Top 10 Reasons Real Estate Investors Are Jumping into DSTs

Emison Capital > Blog Classic > Strategy > Top 10 Reasons Real Estate Investors Are Jumping into DSTs

Delaware Statutory Trusts solve a lot of the headaches of owning and managing rental properties, but real estate investors are looking at them for more reasons than just that. And many are getting involved through 1031 exchanges

In the last 12 months billions of American real estate investment dollars have poured into DSTs (Delaware Statutory Trusts) via the 1031 exchange process. 

What is a DST?  A Delaware Statutory Trust is a legal entity formed under Delaware law that allows investors to own undivided fractional ownership interests in professionally managed institutional grade real estate offerings around the United States. The interests can be owned by individuals or by certain entities. DSTs are offered and available only to accredited investors and entities.

The type of real estate owned in a DST is typically Class A multi-family apartments, medical buildings, hospitals, Amazon distribution centers, manufactured home communities, senior and student living, distribution facilities, storage portfolios, in some cases Walgreens and Walmart stores and industrial buildings. Many 1031 exchange DST investors are at a point in life where they are ready to relinquish the day-to-day headaches of owning real estate and are seeking a more passive way to earn monthly tax-favored real estate income.

The  IRS recognized DSTs as “replacement property” for 1031 exchange purposes. Thus, the purchase of an ownership interest in a DST is treated as a direct investment/interest in real estate, which satisfies the requirement of IRS Revenue Ruling 2004-86. The origin of the 1031 exchange goes back to the 1920s, which makes it a long-standing and stable aspect of tax law.

A Delaware Statutory Trust can offer investors highly tax-favored treatment in regards to monthly distributions due to the nature of the unit investment trust. In this type of trust, real estate is purchased for the trust and income is distributed to the investors via the sponsors’ performance, which can be evaluated in the offering Private Placement Memorandum. The trust is not considered a taxable entity and, therefore, all the profits, losses, etc. are passed through directly to the investors. Investors participate in depreciation and amortization in the same way an investor who owned a 100% ownership interest in his or her own real property would.

The 10 top reasons people are choosing DSTs as replacements for their 1031 exchange:

1) Potential Better Overall Returns and Cash Flows

Many real estate investors may not be earning the cash flows they think they are. An investor wanting to determine their cash flows can take their net rental income from their Schedule E, add back depreciation, then subtract the principal portion of their payment. Next divide that number into the property market value. For example, if one had net rental receipts of $50K and $10K depreciation, and also $10K of principal payment, then the net number would be $50K. If the property value is $1 million then the investor would have a 5% cash flow. DSTs could potentially offer a better cash flow and risk return profile while at the same time offering an investor a passive alternative.

2) Tax Planning and Preserved Step-Up in Basis 

DSTs offer the same tax advantages of real estate that an investor would own and manage themselves. Depreciation and amortization are passed along to DST investors by their proportionate share. DSTs can be exchanged again in the future into another DST via a 1031 exchange. Hold times for DSTs average from five to seven years. See your tax adviser for more clarification and for specific tax advice when evaluating DSTs as an option for your 1031 exchange.

3) Diversification

Many DST holdings own multiple assets within one DST structure. For example, an investor might exchange one apartment building for a portfolio of 10 to 15 Walmart stores and/or Walgreens and other single tenant triple net leases inside a DST structure.

4)  No More Need to Manage Properties

Sometimes we hear of a client who is aging and no longer has the health, time or desire to manage their own real estate investments. DSTs can offer a great passive option while preserving the desire to be invested in real estate.

5) Freedom

Passive investing allows older real estate owners the time and freedom to travel, pursue other endeavors, spend more time with family and/or move to a location that is removed from their current real estate assets.

6)  As a Backup Strategy

In a competitive real estate market an investor may not be able to find a suitable replacement property for their 1031 exchange. DSTs make a great option and should be named/identified in an exchange if only for that reason. Once a real estate investor has sold a property, they have 45 days to identify a replacement and 180 days to close or the tax-free exchange will be disallowed by the IRS.

Click Here To Continue Reading

Click Here To Apply