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Delaware Statutory Trusts

Buying, managing, and selling properties are the three mainstays of the real estate investment industry. Many people who self-manage or hire a third-party management business to oversee their investments eventually choose to liquidate their holdings.

It's possible to defer the capital gains tax imposed on the sales of the investment property through a "like-kind" or 1031 exchange, which permits the owner to reinvest the proceeds from the sale of one property into the purchase of another property, subject to certain conditions.

Investors, however, should be informed of a popular alternative to the traditional 1031 exchange: the Delaware Statutory Trust, which offers significant tax advantages.

What are Delaware Statutory Trusts?

A DST (Delaware Statutory Trust) is a separate legal entity established under Delaware laws to hold titles to one or more commercial properties to earn revenue. Apartment complexes, stores, offices, factories, and other commercial spaces are all acceptable options for a DST replacement property offering which helps you defer capital gains taxes.

A single Delaware Statutory Trust can own one or multiple properties inside of the trust. Keep in mind that if the DST owns property in more than one state, it may be required to submit separate tax returns in each of those states.

Each investor has a "beneficial interest" in the trust that holds title to the Real Property, which means they are entitled to receive their fractional interest of the Delaware Statutory Trust's income and growth in value.

Why Invest in a DST?

There are several reasons for real estate investors to consider the DST option, such as the following:

  • Inventory- 1031 Identification inventory is always accessible.
    Low Minimum Investment- DSTs generally have a $100,000 minimum investment for 1031 exchangers, while cash investors must invest a minimum of $25,000.
  • Passive Investment- The DST structure removes investors' involvement in the property management of their real estate investments and instead places it in the hands of an experienced trustee affiliated with the sponsor.
  • Potential for Cash Distribution- The rental revenue generated by the DST properties can be transferred monthly in cash straight into your bank account.
  • Flexibility to Diversify- DSTs allow you to distribute your holdings over many properties and geographies rather than committing all your capital to a single piece of real estate.
  • Minimal Cost of Ownership- DST investors can hold their property without needing specific purpose LLCs (which can be expensive), reducing their overall cost of ownership compared to a TIC program.
  • Non-Recourse Loans- Investors in a DST have no active role in managing the DST or real estate management. Thus they are not obliged to sign any loan guarantees or indemnities in connection with any loans.
  • Access to institutional-quality Properties- Due to DSTs' fractional ownership structure, investors can park their monies into multimillion-dollar, institutional-quality real estate assets that would otherwise be out of their financial reach. All of these investments have also been subjected to stringent due diligence.
  • Estate Planning- Under the existing tax legislation, the investor's heirs will get a step up in value for any investments acquired through a 1031 exchange. Also, unlike the hands-on management of investment properties, which can be problematic when there are several heirs, the DST leaves it to the professionals.
  • Protection- The "wrapper" that the DST provides helps to protect the exchanging/investing party from any claims someone makes against them because of the real estate property.

Learn About Tax Deferral Strategies with DSTs for 1031 Exchanges

DST investments are a popular investment vehicle. Income potential, passive ownership, and easy access to institutional-grade properties are a magnet for many investors. Want to know more about Delaware Statutory Trusts? Our team of 1031 Exchange advisors will help you with all the information you need about DSTs for 1031 Exchanges.

You can schedule a consultation with the Pivot Professional Partners’ team through this Contact Us form. If you prefer to discuss your requirements regarding DSTs and the 1031 Exchange process over the phone, feel free to speak with our experts at (561) 444-3371.

While a 1031 is considered a tax strategy, we are not tax advisors, and you should consult your tax professional before investing.