ATTENTION REAL ESTATE INVESTORS! Using the secret Tax “loophole” called a Delaware Statutory trust (DST) to your advantage

A. What is a Delaware Statutory Trust (DST)?

A Delaware Statutory Trust (DST) is a legal entity established under Delaware law that allows multiple investors to co-own fractional shares of income-producing real estate.  The trust owns the real estate, and investors own beneficial interests, receiving a share of the income, tax benefits and appreciation.

Combining a Delaware Statutory Trust structure with the benefits of a 1031 exchange allows real estate investors to defer capital gains taxes when selling a property by reinvesting the proceeds into fractional shares of a DST that owns the income-producing real estate.

B. Why Use a DST for a 1031 Exchange?

1. Access to Institutional-grade Properties: DSTs often own large, high-quality commercial properties that may be unaffordable to individual investors.
2. Diversification: Investors can acquire fractional interests in multiple DSTs to spread risk across various asset classes or locations.
3. Hands-off Management: DSTs are managed by professional sponsors, so investors do not have to deal with property management responsibilities.
4. Simplified Replacement Property Identification: Using a DST can streamline the 1031 exchange process by reducing the challenge of finding suitable, like-kind replacement properties.

C.  Advantages: 

1. Tax Deferral: Maintains the tax deferral status of the investment under Section 1031 of the Internal Revenue Code.
2. Passive Income: Offers investors potential monthly income distributions without active management responsibilities.
3. No Property Management: Ideal for retirees or investors looking to reduce their workload.
4. Flexibility: Fractional ownership allows for more accessible entry points.

D. Considerations:

1.  Illiquidity: Investments in DSTs are not easily liquidated, and usually have a holding period of 5-10 years.
2. Loss of Control: Investors have no direct decision-making authority regarding the property.
3.  Fees: DSTs can involve upfront fees, sponsor management fees, and other costs that might negatively affect returns.
4. Accredited Investor Requirement: Most DST investments are available only to accredited investors who meet certain income and net worth thresholds.

E. Ideal for Investors Who:

1. Have sold a property and need to reinvest to defer taxes via a 1031 exchange.
2. Prefer passive real estate investments
3. Seek diversification in high-quality, professionally managed real estate.

Now that you have learned the basics of a Delaware Statutory Trust (DST) 1031 exchange of investment real estate and its advantages, let’s move on to the third article in our 4-part series, “Combining a Delaware Statutory Trust (DST) 1031 Exchange with a 721 Exchange (UPREIT) for Ultimate liquidity and Tax Deferral.”

Disclosure: For educational purposes only. Not legal or tax advice. Consult you professional advisor/s before taking any action regarding this subject.