What is a Delaware Statutory Trust?

As our lives change, our priorities can change, and so can our investment strategy. You could be looking to retire, and want to be done with property management. Perhaps you are now too busy and have other things to focus on, like family. You still want the real estate in your portfolio to stay diverse, but can no longer commit to the time involved with direct management. One option that may be worth considering is a Delaware Statutory Trust, or DST for short. In this blog post, we’ll explore what a DST is and how it can be a valuable alternative option for those who are interested in a passive way to invest in real estate. 

What is a DST?

At its core, a DST is a legal entity that is created under Delaware law. It is a type of trust that holds real estate assets, such as apartment buildings, office buildings, or retail centers. While similar to the way limited liability companies (LLCs) hold property, DSTs possess a unique feature. Properties structured under DSTs are qualified as like-kind exchange properties for 1031 exchanges, as defined by the IRS Revenue Ruling 2004-86. Investors can purchase shares in the DST, which gives them a proportional ownership interest in the underlying real estate. For those considering DST 1031 investments, the typical investment amount starts at $100,000. 

Why Invest in a DST?

One of the primary benefits of a DST is that it allows investors to own a fractional interest in high-quality, income-producing real estate without the headaches that come with property management. The DST sponsor, which is typically a professional real estate investment firm, handles all of the day-to-day operations of the property, such as collecting rent, paying expenses, and making capital improvements.

For those looking to generate passive income, a DST can be a great option. The rental income from the underlying real estate is distributed to the DST investors on a regular basis, typically monthly or quarterly. This can provide a reliable source of income to supplement other sources of retirement income, such as Social Security or a pension.

Another benefit of a DST is that it allows investors to diversify their real estate holdings. Rather than owning just one property, DST investors can own a fractional interest in a portfolio of properties. This can help to reduce risk and provide more stability to an investment portfolio.

One of the key features of a DST is that it can be used as a replacement property in a 1031 exchange. This is a tax strategy that allows real estate investors to defer paying capital gains taxes on the sale of a property by reinvesting the proceeds into a like-kind property. By using a DST as the replacement property, investors can defer taxes while also enjoying the benefits of fractional ownership in high-quality real estate (Read more about 1031 Exchanges here)

DST properties are also particularly advantageous for 1031 exchange investors due to their potential inclusion of “built-in” debt, which aids in satisfying exchange requirements. Fulfilling these requirements involves purchasing replacement properties of equal or greater value and reinvesting 100% of net sales proceeds into these replacements.

Are There Risks?

It’s worth noting that investing in a DST does come with some risks. Like any investment, there is no guarantee of returns and there is always the potential for losses. It’s important to do your due diligence and thoroughly research any DST investment opportunity before committing your funds.

One potential downside of a DST is that it is typically illiquid. Unlike publicly traded REITs, which can be bought and sold on a stock exchange, DST shares are not publicly traded. This means that it can be difficult to sell your shares if you need to access your funds quickly.

However, for those who are looking to generate passive income and are willing to commit their funds for the long-term, a DST can be a great option. With the help of a qualified DST broker, retirees can find high-quality investment opportunities that meet their specific needs and goals.

It’s important to work with qualified professionals and follow the rules and requirements carefully in order to ensure that the exchange qualifies for tax-deferred treatment. Investors should consult with a tax advisor, attorney, and qualified intermediary to determine the best strategy for their specific situation and to ensure that they are in compliance with the IRS regulations.