Common Uses of Delaware Statutory Trusts in 1031 Exchanges
A Delaware Statutory Trust (DST) is a legal entity formed under Delaware trust law that may be structured to qualify as eligible “like-kind” replacement property for the purposes of 1031 Exchanges.
Delaware Statutory Trusts (DSTs) permit eligible investors to become proportional owners of professionally-managed, institutional-quality real estate projects alongside other accredited investors. As such, DSTs permit Exchangers the potential of achieving the tax benefits of 1031s when exchanged into passively-owned, turnkey investment property.
But there is more to DSTs than just tax advantages. When suitable, DSTs may potentially:
Secure the tax-advantages of 1031 Exchanges
Help owners exit the oversight-burdens common to actively-owned property in exchange for passive real estate alternatives
Provide investors with access to institutional-grade investment opportunities
Offer the potential for passive income
Provide low minimum-investment (often $100k) access to institutional-quality property
Permit diversification into multiple DSTs via the same Exchange, each containing unique properties with potentially different:
Real estate sectors
Rescue 1031 Exchanges where deadlines are fast approaching, and replacement property cannot be found or falls through
Help maximize 1031 tax advantages in a “downsize 1031” by soaking up “taxable boot” (where the new, replacement property value is lower than the sold property’s value)
Help solve problems related to carrying “replacement debt” through an exchange. (Settled debt is part of a 1031 Exchange potential tax calculation, and replacing it is not always desirable or possible, creating tax problems.)
Allow investors with aging property in need of substantial capital investment and improvements to swap it for established, professionally-managed investment property.
Of course, no investment is perfect. DSTs have their own nuances and some drawbacks. Those include each having unique business risks and a need for quality due diligence, to illiquidity. Moreover, depending on the source, too few DST options may lead to “round peg/square hole syndrome”, where only one or two available alternatives are forced to fit every client scenario.
That is a tall order for many investors and real estate teams, especially those facing fast-approaching deadlines. It can, therefore, be helpful to align with DST professionals familiar with the DST marketplace and its constantly shifting landscape, and who will have access to a library of pre-qualified DST programs that have been thoroughly vetted and are subject to ongoing reviews by competent due diligence professionals that do not cut corners for convenience or opportunity.
My firm, Asset Strategy, and my Broker Dealer, Concorde Investment Service, LLC, specialize in this area. For more information, contact our team!
The prior material is based on the views, experience, and opinions of Johannes Ernharth, AIFA©. Johannes has spent his career in Wealth Management and is a Senior Advisor and Mid-Atlantic Regional Director for Asset Strategy Financial Group.
This is for informational purposes only and does not constitute an offer to buy or sell any investment. DST 1031 properties are only available to accredited investors (typically have a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last three years) and accredited entities only. There are material risks associated with investing in DST properties and real estate securities including liquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal. Diversification does not guarantee profits or guarantee protection against losses. Because investors situations and objectives vary this information is not intended to indicate suitability for any particular investor. This material is not to be interpreted as tax or legal advice. Please speak with your own tax and legal advisors for guidance regarding your particular situation. Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated.