Leveraging a Delaware Statutory Trust (DST) When Facing Tight Deadlines

When dealing with a 1031 exchange it can feel like a race against time. This becomes particularly evident during the all-important 45-day period, when you need to pinpoint a suitable property. Read more about 1031 exchange rules here. It’s during these nail-biting times you might be scrambling for something to identify. Or perhaps you are unsure of the deals you are aiming to close on and would love a backup option.  A Delaware Statutory Trust (DST) can be more than just another option—it can be your safety net, offering the flexibility and security you need when the clock is ticking.

DSTs: A Quick Solution in Time-sensitive Scenarios

A Delaware Statutory Trust (DST) is a legal entity that allows investors to collectively own fractional interests in real estate. This enables you to invest in large, institutional-grade properties while potentially deferring capital gains taxes through mechanisms like 1031 exchanges. Read more about DSTs here. When you’re in the midst of a 1031 exchange and haven’t yet found a suitable replacement property, DSTs present an efficient solution.

Here’s why:

1. Pre-Packaged Investment Option: DSTs typically hold pre-acquired real estate assets. This means they are “ready to invest in,” offering an immediate solution for 1031 exchange participants who need to identify a replacement property swiftly. This aspect of DSTs significantly reduces the risk of failing to meet the 45-day identification period and the 180-day purchase completion requirement of a 1031 exchange, thereby safeguarding against potential tax consequences. 
2. Diverse Portfolio Access: Investing in a DST allows you to own a fractional interest in a portfolio of properties, rather than being limited to a single replacement property. This diversification can reduce risk and offer more stability to your investment portfolio.
3. Simplified Process: The structure of a DST simplifies the investment process. Unlike direct property purchases, which involve numerous complexities such as property inspections, loan approvals, and individual property management challenges, DSTs offer a streamlined approach. The DST sponsor handles all the operational aspects of the property, allowing you to complete your 1031 exchange without the usual hurdles of direct property acquisition.
4. Potential Inclusion of “Built-In” Debt: Many DSTs include “built-in” debt which can be beneficial for 1031 exchanges. To satisfy exchange requirements, you need to purchase a property of equal or greater value and reinvest all the net proceeds. A DST with pre-arranged debt can help meet these requirements, especially for investors who sold their relinquished property with a mortgage.
5. Professional Management: DSTs are managed by professional sponsor companies, who take care of all aspects of property management. This not only provides ease during the 1031 exchange process but also ensures that the investment is professionally managed post-acquisition.

Considerations and Risks

Case Study

Background

John, a 62-year-old retiree, had recently sold a small apartment complex he owned for several years. The sale had gone smoothly, but as the 45-day mark to identify a new investment property approached, John found himself in a difficult position. The market was tight, properties that suited his needs were either too expensive or under competitive bid, and he was growing anxious about meeting the strict timelines imposed by the 1031 exchange rules.

After our conversation we discovered John’s main challenges were:

• Finding a suitable replacement property quickly to defer capital gains taxes.
• Managing another property as he was looking to reduce his daily responsibilities.
• Ensuring a stable and reliable income from his real estate investments to help sustain his retirement.

Solution

After discussing his situation John was introduced to the concept of investing in a Delaware Statutory Trust (DST). He invested in a diversified portfolio of properties, including commercial real estate and multifamily homes, which traditionally offer stable rental incomes.

Outcome
By choosing to reinvest his funds into the DST:

• Timely Exchange Completion: John successfully met the 45-day identification requirement of the 1031 exchange, deferring upwards of $150,000 in capital gains taxes.
• Reduced Management Responsibilities: Investing in the DST allowed John to remain a real estate investor without the burdens of property management, fitting perfectly with his retirement lifestyle.
• Stable Income: The DST’s diverse property portfolio provided John with a reliable monthly income, derived from the collective rental revenues of the buildings within the trust.

Conclusion

Using a DST in your 1031 exchange can be a highly strategic move, especially when pressed for time to find a suitable replacement property. It offers a ready-to-invest-in option, diversification, professional management, and the potential for built-in debt structures. However, as with any investment, it’s imperative to conduct thorough due diligence, understand the inherent risks, and consult with financial and legal professionals to ensure that this investment aligns with your overall strategy and goals. Remember, this approach should be part of a well-considered investment plan rather than a hasty decision made under the pressure of 1031 exchange deadlines.

It’s important to note that the information provided in this article is for educational and informational purposes only. Investing in real estate and Delaware Statutory Trusts (DSTs) involves risks, and decisions should be made after thorough research and consultation with qualified financial and legal professionals. This article does not constitute financial or investment advice. Always seek guidance from professionals who are well-versed in DSTs and their implications before making any investment decisions.