• About
  • Listings
  • Resources
    • All Resources
    • Blog
    • Frequently Asked Questions
    • Glossary
    • Videos
    • Financial Planning
    • Due Diligence
  • Masterclass
  • Contact
  • Register
  • Login
1031 Exchange

Passive Real Estate Investing With A Delaware Statutory Trust

Daniel Goodwin on Mar 4, 2022
Passive Real Estate Investing With A Delaware Statutory Trust - Provident 1031 Houston

Real estate investors today have options that have not always been available. For example, in 2002, Delaware passed the Delaware Statutory Trust Act, which was groundbreaking.

Revenue Ruling 2004-86 soon followed and allowed for DSTs to qualify as “Replacement Property” for the tried and true 1031 Exchange (part of our tax code since the 1920s).

One of the primary strategies for creating wealth in real estate has always been to buy properties, build equity, and then sell and move on to larger properties, in many cases using leverage to expand the size and scope of one’s real estate holdings.

1031 Tax-Deferred Exchanges have been investors’ saving grace and have allowed all capital gains to be deferred as investors move on to bigger properties. Thus, real estate is one of the greatest wealth creation tools known to humanity. It is estimated that over 70% of all millionaires in the United States credit real estate as their number one wealth creation source.

As time goes on, we all age, sometimes we reach a place in life where we no longer want to be a landlord, and here’s where DSTs can get very interesting.

It is estimated that over 70% of all millionaires in the United States credit real estate as their #1 wealth creation source.

— DANIEL GOODWIN

Tax Advantages

DSTs can mean simply that real estate investing now has new tax advantages that could be a massive win for someone ready to sell but still wants to save/defer capital gains.

Here’s where an investor no longer wanted to deal with the headaches and hassles that often come along with income-producing real estate but can’t stand the thought of writing that big check to the IRS for capital gains … the proverbial “rock and a hard spot.”

Today investors can now sell their property and defer all of their capital gains using a 1031 exchange AND use a passively owned DST for their replacement property. In doing so, all capital gains can be deferred, assuming the investor works with a Qualified Intermediary and follows all of the IRS rules and guidelines.

More on that later.

Example

Zero Coupon Fulfillment Center - DST

Instead of going out and finding another apartment complex or hotel to manage, an investor can now select from fractionalized institutional-grade real estate offerings and effectively “outsource” all of the management, reporting, maintenance, midnight phone calls, hassles, and headaches that landlords often lament. DSTs are for when an investor is ready to pass the control along to someone else but still wants the tax-favored income that comes along with owning income-producing real estate.

DSTs are pass-through entities, and fractional owners can participate in depreciation and amortization. This often means that investors can shelter much of their monthly DST income from taxation, in the same way they would be were they an owner/manager.

Many DST properties are capitalized with $100,000,000 or more. The offerings are syndicated and institutional. Properties are often medical buildings, Class A multi-family apartment buildings, hotels, senior living facilities, student housing, storage portfolios, retail, and industrial warehouse buildings.

Nationally known tenants are typically companies like Walgreens, Hilton, and Amazon.

Often, many investors might feel better with a large and stable company like Amazon guaranteeing a lease rather than the tenants who last skipped out on rent, leaving them high and dry. But unfortunately, these higher-grade properties are typically out of reach for smaller real estate investors.

DSTs and all other real estate investing come with risk, and investors should do their homework, perform due diligence and read the Private Placement Memorandum (PPM) before investing any capital. 

DST offerings are typically illiquid and would not be considered suitable for a large portion of someone’s wealth. In addition, because DSTs are regulated and are “securities,” you must purchase them from a Registered Investment Advisor and/or a Broker-Dealer Representative who holds a proper securities license, Series 7 or Series 65.

Who can invest in a DST?

An Accredited Investor is an Individual with a net worth in excess of $1,000,000, excluding his or her home, OR an individual with an income over $200,000 over the last two years. If married the combined income required is $300,000. The income is required to be “reasonably expected” going forward.

Other Accredited Investors Under Rule 501

  • Certain Trusts with assets of at least $5,000,000.
  • A Bank, Insurance, or certain Registered Investment Companies
  • Certain Employee Benefit Plans and certain tax-exempt charitable organizations, corporations, or partnerships with assets exceeding $5,000,000
  • Certain Family Trusts
  • Pass-Through Entities such as LLCs, S Corps, and LLPs

I would stress again the importance of working with a qualified CPA and Qualified Intermediary BEFORE you sell your investment real estate. Working with the Qualified Intermediary (QI) is required, and working alongside the CPA is advised.

Unfortunately, many CPAs in the marketplace are not informed and/or educated on how these real estate transactions work. You can find referrals for QI’s and qualified CPAs on our website. You can also speak with an advisor and receive counsel on whether a DST is or isn’t a good idea for you.

What if I am not accredited but still want to sell and invest in passive real estate?

The DST accredited qualification requirements are hard and fast, but other options exist for real estate investors. For example, if you are not accredited, you can still sell your real estate.

You can still do a 1031 Exchange, defer your capital gains tax and invest in a property that you manage, or you could sell your real estate and pay any applicable capital gains and then invest in something passive like a Real Estate Investment Trust (REIT).

Previous Article

What Does DST “Sponsor” Mean?

Next Article

Delaware Statutory Trust (DST) – Pros and Cons

Master The 1031 Exchange with Daniel Goodwin
Call us for more information

(281) 466-4843

Email Us

[email protected]

Get Started

Schedule a Consultation

Our address

25511 Budde Road, Suite 1002
The Woodlands, Texas 77380

Copyright 2022 - Provident 1031

Privacy Policy | Terms and Conditions

Built with and by Jeff Payne Co.

There are material risks associated with investing in DST and QOZ ( Qualified Opportunity Zones) properties and alternative 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. Past performance is not a guarantee of future results. Potential cash flow, returns and appreciation are not guaranteed. IRC Section 1031 is a complex tax concept; consult your legal or tax professional regarding the specifics of your situation. This is not a solicitation or an offer to sell any securities. THIS IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES DESCRIBED HEREIN. AN OFFERING IS MADE ONLY THROUGH DELIVERY OF THE PPM and to accredited investors only. THIS MATERIAL MUST BE PRECEDED OR ACCOMPANIED BY A CURRENT PPM WHICH SHOULD BE READ IN ITS ENTIRETY IN ORDER TO UNDERSTAND FULLY ALL OF THE IMPLICATIONS AND RISKS OF THE OFFERING OF SECURITIES TO WHICH IT RELATES. Please consult the appropriate professional regarding your individual circumstance. Alternative investments are often sold by prospectus that discloses all risks, fees, and expenses. For additional information, please contact 281.466.4843 or www.Provident1031.com. Fee-based financial planning and investment advisory services are offered by Provident Wealth Advisors, a Registered Investment Advisor in the State of Texas, and the State of Louisiana. Insurance products and services are offered through Goodwin Financial Group. Provident Wealth Advisors, and Goodwin Financial Group are affiliated companies. Provident Wealth Advisors, LLC does not offer legal or tax advice. Consult the appropriate professional regarding your individual circumstance. Securities Offered through AAG Capital, Inc. Member FINRA/SIPC. The presence of this website shall in no way be construed or interpreted as a solicitation to sell or offer to sell investment advisory services to any residents of any State other than the State of Texas or where otherwise legally permitted. Important Notice - If you are investing in Alternatives your tax advisor may require you to file a tax return in the state where the subject property is located which could result in additional cost associated with your investment. Any additional expenses associated with any required tax filing are the sole responsibility of the investor/client.

Schedule Consultation
Name
Connect with a Qualified Intermediary

"*" indicates required fields

Name*
Schedule a Consultation
Name
Subscribe to Provident 1031
Name
Cleantalk Pixel