What is a Delaware Statutory Trust?

Any profits made on the sale of an investment property incur federal and state capital gains taxes. As described in another post , tax-deferred exchanges allow sellers to defer payment of taxes by reinvesting their proceeds into another property of equal or greater value. A DST is similar to a 1031 exchange in that regard, but there are some key differences. Read on to learn more...

(The material contained herein is for informational purposes only and does not constitute tax or investment advice.)

Overview:

A DST is deceptively simple. Multiple investors contribute money to a DST (typically arranged by a qualified DST sponsor, or syndicator). Each investor has their own share of the trust, but the trust itself is considered the legal owner. Like other investments, ownership in the trust is determined in proportion to the amount of money contributed by the investor. The investors are called the ‘beneficiaries’ of the trust. The IRS considers interest in a DST as property ownership, and thus qualifies for a 1031 exchange.

A DST sponsor will find deals, perform due diligence, secure financing, and arrange adept property management. The sponsor will then offer ownership shares of the property (or properties) to 1031 investors. When the properties in the DST produce income, the investor is entitled to their proportionate share.

There are innumerable DST investment options. A few common property types include "Net-Leased Portfolios" (ie: dollar store chains, pharmacies, fast-food restaurants, grocery stores, etc). Other investment vehicles include multi-family developments, medical buildings, hotels, self-storage facilities and even vacation resorts. One of the great benefits of a DST is that you do not have to invest in your own backyard. Because you are not actively managing your DST investment, you can buy into qualified properties all across the country. Remember, "live where you want to live but invest where the numbers make sense."

(Please note: as a legal entity, a DST is defined under Delaware law, but neither the investors nor the property need to be located in Delaware.)

Advantages:

The proceeds from the sale of your property, if invested via a 1031 directly into a DST, is tax-deferred. Furthermore, income generated by the DST property has additional tax advantages because the investor can deduct their share of mortgage interest, depreciation, and operating expenses.

DST’s are known for being passive, stress-free investments. The DST sponsor is responsible for all asset management, as well as all on and off-site property operations. This of course is not the case with a traditional investment property. Sponsors will provide monthly or quarterly payments and reports on the performance of the property.

In addition, the investor/seller can select a DST that is tailor-made to the equity received from the sale of their property. This makes finding a property or properties of ‘like-kind’ very simple. A key advantage of DST's is that a sponsor will typically have multiple investment opportunities to choose from with pre-determined distribution rates. This alleviates some of the stress associated with a typical 1031 exchange in which a new property must be identified for purchase within 45 days after the sale of the original property.

Despite requiring a relatively small minimum investment, DST's provide investment access to properties often unattainable to individual investors. For instance, in a recent transaction, Pioneer purchased a portfolio of small multi-family properties from a seller just outside of Boston. The seller netted roughly $2,500,000 on the sale. He kept $500,000 for himself and invested the remaining $2,000,000 into a $45,000,000 portfolio of medical office buildings in the Southeast through an open-ended DST. The annual return for this particular portfolio was 6.4%, thus netting the investor $128,000 per year in tax-deferred income. An investment of that caliber would not have been possible for our seller by simply doing a traditional 1031.

Pioneer has partnerships with some of the largest DST providers in the country. If you're thinking about selling your property and have questions on how best to meet your tax, investment, or estate planning objectives please call Chris Drane at 617-575-7181.

Important note: Pioneer does not earn any money or commissions through our DST affiliates. Many sellers are simply unaware of the valuable tax and estate planning tools available to real estate owners. We encourage all of our sellers to consult their trusted accounting, tax, and legal advisors before making any investments.