In A Delaware Statutory Trust, Who Owns The Property?
What Is A Delaware Statutory Trust?
A Delaware Statutory Trust (DST) is an ownership structure achieved through a separate legal entity (usually an LLC) that allows real estate investors to co-invest in a single asset. Besides their numerous benefits, DSTs are eligible for a property exchange under the Internal Revenue Code IRC Section 1031, granted by the IRS Revenue Ruling 2004-86.
This type of transaction allows individual investors to sell their existing investment property and use the proceeds to purchase a replacement property and defer capital gains tax — provided that both transactions are executed within a specified time period, generally 180 days with a 45-day identification rule.
Why Should You Invest In A Delaware Statutory Trust (DST)
Imagine you want to sell your rental property and invest in something that could provide you with reliable income while at the same time eliminating the hassles of negotiating new leases or dealing with unexpected expenses like a new roof or HVAC unit. Selling your real property and placing the proceeds in the bank may sound like a good plan. Still, you may be subject to income tax of up to 20%, net investment income tax of 3.8%, depreciation recapture of 25%, and state income taxes if applicable. You could give away a massive portion of your gains to the IRS without a tax plan or strategy.
In contrast, you may defer tax gains if you invest your sale proceeds in a DST, which allows you to co-invest with other beneficiaries in one or more institutional-quality DST investment properties. The formation of the Trust is done by DST sponsors (usually LLCs — limited-liability companies), who pool the money from smaller investors and invest it in a single, sizable real estate investment.
DST Sponsors
This structure offers numerous benefits, such as acquiring passive ownership in institutional-quality assets, minimum investments, and no renting/asset management responsibilities. It also helps diversify your investment portfolio and removes managerial hassles associated with property management since a DST sponsor is managing the property. Moreover, in today’s tight real estate market, a DST can provide a more reliable closing as DSTs can be more readily available.
Keep in mind DSTs are offered only to “accredited investors,” which generally means an individual or entity with a net worth apart from one’s primary residence in excess of $1,000,000, or an income of $200,000 if single or $300,000 for a married couple. In addition, certain exclusions apply to the IRS rules. Your DST firm associate will make sure you meet the IRS qualifications.
In A Delaware Statutory Trust Who Owns The Property?
DSTs are structured as a passive investment in which several DST investors hold an undivided, fractional beneficial interest in the holdings of the Delaware Statutory Trust. This means that you do not actually own a specific property, such as one apartment in an apartment building, but rather a fractional ownership in the property, which corresponds to your share of the Trust. These sometimes are referred to as “beneficial interests.”
For example, if you have a 13% fractional interest, you own 13% of the apartment building and, by extension, 13% of each individual apartment unit. Therefore, you are also entitled to 13% of the net profit generated by the rental property.
Should I Invest in a DST?
There’s a reason why accredited investors are moving in droves towards investing in Delaware Statutory Trusts. These include tax benefits, passive income, elimination of personal liability, and the ability to manage cash flow and transfer of wealth. In addition, DST offerings are an optimal investment vehicle for obtaining access to rentable multifamily and commercial real estate at a fraction of the price.
If you are interested in investing in Delaware Statutory Trusts or learning more, contact Provident 1031, where you can view Master The 1031 Exchange Masterclass video learning series on DSTs, 1031 Exchanges, and other investment properties.
