Insights Blog
Navigating Florida’s Real Estate Challenges: The Strategic Shift from Investment Property to DSTs via 1031 Exchanges
Florida’s real estate market, long a magnet for investors due to its favorable climate, low taxes, and affordable housing, is now facing a seismic shift. The once attractive destination is grappling with a rising insurance crisis, compelling many property owners to reevaluate their investments. For those caught in this predicament, utilizing a 1031 exchange to transition from their Florida property to Delaware Statutory Trusts (DSTs) presents an innovative and strategic solution.
Understanding Florida’s Insurance Predicament
Recent years have seen a dramatic change in Florida’s real estate dynamics, primarily driven by skyrocketing insurance premiums. The state, which had been an epicenter for migration, saw nearly 276,000 departures in 2022, as reported by the U.S. Census Bureau. This exodus is largely attributed to the untenable rise in insurance costs, a consequence of frequent and devastating hurricanes. Since 2017, Florida has been hit by four major hurricanes, including category 4 and 5 storms, leading to extensive property damage and straining the insurance industry.
The financial implications for property owners have been severe. The Insurance Information Institute notes a 300% increase in Florida’s insurance premiums over the last five years, with homeowners now paying an average of over $4,200 annually, significantly higher than the national average. This surge in premiums, coupled with the risk of insurers exiting the market, has left many property owners facing a dilemma: endure the escalating costs or seek alternatives.
The 1031 Exchange: A Gateway to DSTs
For investors facing the brunt of Florida’s real estate challenges, selling their property and reinvesting through a 1031 exchange into DSTs emerges as a compelling strategy. A 1031 exchange allows property owners to defer capital gains taxes from the sale of an investment property by reinvesting the proceeds into a like-kind investment. DSTs qualify for this exchange, offering a seamless shift from direct property ownership to a diversified trust-based investment.
The Allure of Delaware Statutory Trusts (DSTs)
DSTs offer a myriad of potential benefits, making them an attractive option for real estate investors, especially those looking to move away from the volatile Florida market:
Diversification: DSTs allow investors to spread their risk across various real estate assets, including commercial, residential, and industrial properties, across different regions. This diversification is crucial in mitigating the localized risks associated with markets prone to natural disasters, like Florida.
Professional Management: Investing in a DST means entrusting your investment to experienced real estate professionals who handle all aspects of property management. This shift frees investors from the day-to-day burdens of property management.
Access to Premium Properties: DSTs often comprise high-grade properties that might be out of reach for individual investors. This access elevates the quality of an investment portfolio.
Tax Efficiency: A 1031 exchange into a DST provides significant tax deferral opportunities, allowing for more capital to be reinvested and potentially leading to greater compounded growth.
Making the Strategic Shift
Investors in Florida’s challenging real estate market should seriously consider the benefits of selling their property and reinvesting in DSTs through a 1031 exchange. This move not only alleviates the burden of rising insurance costs but also repositions their investment into a more potentially stable and diversified portfolio.
The process of engaging in a 1031 exchange to invest in DSTs involves careful planning and timing. Investors must adhere to specific timelines and rules to qualify for tax deferral benefits. Therefore, it is crucial to work with financial advisors and tax professionals who are well-versed in 1031 exchanges and DST investments.
Conclusion
As Florida’s real estate market continues to navigate through its insurance crisis, DSTs stand out as an optimal investment alternative for those looking to mitigate risk, diversify their portfolios, and enjoy the benefits of professional management. The pathway through 1031 exchanges into DSTs not only offers a solution to the current challenges but also paves the way for a more robust and resilient investment strategy. For investors seeking to move beyond the confines of Florida’s turbulent market, DSTs present an opportunity to reinvent their real estate investment approach, blending stability, diversification, and tax efficiency in one strategic move.
1031 Risk Disclosure:
- There is no guarantee that any strategy will be successful or achieve investment objectives;
- Potential for property value loss – All real estate investments have the potential to lose value during the life of the investments;
- Change of tax status – The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;
- Potential for foreclosure – All financed real estate investments have potential for foreclosure;
- Illiquidity – Because 1031 exchanges are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments.
- Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;
- Impact of fees/expenses – Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits
General Disclosure
Not an offer to buy, nor a solicitation to sell securities. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Any information provided is for informational purposes only. Securities offered through Arkadios Capital, member FINRA/SIPC. Advisory Services offered through Arkadios Wealth. Perch Wealth and Arkadios are not affiliated through any ownership.
Ehud Gersten
1031 Exchanges California
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29122 Rancho Viejo Rd. Suite 111
San Juan Capistrano, CA 92675
info@perchwealth.com
Not an offer to buy, nor a solicitation to sell securities. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Any information provided is for informational purposes only. Securities offered through Arkadios Capital, member FINRA/SIPC. Advisory Services offered through Arkadios Wealth. Perch Wealth and Arkadios are not affiliated through any ownership.
Check the background of this firm/advisor on FINRA’s BrokerCheck. 
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- There’s no guarantee any strategy will be successful or achieve investment objectives;
- All real estate investments have the potential to lose value during the life of the investments;
- The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;
- All financed real estate investments have potential for foreclosure;
- These 1031 exchanges are offered through private placement offerings and are illiquid securities. There is no secondary market for these investments;
- If a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;
- Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits;
- Tax benefits are not guaranteed and are subject to changes in the tax code.