A DST or Delaware Statutory Trust is a legal issuance that real estate investors create and frequently use, allowing for multiple investors to pool their money in an effort to hold fractional interest in the trust’s assets and holdings. It’s comparable though there are critical legal distinctions to the functionality of a limited partnership where a master partner has the assignment to manage the trust’s owned assets. The DST then gives owners limited liability and passes cash distributions and income to minority partners.
The use of 1031 exchange deems a staple for investors and has for some time. Still, the Delaware Statutory Trust gives investors more flexibility as far as real estate investment options for those interested in using the 1031 exchange. These tools are well known and very useful for real estate investors. Still, the details and the execution can prove to be challenging, making it necessary to consult with a professional such as Capital Square 1031 Exchange to make sure you go through the processes adequately and correctly.
DST / Delaware Statutory Trust
The rules with real estate investing with the tax advantages and the ability to defer capital gains taxes through 1031 exchange make the option attractive for investment teams. The rules, however, can be complicated, intricate, and strict, meaning anyone considering an investment reliant on the IRS code should follow the advice of qualified professionals.
A DST will typically be set up by a third-party sponsor who will also be responsible for naming the trustee. The trustee is the person or persons who will manage the trust business and assets as the sole authority. The trust has direct ownership over the assets while the individual partners own a share of the trust. Distributions and income will come through to the individual partners and are taxed to them.
A DST offers incredible efficiency of fractional partnership in real estate. Other mediums such as TIC or tenants in common ownership are often much more cumbersome to manage in that they require individual LLC for every investor with financing per owner. In the DST set up, the trust collects the funding. It typically allows for administrator decisions rather than needing unanimous group approval from the partnership, as is required with a TIC. DST offers a twist to the traditional 1031 exchange; find out at https://chicagoagentmagazine.com/2019/08/02/this-twist-on-1031-exchanges-opens-opportunities/.
Drawbacks To The DST
Some view the structure of the DST as essentially losing control with the trustee having the sole responsibility of making the investment and all property management decisions. In some eyes, this deems an advantage, but some feel losing that place of being in charge, or any type of philosophical differences that may arise with the trust management could bring issues.
The real estate market is active and productive and provided an appropriate amount of time and reasonable expectations, an investor can choose the option of if and when they want to sell. In a DST, an investor is capable of selling the beneficiary interest. Still, there will likely not be a high demand or a secondary market actively seeking your interest, meaning the price you get will be unfavorable, or the terms will not be what you’re hoping for on this premature sale. When you consider engaging in DST, this should be something you prepare to stay in for the life of the trust, and that can go up to ten years.
The suggestion is that DST investments are perfect for those real estate investors who want to exit holdings but have no interest in taking on exposure to capital gains or any other type of active investment management role. The structure allows a 1031 exchange to be used for a fractional interest in institutional type investments. Follow this for the pros and cons of DSTs.
The DST is potentially a good option for the novice in real estate investing who would like the exposure to the alternative that real estate offers. Still, they don’t have quite the amount of expertise or sufficient time to handle active investment management.
The Delaware Statutory Trust and 1031 exchange are both reasonably straightforward but require quite a bit of intricacy and details with their execution. In saying that, the suggestion is that you obtain qualified professional assistance, particularly when it comes to something involving IRS coding.