For accredited investors who want a tax-efficient way to preserve the equity they have earned by investing in real estate, a DST (Delaware Statutory Trust) used in an IRC §1031 exchange offers significant advantages such as:
Whether it’s the right choice for you depends on a few factors, including your comfort level with not being involved in the daily management of the property or a say in major decisions, such as when to sell the property. For many investors, that’s a DST’s greatest appeal.
If you’re not familiar with the phrase or have heard it but aren’t sure what it means, a Delaware Statutory Trust is a business trust established under Delaware law. Investors own an undivided beneficial interest in the trust; the trust owns the real estate. The investors share in the overall financial performance of the investment property or properties on a pro-rata basis.
How can you be sure that a DST qualifies as like-kind property in 1031 Exchanges? IRS Revenue Ruling 2004-86 sets forth the relevant conditions, with each offering containing a written tax opinion verifying that these IRS conditions have been met. The tax opinion is usually found in the PPM, or Private Placement Memorandum.
For an interest in a DST to be treated as a direct interest in real estate for Section 1031 Exchanges, the IRS stipulates that the trust must not violate the following conditions, often referred to as the “seven deadly sins:”
If you like the idea of monthly income from commercial property but want to switch from an active landlord role to a more passive one, exchanging into a DST is a smart way to do it. Instead of directly dealing with tenants, property improvements, taxes, mortgages, and other liabilities, you can have ownership in one or more professionally managed properties, including:
There are two important ways using a DST makes owning investment real estate less stressful.
Traditional 1031 Exchanges allow you to grow the value of your portfolio, but if you simply exchange one property for another it does little to help you diversify. A DST lets you pool your funds with other investors to invest in multiple institutional quality replacement properties. And you’re not limited to one geographic location or type of property.
When you choose a DST, you are making an investment in real estate. And like any real estate investment, it’s subject to market value, tenant issues, rental income fluctuations, vacancies, taxes and governmental regulations.
Other potential disadvantages include:
Because DSTs are uniquely structured, you can access a greater variety of investment properties, diversify your portfolio, and forego property management responsibilities and headaches that often come with traditional ownership.
There is no dollar price you can put on quality of life. After actively managing real estate for a good part of your real estate investment life, exchanging into a DST frees you to enjoy the fruits of your labor without being tied to a landlord’s duties. For many people, a DST offers the ideal solution to a true retirement way of life.
At Turner Investment, we specialize in providing investors access to investment real estate through DSTs and traditional ownership. To learn more about whether a DST is the right investment choice for you, contact us today. We’d love to talk with you about your options.
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