We speak to investors daily about the benefits of DSTs, but if you haven’t invested in a DST before, you may be wondering, what is a DST? What does DST even stand for?
What is a DST?
DST stands for Delaware Statutory Trust (DST). A Delaware Statutory Trust is a separate legal entity created as a trust under Delaware statutory law. While the concept of business trusts, especially those that involved the holding of real property, dates back as early as 16th century English Common Law, DSTs gained legal recognition with the passage of the Delaware Statutory Trust Act in 1988 (12 Del. C. 3801 et. Seq.,). Under the act, developed on the premise of trust law, statutory trusts became recognized as their own legal entity, separate from their trustee(s), offering freedom from the corporate law template. Within the tradition of trust law, freedom of contract allows the trustee(s) to structure their entity in a way that is most beneficial to the relationship of all parties and their expertise while offering liability protection similar to that of a limited liability company or partnership.
A Delaware Statutory Trust is in the nature of a unit investment trust or a fixed investment trust. The trust acquires and maintains assets such as securities, real estate, etc. Investors then have an opportunity to purchase units of beneficial interests in the trust, thereby becoming beneficiaries of the trust’s assets. Because the trust is not considered a taxable entity, all the profits, losses, etc. are passed through directly to the beneficiaries. This type of trust offers a vehicle for investors to have interests in certain assets without having to hold the title or manage those assets.
For the purpose of completing a 1031 exchange, IRS Revenue Ruling 2004-86 opened the way for eligible DST investments to qualify as the replacement property in a 1031 exchange. This revenue ruling states that a beneficial interest in a DST that owns real estate can be considered a "direct interest in real estate." As a result, owning interest in a DST that owns real estate equates to holding title on real estate in the eyes of the IRS. Because of this ruling, DSTs have become one of the most common ownership structures used by smaller investors to own investment-grade real estate.