A Delaware Statutory Trust (DST) is a separate legal entity created as a trust under Delaware Statutory Law. A DST allows you to co-invest with other investors in one or numerous properties. Although DSTs aren’t new, current tax laws have made them popular among 1031 exchange investors. A 1031 exchange can be completed using a DST. This real estate investment solution is commonly called a DST 1031 exchange.
A DST 1031 exchange is a way to defer capital gains tax from selling an investment property. Investors can exchange their investment property for interests in a property or portfolio that could otherwise be unattainable. The goals of a 1031 exchange DST are:
- Tax deferral for capital gains and depreciation recapture.
- Access to quality real estate via fractional ownership.
- Potential capital appreciation by acquiring a more valuable property.
10 Reasons to Consider a DST 1031 Exchange
A 1031 exchange DST offers several advantages for investors to consider for their portfolios. The top reasons to add this investment type to your portfolio include the following:
1. Investors can hand off management responsibilities to a professional.
If you’ve owned rental real estate in the past, you know that property management can be time-consuming and stressful. Some investors hand over the management and decision-making responsibilities to a professional team of experienced managers so they can spend their time elsewhere.
2. Investors can acquire investment-grade, high-value properties.
Most real estate investors cannot afford to invest in multi-million-dollar properties on their own. Delaware Statutory Trusts provide a unique opportunity for investors to acquire partial ownership and experience the benefits only found with these types of properties.
Purchasing into a Delaware Statutory Trust is treated as a direct interest in real estate. You are assigned fractional ownership of equity and debt, fulfilling your exchange requirements. A single investor may own a fractional interest in an entire property or portfolio and receive distributions from the operation of the trust, from rental income and the eventual sale of the assets.
3. DSTs present opportunities for diversification.
For investors seeking diversity in their real estate portfolio, a 1031 DST exchange presents an opportunity for this goal. This diversification potentially mitigates risk through protection from single market or asset type volatility. Because you can choose the amount you invest in a Delaware Statutory Trust, you can split your investment among multiple DST properties, giving you an opportunity to diversify your real estate portfolio. You can also manage concentration risk by purchasing various property types.
4. Investors may get more predictable distributions.
While it cannot be guaranteed, DSTs have the potential to provide investors with a more predictable distribution. DSTs are permitted to keep a reasonable amount of cash reserves to be prepared in the event the property requires repairs or faces unexpected expenses. However, all earnings and proceeds above the reserve amounts must be distributed to the beneficiaries on a regular basis and within the expected timeframe.
5. Investors do not have to qualify for the debt.
Investors do not have to qualify for the property’s mortgage loan. The Delaware Statutory Trust is the only entity liable for the mortgage loan, and it is nonrecourse to the investor. Investors do not have to provide personal documentation for loan approval, and other personal assets or liabilities will not affect the status of the loan.
6. Investors can easily meet exchange deadlines.
Because an investment in a DST can close very quickly, investors can trust that the acquisition transaction will close on time and that they will be able to acquire a chosen property despite competition in the market. You may also be able to reserve a DST before closing your relinquished property. You can have a replacement property available when the exchanger is ready to purchase your relinquished property.
7. DSTs can serve as a 1031 exchange backup plan.
1031 exchange investors can include a DST property among their three candidate properties identified during their identification period. If they cannot acquire their first two choices of identified candidate properties in time to meet their deadlines, the DST property remains an option that can close very quickly to meet the exchange deadline, provided the DST is still available.
8. DSTs can eliminate boot.
1031 exchange investors prefer to avoid paying capital gains taxes on boot if their replacement property costs less than the value of their relinquished property. Because DST interests can be acquired for lower amounts than most worthwhile investment properties, the remaining value, or boot, can be used to acquire a percentage of a DST property as a second replacement property in the 1031 exchange.
9. Investors can choose the amount they invest.
Too often in real estate investing, investors overextend themselves financially to acquire a suitable investment property. With a DST, you can invest the amount that is right for you and acquire the percentage of the property you can afford. However, investors must keep in mind that there are minimum investments in DSTs, typically between $25,000 and $100,000 for 1031 exchange investors.
10. DSTs are a valuable inheritance to pass on.
If you have intentions of creating a portfolio of income-generating investments that will outlive you and continue to provide for your heirs long after you’re gone, a DST could be a worthy investment candidate. As with all 1031 exchange-qualified investments, your heirs will receive a step-up in cost basis when they receive your DST assets, so they will not have to inherit the previously deferred capital gain liabilities.
Register to View Our Marketplace of DSTs Today
When you invest in a DST, you are assigned a fractional ownership of equity and debt, fulfilling your exchange requirements. You will receive a 1099 for ordinary income, a 1098 allowing for mortgage interest write-off, and an operating statement or profit and loss statement for depreciation. With a DST, investors can still enjoy the benefits of owning real estate without dealing with the day-to-day responsibilities of actively managing real estate.
1031 Crowdfunding can assist you with your DST 1031 exchange. Register to view our DST properties, or call us today at 844-533-1031 to learn more about DSTs and how they may fit within your investment portfolio.
This material does not constitute an offer to sell or a solicitation of an offer to buy any security. An offer can only be made by a prospectus that contains more complete information on risks, management fees and other expenses. This literature must be accompanied by, and read in conjunction with, a prospectus or private placement memorandum to fully understand the implications and risks of the offering of securities to which it relates. As with all investing, investing in private placements is speculative in nature and involves a degree of risk, including loss of your principal. Past performance is not necessarily indicative of future results and forward-looking statements and projections are not guaranteed to achieve the results described and your actual returns may vary significantly. Investments in private placements are illiquid in nature and there may be no secondary market or ability to sell the investment should the need for liquidity arise. This material should not be construed as tax advice and you should consult with your tax advisor as individual tax situations will vary. Securities offered through Capulent, LLC Member FINRA, SIPC.