Passive Real Estate Investing With A Delaware Statutory Trust

Real estate investors today have options that have not always been available. In 2002 the state of Delaware passed the Delaware Statutory Trust Act which was groundbreaking. Revenue Ruling 2004-86 soon followed and allowed for DST’s to qualify as “Replacement Property” for the tried and true 1031 Exchange (part of our tax code since the 1920’s). 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 investor’s saving grace, and have allowed for all capital gains to be deferred as investors move on to bigger properties. Thus, allowing for real estate to be one of the greatest wealth creation tools known to mankind. It’s 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 DST’s can get really interesting….

DST’s can mean simply that real estate investing now has new tax advantages that could be a huge win for someone who is 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…

Here’s an example: – 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. DST’s are for when an investor is ready to pass the control along to someone else but still want the tax favored income that comes along with owning income producing real estate. DST’s are pass through entities and fractional owners are allowed to participate in depreciation and amortization. This often means that investors are able to shelter much of their monthly DST income from taxation in the same way they would were they an owner/manager.

Many DST properties are capitalized with $100 million dollars or more. The offerings are syndicated and institutional. Properties are often Medical Buildings, Class A Multi-Family Apartment Buildings, Hotels, Senior Living, Student Housing, Storage Portfolio’s, Retail, and Industrial Warehouse Buildings. Nationally known tenants are typically companies like Walgreens, Hilton, Amazon, among others. 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. Most of these higher grade properties are typically out of reach for smaller real estate investors. DST’s and all other real estate investing comes 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. Because DST’s are regulated and are “securities”, they must be purchased 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?

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

Other Accredited Investors under Rule 501 include:

Certain Trusts with assets of at least $5 million dollars.

• 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 million dollars
• Certain Family Trusts
• Pass Through Entities such as LLC’s, S Corp’s, and LLP’s

Here is where 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 at www.Provident1031.com.  You can also speak with an advisor and receive council on if 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. 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 yourself 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). Want to learn more? Contact our Provident1031 at www.Provident1031.com. Speak to an advisor at 281.466.4843