is avoiding a large tax bill. The right level of leverage can allow an investor to meet the requirements for full tax deferral, even with a limited amount of cash to reinvest.
Different Levels of Leverage in DSTs
DSTs are built with different leverage levels. Some have moderate leverage around fifty percent. Others, called zero coupon DSTs, can reach eighty to eighty five percent leverage. The level of leverage determines how much property an investor can control with the money they have available.
For example, an investor with 150,000 dollars to reinvest might find that a fifty percent leveraged DST does not provide enough replacement value to satisfy IRS requirements for a full 1031 Exchange. That shortfall could trigger a significant tax bill. A highly leveraged zero coupon DST allows the investor to control a larger property interest and meet the value requirements needed for full tax deferral.
Weighing the Trade Offs
Zero coupon DSTs generally do not provide monthly distributions. Tom Moore explains that while some investors see that as a downside, the alternative—paying a large tax bill—is often worse. For investors focused on long-term results, deferring taxes can be far more valuable than receiving monthly income.
Using higher leverage allows investors to achieve the main goal of a 1031 Exchange: deferring taxes while keeping capital intact. Zero coupon DSTs may not provide immediate income, but the overall financial outcome can be stronger than lower leveraged options.
Maximizing Replacement Value
Replacement value is one of the most important things to consider in a 1031 Exchange. To fully defer taxes, investors must acquire property of equal or greater value to the property they are wanting to exchange. If the cash they have to put into the Exchange is limited, moderate leverage may not be enough to meet the minimum value. Zero coupon DSTs multiply an investor’s purchasing power, helping meet the replacement property threshold even with smaller amounts of capital.
For someone investing 150,000 dollars, a higher leverage DST can be the difference between paying roughly 100,000 dollars in taxes or deferring the full amount. Understanding leverage is key to making the Exchange work.
Take Action on Your 1031 Exchange
Leverage in DSTs can have a major impact on achieving full tax deferral. High leverage zero coupon DSTs allow investors to control larger property interests with limited capital while preserving equity. Even though they do not provide monthly income, zero coupon DSTs can deliver stronger long-term results by reducing or eliminating your tax liability.
If you’re currently planning a 1031 Exchange and want guidance on the best DST strategies to minimize your tax liability, reach out to the Equity Advantage team today. Our experts can help you evaluate your options and find the Exchange strategy that best fits your needs.
The Guys With All The Answers…
David and Thomas Moore, the co-founders of Equity Advantage & IRA Advantage
Whether working through a 1031 Exchange with Equity Advantage, acquiring real estate with an IRA through IRA Advantage or listing investment property through our Post 1031 property listing site, we are here to help Investors get where they want to be. Call them today! 503-635-1031.
