August 12, 2021
Peter
Peter Marzo

A Delaware Statutory Trust or DST is a legal entity created under Delaware Law that permits fractional ownership of real estate assets.  Real estate held within a DST is eligible for 1031 exchange as long as the property complies with the requirements of IRS Revenue Ruling 2004-2086. 

There are several benefits to owning a Delaware Statutory Trust (DST), the most important being diversification and passive ownership.  Lower investment minimums within a DST allow a single investor access to institutional property ownership. 

Advantages of owning a Delaware Statutory Trust (DST) include:
 
          1.      Access to Institutional-Quality Real Estate
          2.      Professional Property & Asset Management (Passive ownership)
          3.      Diversification
          4.      Ability to Close Quickly & with Certainty
          5.      Non-Recourse Debt
          6.      Lower Minimum Investments
          7.      1031 Identification & Boot Backup
          8.      Tax Optimization
          9.      Estate Planning Flexibility
         10.  Simple Tax Reporting

 

 

1. Access to Institutional-Quality Real Estate

Through the Exchange-X platform, investors can access the highest quality, private real estate investments from over 50+ leading sponsors in the country.  These properties are typically stabilized, new construction complexes in desirable, high barrier to entry markets. 

 

 

2. Professional Property & Asset Management
Investors can enjoy the benefits of owning real estate passively without ongoing management responsibilities.  DSTs are operated by seasoned asset managers that handle all aspects of management including market analysis, local architectural, zoning & building boards, contractors for rehab/development, inspections, leasing, financing & closing, and much more.

 

 

3. Diversification
Investors now can fully diversify their portfolio by acquiring beneficial interests of investment grade properties throughout various geographical locations, property types, asset classes & tenant profiles. 

 

4. Ability to Close Quickly & with Certainty

A Delaware Statutory Trust (DST) offers the ability to close escrow quickly and with certainty.  This can be beneficial when faced with strict 1031 Exchange timelines to follow.

 

 

5. Non-Recourse Debt

Since the Delaware Statutory Trust (DST) is the only entity liable for its debts, any mortgage on the property is non-recourse to the limited partners (investor) under the trust.  Investors are insulated against any debt on the entity level and are not required to provide personal documentation for loan approval.   

 

 

6. Lower Minimum Investments

Minimum investments as low as $25,000, investors have the flexibility to diversify into several different properties around the country.

 

 

7. 1031 Identification & Boot Backup

 

Identification Backup

With strict 1031 exchange 45-day ID periods, a DST can serve as backup insurance in the event a property previously identified is no longer available or falls through. 

 

Boot Backup

A 1031 exchange replacement property must be purchased at or above the price of the relinquished property.  Boot” occurs when there is excess equity left over that will be subject to taxation.  A DST can be used to place the “excess” equity to work and avoid taxation.

 

8. Tax Optimization
Delaware Statutory Trusts (DST) offers several tax benefits including annual depreciation and mortgage interest write offs, as well as the ability to utilize a 721 or 1031 Exchange to defer capital gain taxes.  DSTs can also be held within qualified self-directed IRA and 401K retirement accounts further reducing tax liabilities.

 

9. Estate Planning Tool

A DST allows an investor to allocate beneficial ownership of their DST interests among heirs of their choice.  When coupled with a 1031 exchange, the investor can defer all capital gain taxes owned upon the sale and receive a step-up in cost basis for heirs (or beneficiaries) upon death.  Since DSTs are professionally managed, there is no need to worry about how or who will manage the properties upon passing. 

 

10. Simple Tax Reporting
Owners receive a 1099 for ordinary income, 1098 allowing for mortgage interest write-off, and an operating statement or profit & loss statement for depreciation.  A DST allows investors to enjoy all the benefits of owning physical real estate while alleviating management responsibilities.

 

Conclusion
There is an increasing demand for passive 1031 exchange replacement properties.  Owning beneficial interests within a Delaware Statutory Trust (DST) can be the single most advantageous tool for an investor looking to diversify their portfolio with institutional grade real estate without the burden of landlord responsibilities. 

By utilizing a DST, an investor can defer capital gains taxes (via the 1031 exchange) while diversifying into multiple geographic locations, property types, asset classes and tenants.  Rules in place for a 1031 exchange are tricky and can result in a failed exchange.  A DST also offers exchange buyers a backup option along with the flexibility to close quickly.  It is always recommended to identify more than one replacement property to ensure a successful exchange.  This is a major advantage when identifying a replacement property to serve as a last-minute solution for an at-risk exchange.   

DST interests can be purchased through most Self-Directed IRA and 401k retirement accounts making the DST a great tool for tax deferral and estate planning purposes. 

If you are ready to start a 1031 exchange, or have any additional questions about how it might work for your specific situation, schedule a consultation with one of our experts at Marzo Capital Group.  To learn more about real estate investing and how a 1031 can complement your portfolio, visit the Marzo Capital Group Learning Center.


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