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Why Real Estate Investors Are Choosing DSTs over REITs

It is not too hard to argue that the more money you invest, the more money you can make. So if you could defer paying taxes and use that money to increase the amount of your next investment, wouldn’t you do it? Of course you would at least look into it. Let us answer some of the common questions about 1031 Exchanges-DST's and REIT's.

How can I use tax money to increase my investment amount?

The Internal Revenue Code Section 1031 provides allowances for owners of business or investment properties to exchange their property for a new business or investment property without having to pay capital gains taxes on the sale of the relinquished property. The payment of the taxes is deferred, allowing the investor to have a greater amount to invest in the replacement property. Here’s what we mean:

What does that have to do with REITs and DSTs?

A Delaware Statutory Trust, or DST, is a separate legal entity created as a trust under Delaware statutory law, which permits a very flexible approach to the design and operation of the entity. Investors in a DST own a pro rata interest in the trust and have the right to receive distributions from the operation of the trust, either from rental income, or from the eventual sale of the assets.

IRS Revenue Ruling 2004-86 determined that a beneficial interest in a DST that owned real estate assets would be considered a "direct interest in real estate" and, thus, could qualify as a tax-deferrable real estate investment. At the completion of a DST investment, beneficial owners have the ability to engage in a 1031 exchange by purchasing beneficial interests in another DST or another eligible real estate investment. Likewise, an investor who sells a tax-deferrable real estate investment can purchase beneficial interests in a DST as a like-kind replacement property to complete their 1031 exchange.

A Real Estate Investment Trust, or REIT, is another type of trust that owns real estate and offers shares of stock to investors and also distributes all of its net operating income to stockholders. However there is a great difference in the regulations and requirements by which each trust must operate. REIT investors are not considered to have a direct interest in the real estate owned by the REIT and, therefore, do not own real estate that can be exchanged in a tax-deferred 1031 exchange.

So if you like the idea of deferring capital gains taxes in order to increase your real estate investment amount, a DST, rather than a REIT, is the way to go.

Is a DST the only way to qualify for a 1031 exchange?

No. You must have a direct ownership in business or investment real estate to conduct a 1031 exchange. That direct ownership can be attained as an individual, through a DST, or through a Tenant in Common (TIC) which has been less popular lately. We like DSTs as an investment vehicle because they compare so closely to the ease and benefits of a REIT.

    Like REITs, DST investors:

  • Receive distributions for all income earned by the fund,
  • Do not have deeded title to the real estate and, therefore, have limited liability for the real estate,
  • Do not have to disclose personal information for consideration by the lender,
  • Are not responsible for making operating decisions,
  • Are not responsible for managing the real estate, and
  • Purchase shares as a security.

What do you think? With this information, might you choose a DST over a REIT as well? Take a look at our offerings and see if any are right for you.

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 are speculative in nature and involve 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.

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