Purchasing real estate in today’s market has never been more challenging. Economic uncertainty, competitive markets, local laws, and a variety of other factors have added layers of complexity to the purchasing process.

A few of these complexities today involve:

• Ability to source, identify, analyze, inspect and value replacement properties
• Ability to secure financing
• Ability to secure an appraisal at a sufficient value
• Ability to meet 45-day identification & 180-day closing 1031 timelines
• Overpaying in a competitive market
• Landlord Responsibility

Fortunately, we believe there is a more simplistic and pragmatic approach to owning real estate, the Delaware Statutory Trust (DST).  In this article we dig into DSTs by answering some of the most common questions, including:

• What is a Delaware Statutory Trust (DST)?
• Do Delaware Statutory Trusts (DST) qualify for 1031 exchange?
• Why Consider a Delaware Statutory Trust (DST)?

What is a Delaware Statutory Trust?

A DST is a trust created under Delaware law that permits fractional ownership of real estate assets.  DSTs are classified as “direct interests” and possess the unique ability to qualify for 1031 exchange.  The DST is not considered a taxable entity, so all profits and losses are passed through directly to the beneficiaries (investors).

Ownership interest in a DST is made available through a sponsor, typically a professional management company, private equity firm or developer.  The sponsor will form a DST to purchase a property, then make available a portion of the overall investment to outside investors.  As an investor (limited partner), you can then purchase beneficial shares of interest within the DST.

For example, say a sponsor is purchasing a $50 million office building through a DST.  If you invested $1 million in equity and $1 million in debt ($2 million total investment), you would be 4% owner of the DST.  As a limited partner in the trust, your 4% ownership would then give you beneficial interest to that portion of the profits or losses of the office building.

Do Delaware Statutory Trusts (DST) Qualify for 1031 Exchange?

In one word, yes.

For the purpose of completing a 1031 exchange, IRS Revenue Ruling 2004-86 opened the way for eligible DST investments to qualify as replacement property under the “like-kind” requirement. This revenue ruling states that beneficial interests in a DST are considered “direct interest in real estate.”  As a result, owning interest in a DST that owns like-kind real estate equates to holding title on real estate in the eyes of the IRS.

However, to use a DST in a 1031 Exchange, it must comply with the requirements of IRS Revenue Ruling 2004-36.  The rule states that beneficial interests in the trust are treated as an undivided fractional interest for federal income tax purposes (as opposed to a security or other prohibited interest that would not be treated as real property under Section 1031).

Why Consider a Delaware Statutory Trust (DST)?

There are many potential benefits to investing in a DST property versus traditional ownership.  The reasons being institutional grade properties, no landlord responsibilities through professional property management, added diversification and lower minimum investment requirements. Let’s highlight a few main reasons to choose a DST property.

• Simplicity & Flexibility: DST properties offer exchange investors the ability to quickly identify, research and close.
• Institutional Grade: DST properties are typically stabilized, A-class properties in high barrier to entry markets.
• Professional Property Management: DST properties include best-in-class property management companies to handle all aspects of leasing, maintenance, and management responsibilities.
• Diversification: DST properties can add a level of diversification to an investment portfolio.
• Lower Minimum Investments: DST investment minimums typically start around $25,000 ($100,000 1031 exchange) making a DSTs an affordable option.  You might not be able to purchase a $100 million office building on your own, but by investing in a DST you can be a part of the action.

For a full list of potential benefits, read our article titled 10 Advantages of Owning a Delaware Statutory Trust (DST).

Conclusion

Delaware Statutory Trusts (DST) come with many potential benefits, especially for 1031 exchangers looking for passive investment options.  Understanding what a DST is and how to one works can have a major impact on your overall investment portfolio.

Investing in a Delaware Statutory Trust is a great way to diversify your portfolio into higher-grade properties, while giving you the ability to defer capital gains taxes through a 1031 exchange.  DST investors can close quickly and can allocate smaller minimum investments making a DST a great option for 1031 exchange ID and boot backup.  Built in professional asset management also makes owning a DST a passive investment which serves as a great estate planning tool.

Our team at Exchange-X has years of experience with DSTs and would be glad to help you navigate the process.  If you are in a 1031 exchange or want to learn more about how DSTs can complement your portfolio, schedule a call with an advisor or call (888) 775-1031 today.

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Download your free copy of “The Power of 1031 Exchanges and Delaware Statutory Trusts (DSTs)” to learn more about how Delaware Statutory Trusts (DST) can complement your portfolio.