The 1031 Exchange Institute

Welcome to The 1031 Exchange Institute™. The 1031 Exchange Institute is your complete online resource for 1031 exchange, 1033 exchange, 1034 exchange, 721 exchange, 453 installment sale and 121 exclusion information.  Information will also be provided regarding Self-Directed IRAs, including Traditional IRAs, ROTH IRAs, SEP-IRAs and SIMPLE IRAs. 

The 1031 Exchange Institute is dedicated to educating and informing real estate investors and their advisors on the benefits of 1031 tax-deferred exchanges and other tax deferred and tax exlcusion strategies so they can make better informed investment decisions.

Disadvantages of the Structured Sale

Discussing the disadvantages of using a Structured Sale is just as important as discussing the advantages.  So, let's dive into the potential downside and/or disadvantages of using the Structured Sale.  This discussion should be an important part of your due diligence process in evaluating whether the Structured Sale is suitable for your situation. 

Disadvantages of the Structured Sale

The primary disadvantage of the Structured Sale is the lack of any guidance from the Internal Revenue Service on the Structured Sale.  We would like to see at least a Private Letter Ruling ("PLR") regarding the Structured Sale, but none exists at this point in time. 

Another disadvantage is that Structured Sales are drafted pursuant to Section 453 of the Internal Revenue Code ("IRC"), which means that depreciation deductions taken in excess of straight line depreciation can not be deferred through the Structured Sale and must be recognized in the year that the property was sold.

Also, any amount of mortgage pay-off in excess of your adjusted cost basis ("mortgage over basis") can not be deferred and may eliminate your ability to use the Deferred Sales Trust. 

Other Miscellaneous Disadvantages

Structured Sales are more complicated income tax planning structures than other tax planning strategies such as the 1031 tax deferred exchange.  Real estate owners using the Structured Sales must follow the specific requirements imposed by the Structured Sale . 

DST set-up fees and related costs to established, structure and implement the Deferred Sales Trust are often much higher than other income tax planning strategies such as the 1031 tax deferred exchange. 

And, finally, your payments from the installment sale note received through the Deferred Sales Trust stratregy will be made from the investment earnings within the Deferred Sales Trust in which the proceeds from the sale are invested in securities that will involve varying degress of risk, including fluctuating market values and possible loss of principal. 

However, Deferred Sales Trusts can still be suitable strategies when properly implemented under the right circumstances.  You should always consult with your legal, tax and financial advisors before proceeding with any tax strategy such as the Deferred Sales Trust.