Delaware Statutory Trusts. Ready to Retire from Landlording?
Fantastic Option for Passive Income.
What is a Delaware Statutory Trust?
A Delaware Statutory Trust is a real estate ownership structure where multiple investors each hold an undivided fractional interest in the holdings of the trust. The trust is established by a professional real estate company, referred to as “DST sponsor”, who first identifies and acquires the real estate assets. As individuals invest, their investments displace the capital used by the DST sponsor to acquire the property until it is eventually wholly owned by the investors. Investors own a beneficial interest in the trust. This means that investors hold a percentage of the ownership, and no single owner can claim exclusive ownership over any specific aspect of the real estate.
Key Benefits of a Delaware Statutory Trust
The DST ownership structure comes with many advantages, including tax benefits, income potential, the opportunity to buy ownership in an institutional-quality asset and—perhaps most notably—DSTs are eligible for 1031 exchanges.
DSTs stand out as a 1031 replacement property option for investors seeking passive income potential and diversified risk by allocating their 1031 exchange proceeds across multiple institutional-grade DST properties that are typically much larger and out of reach of most individual investors.
Delaware Statutory Trusts for 1031 Exchanges
A 1031 Exchange, named for Section 1031 of the U.S. Internal Revenue Code, is a transaction approved by the IRS that allows real estate investors to defer the tax liability or capital gains taxes on the sale of investment property. DSTs are considered direct property ownership for tax purposes, and as such, they are eligible for tax-deferred 1031 Exchanges.
To defer tax, the proceeds from the sale of the relinquished property must be reinvested into another “like-kind” replacement property of equal or greater value within 180 days of the closing date of the relinquished property. Tax deferral allows DST investors to preserve all of the equity from the sale of their relinquished property so it can continue working for them in their new DST replacement property.
The Basics for a 1031 Exchange work the same way for every property type, including DSTs. However, DSTs typically close within 3 to 5 business days following the sale of the relinquished property – a significant advantage considering strict 1031 exchange rules and deadlines.
Investing in DST Properties
Nearly all commercial real estate property types are held as DST properties, including the four major property types—multifamily, office, industrial and retail—as well as niche property types, like senior housing, medical office and self-storage.
DST real estate is typically comprised of institutional-grade assets with competitive income potential. Due to the large purchase price of typically $30 million to $100 million, these assets would otherwise be unattainable for a typical individual investor, but are accessible through the fractional ownership offered by a DST.
