Broker Check

The Future of 1031 Real Estate Investing: The Delaware Statutory Trust (DST)

| October 20, 2014
Share |

As income property owners wait for real estate to continue to improve before selling, the Delaware Statutory Trust (DST) is being considered as a 1031 Exchange Replacement property. The tenancy-in-common (TIC) was the principal investment tool of Section 1031 before 2008. In a tenancy-in-common, the IRS requires all fundamental decisions of the property, such as refinacing or selling the property, to be made unanimously by the investors. This can prove to be problematic because a single investor could postpone a given deal. 

As investors face a more challenging tax environment with federal capital gains increasing for high-income taxpayers, the benefits of the DST are beginning to outweigh the challenges of completing a 1031 Exchange for a multitude of reasons.



Advantages of a Delaware Statutory Trust (DST)

(1) Control.

          -The structure of the DST reduces the control of the investor and gives the sponsor-affiliated trustee the decision-making power. Investors purchase interests in the trust, hold titled to the property, and guarantee the mortgage loan. The main difference between the traditional tenancy-in-common and the DST program is that, in a DST, the investors are not the direct owners of the property; they hold only beneficial interests in the DST. Because there are multiple investors maintaining control of the trust, the possibility of a single investor delaying a deal is eliminated. 

(2) Structural Ease.

          -The tenancy-in-common deals can be complicated, costly, and involve a level of risk. The TIC deals require investors to set individual single member limited liability companies to own the TIC interest and shield them from liability. After forming the entity, there are a plethora of agreements, leases, and documents that the investors must execute before the deal can proceed. In contrast, a DST investor is only required to execute a single document, a trust agreement, without any additional deeds or guaranties to sign or execute. In addition, the DST, by itself, shields the investors from liability without the need for creating a LLC.

(3) Flexibility.

          -The tenancy-in-common program is limited by the IRS to 35 investors, therefore, limited to real estate with a total value of $25 million. In contrast, DST's are not limited under the tax law and can have up to 2,000 investors, allowing ownership of properties with a total value much greater than a TIC deal and can accommodate smaller minimum investments. Such scalability permits maximum diversification across many DST programs. 

Disadvantages of the Delaware Statutory Trust (DST)

(1) Long-Term Holding Periods

          -DST's are best suited for properties subject to long-term leases because these investments are designed for a holding period of 2-10 years. Therefore, a DST is likely an impracticable option for an investor wishing to temporarily store his money while waiting for another investment opportunity to transpire.

(2) Passive Investment

          -The DST is not best suited for someone who enjoys hands-on property management as the DST is structured to have very limited input from investors.

(3) Lower Returns

          -Investors that have managed their own properties in that past have probably enjoyed higher annual income than the 6%-7% that most DST's offer.

 



The 1031 Exchange can provide taxpayers the opportunity to defer taxes due upon their property. The DST is yet another tool in the future of real estate investing that can prove helpful to investors wishing to take advantage of such exchanges. Please use the button below to schedule a phone call to discuss how this might fit into your overall financial plan. 

Schedule an Appointment

Share |