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When the sale of a business includes related real estate, the 1031 exchange option defers taxes on gains and may relieve you of property management obligations.

Preparing for transition

Selling Your Dealership? A Delaware Statutory Trust Offers Tax and Other Benefits

  • 6/23/2016

If your dealership is up for sale or will be in the near future, and the sale of your business includes the land and building where the dealership is located, you might consider a 1031 exchange to claim significant tax benefits on the sale of the real estate. 

When you make money on the sale of the real estate, you generally have to pay an immediate tax on the profits. Section 1031 of the Internal Revenue Code lets you defer the payment of those taxes when you reinvest the proceeds in other property as part of a qualifying like-kind exchange. 

Dealers who pursue the tax benefits from a 1031 exchange have three options for acquiring replacement property in planning the sale of the dealership real estate: 

  1. Seek out like-kind real estate that you can control and operate. Typically, this option is available in a fully marketed manner, which means a real estate broker has been assigned to it for transactions purposes. 
  2. Find like-kind real estate in an off-market property that does not have a broker yet assigned to it. 
  3. Invest in a Delaware statutory trust (DST), which will put your money into real estate vetted by rigorous credit underwriting without requiring you to operate or manage the property. 

Some basic information about DSTs may help you better understand your options. 

Benefits of a Delaware statutory trust (DST) 

A DST is a passive investment vehicle; in other words, the proceeds from the sale of your real estate are invested into a beneficial interest in the DST. If that sounds like an investment in a security, it’s because that is precisely what a beneficial interest is. The purchase of a share of the DST entitles you to a cash return that is a percentage of the dollars invested. 

For example, let’s say the proceeds from the sale of your real estate were $1 million, and the cash-on-cash return of the DST was 5.5 percent. The result from that investment is an annual cash flow of $55,000, paid out on a quarterly basis. 

A DST nearly always invests in high quality real estate with excellent credit underwriting. Many recent DST offerings have included hospitals, apartments, commercial retail centers, and office parks. Plus, these properties are geographically diversified to sidestep the whims of a local economy, protecting investors from downturns that restrict cash flow from the underlying real estate. 

Duration of a DST investment 

Typically, the duration of the investment is directly related to one of two things (and sometimes both): 

  1. The master lease on the properties is normally at least three years, but it can be longer (and in many instances it is). In other words, the terms of the master lease are set and won’t be interrupted. 
  2. In other cases, the terms of the debt on the property control the duration of the DST. Because the trustee of the DST is the operator and negotiates the terms of the master lease and debt, the duration is truly a function of the negotiations, which are normally completed prior to the real estate becoming a part of the DST. 

How we can help 

Dealers contemplating the sale of a business that includes real estate have a lot of options and probably even more questions. CLA’s dealership industry professionals work closely with our firm’s real estate and investment advisors to help analyze all possibilities and make informed decisions about your business and your future. 

The key is to plan. Time is of the essence in so many transactions. In tandem with the CLA Trust Company, we offer a multidisciplinary approach to meeting your combined tax, estate, financial, and investment planning needs, all in one place.