Selling a business can create a large tax bill in the year of the sale. Some owners look at private real estate as a way to defer part of that bill. Two common options are a Delaware Statutory Trust (DST) and a traditional real estate syndication. They are structured differently, and their tax treatment depends on how each one is set up and on your own situation.
What a DST is. A DST is a trust that holds real estate for multiple investors. Each investor owns a beneficial interest, and a sponsor manages the property. DSTs are often used as replacement property in a 1031 exchange, which can defer capital gains tax on the sale of investment real estate when the proceeds go into like-kind property. The timing rules are strict. Generally, you must identify replacement property within 45 days and close within 180 days of the sale, and a qualified intermediary must hold the proceeds.
What a syndication is. A syndication is usually an LLC or limited partnership that buys a specific property. Investors buy membership interests, and the sponsor runs the deal. Not every syndication is structured to qualify for a 1031 exchange, so you need to check the offering documents before assuming it does.
An important limit after a business sale. A 1031 exchange applies to real property held for investment or business use. Stock or business interests generally do not qualify. If the sale included real estate that you owned, that portion may be eligible. The business interests themselves usually are not.
Oil and gas as a different tax path. Some investors use oil and gas investments for tax planning. Certain drilling costs may be deductible in the year they are incurred, and some producers can use depletion deductions. The treatment depends on whether you hold a working interest or a limited partnership interest, and on passive activity rules. Oil and gas interests generally do not qualify for 1031 exchanges, because that provision covers real property. Oil and gas is also exposed to commodity price swings, and drilling can result in dry holes that produce no return.
Comparing the options. A DST or a qualifying syndication can defer capital gains through a 1031 exchange, but only for real estate proceeds. Oil and gas may offer current-year deductions, subject to rules and risks, but it does not offer the same deferral. All of these options are generally illiquid or volatile, and each requires its own due diligence on the sponsor, the fees, and the reporting.
Taxes are one factor among several. Investment risk, liquidity, and the quality of the sponsor matter as much as the tax result. Work with a CPA who understands your entity structure before you commit.
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A DST is a trust that holds real estate for multiple investors. Each investor owns a beneficial interest, and a sponsor manages the property.
Only real estate proceeds may qualify for a 1031 exchange. Stock and business interests generally do not qualify. Check with your CPA about your situation.
Generally, you must identify replacement property within 45 days and close within 180 days of selling the relinquished property. A qualified intermediary must hold the proceeds.
Some investors use oil and gas for tax planning. Certain drilling costs may be deductible in the year incurred, and treatment depends on your interest type and passive activity rules. Oil and gas interests generally do not qualify for 1031 exchanges.