Avoid the tax bill without having to do a 1031 exchange, giving your asset away to charity or risky payment streams.*
Our tax-planning strategies work on primary residences, commercial real estate and as a 1031 exchange backup strategy.
Maintain 100% control of how your money is invested with the ability to invest into different asset classes.
If you have a professional practice or other business you’d like to sell? We can help you with those also.
*At time of sale
What is a Delaware Statutory Trust?
- A Delaware Statutory Trust (DST) is a legally recognized trust that is set up for the purpose of business. DST’s have become popular as 1031 Tax Deferred Exchange properties.
- A step-by-step process that replaces the unidentified property in your exchange with the assurance that your upleg investment will directly improve your investment position.
- Have an opportunity to diversify your investments and limit your exposure by investing in a professionally managed, multi-owner property in a strong and growing market.
- Remove yourself from the day to day management of real estate.
- Estimated annualized distributions ranging from 5-8%.
- You can potentially double your cash flow by putting your passive equity to work.
- Monthly distributions conveniently deposited directly into your bank account.
- Multiple asset types (multifamily, triple net, commercial, etc.) and locations are available.
- High quality “Institutional” properties located in carefully researched markets.
What are the Benefits?
For real estate investment owners considering selling their appreciated property, it may be beneficial to consider a DST as replacement property when utilizing a tax-deferred 1031 Exchange. DSTs may provide a unique and flexible solution to investment real estate owners looking to defer tax and continue to own investment real estate, yet seek to eliminate the active management of directly owned Fee-Simple property.
DSTs Qualify For a 1031 Exchange
First and foremost, Delaware Statutory Trusts are considered a qualified replacement property for IRC 1031 Exchanges, as established by IRS Revenue Ruling 2004-86. DSTs can be identified either as ‘primary replacement properties’ or as a sort of ‘insurance’ in case a Fee-Simple property cannot be found and closed within the mandated exchange timeline.
Defer Capital Gains Tax
Delaware Statutory Trusts allow real estate investors to defer paying taxes on the sale of an investment property, which can be very expensive. In some states, the total amount of tax can be as high as 37%.
- Federal Capital Gains Tax: 15% - 20%
- State Capital Gains Tax: 0% - 13.3%
- Depreciation Recapture Tax: 25%
- Net Investment Income Tax: 3.8%
However, by utilizing a 1031 Exchange, an investment property owner can defer their tax, as long as they acquire a replacement property or properties of equal or greater value.
Eliminate Active Property Management
Beyond deferral of taxes, unlike most investment real estate, ownership of DSTs is entirely management free. The only responsibility of an owner is to select which DSTs they would like to exchange into. We have developed a very well-received approach to determine our clients' objectives and assist them in selecting the appropriate DSTs among the offerings we have vetted and approved.
Potential For Competitive Cash Flow
Typically, DST properties are structured with an emphasis on cash flow for the investors and because Delaware Statutory Trusts acquire high-quality institutional property in cities with strong projected growth, DSTs can focus on preserving investment value and producing income potential for their owners. Annual cash flow to the investors varies from trust to trust depending on the property type and sponsor, however investors may have the potential to experience greater cash flow through the ownership of the DST property than that of their relinquished property.
Low Minimum Cash Investments
Investment minimums for Delaware Statutory Trusts are quite low, typically $100,000. Low minimums allow for exchangers to acquire multiple DSTs – effectively creating their own personal property portfolio, diversified among multiple property types, geographic areas, and DST sponsors.
High-Quality Investment Property
The underlying real estate held by DSTs tends to be high-grade institutional property. Due to the rigid criteria established by the IRS for a DST property to qualify for exchange purposes, rarely is any other type of property, other than highgrade investment property, considered for the trust. It is common for a DST property to be leased to credit-worthy Fortune 1000 companies. In fact, a number of DST sponsoring firms require long-term leases with Fortune 1000 companies, or privately held companies with assets in excess of $100 million, to be in place before formation of the trust. DST ownership provides investors access to properties held traditionally by pensions, REITs, and large institutional investors.
Low Cost Non-Recourse Debt Matching
Most investors have debt that must be matched in their exchange. DST sponsors understand this and, as a result, many DSTs are structured with debt in place. Access to low-cost non-recourse debt is a major benefit of DST ownership, one that serves to enhance potential cash flow and appreciation. Delaware Statutory Trusts also provide liability protection for their owners, further reducing risk of ownership.
Increase Annual Depreciation to Offset Income Tax
There are a number of key tax benefits associated with DSTs including the potential to increase annual depreciation to offset taxable income and the ability to own DST property in non-income tax states.
Opportunity For Appreciation
Ownership of an interest in a DST shares many similarities with ownership of Fee- Simple property, including the opportunity for appreciation. Furthermore, the Delaware Statutory Trust distributes all potential appreciation to the DST owners, consistent with their percentage ownership of the Trust.
Eliminate Tax For Estate Beneficiaries
The benefit of increasing cash flow and invested dollars is clear, but perhaps the biggest benefit of a 1031 Exchange is that it allows for a "step-up in basis" upon the passing of an owner. “Step-up in basis” refers to the IRS’s elimination of Capital Gains, Depreciation Recapture, and Net Investment Income Tax upon the death of an owner. In "community property" states, a surviving spouse receives a full step-up in basis to the properties' fair market value. From an estate planning standpoint, DSTs are a particularly attractive solution due to their ability to be seamlessly divided among beneficiaries – whether that be family, charities or any other beneficiaries. Furthermore, because DSTs are considered illiquid and owned as a non-controlling interest, ownership of DSTs can be discounted by an investor’s CPA when calculating total estate value upon death. It is not uncommon to see discounts ranging from 20%-30% for estate calculation purposes.
Exchange Proceeds Can Be Diversified Among Multiple DST Properties
Due to the replacement property identification rules established by the IRS, multiple DST properties can be combined as replacement property. Furthermore, many DSTs are comprised of multiple properties, thus providing additional diversification. Due to the low minimum investment requirement, additional diversification can be achieved by selecting multiple DST sponsors, property types, and geographic areas.
How Long are DST Properties Held?
Delaware Statutory Trusts are considered illiquid investments, meaning the DST Sponsor will determine when the property is to be sold. The IRS required DST framework states that a DST Sponsor cannot refinance the property; the property must be sold before the loan’s maturity date. There are DSTs available with no debt, in which case there is no required timeline for the property to be sold, however most DSTs have 45% - 55% loan-to-value (LTV) and utilize 10-year fixed rate debt. Therefore, the longest these properties could be held as a Delaware Statutory Trust is 10 years. Typically, DSTs are held for 3 – 9 years. The hold period is long enough to reduce prepayment penalties associated with the debt, yet short enough that the DST Sponsor is not forced to sell the property due to a pending debt maturity date.
The illiquid nature of Delaware Statutory Trusts is what enables the DST Sponsor to monitor market conditions and select a sales date that is most advantageous for the investors. The sponsors we have vetted and work with monitor the properties financial performance, forecasts, rental demand, and competing inventory to select a sale date that benefits the DST owners.
What are the risks?
Delaware Statutory Trusts are not suitable for every real estate investor. We work diligently to understand an investor's objectives and recommend replacement property options that will position them to accomplish their financial and lifestyle goals. For those in which DSTs are a suitable replacement property option, it is very important to select a 1031 Exchange company that has expertise in tax, real estate, and securities. We encourage all our clients to ask about our proven track record of navigating complex ownership structures, exchanges, implementation of tax strategies, due diligence of DST sponsors and offerings.
Ownership of Delaware Statutory Trusts is still very much ownership of investment real estate. Due to the structure of Delaware Statutory Trusts as a passive ownership entity, a beneficial ownership interest in a DST presents additional risks that the investor should be aware of.
The following risks should be fully understood and carefully considered when assessing an investor’s suitability for ownership of a Delaware Statutory Trust:
Lack of liquidity and timing of exit: Generally DSTs have a target property hold period ranging from 3 – 9 years. The hold period may differ significantly from the targeted timeline based on market conditions. The investment should be viewed as illiquid while invested in the property. Early exit by the investor for liquidity purposes may not be possible or may be only possible at a significant discount to the trust’s net asset value.
Lack of control: Owners of a beneficial interest in Delaware Statutory Trust have little control over management decisions and eventual sale of the underlying property. The real estate investment company managing the trust is responsible for all operating decisions.
Failure of due diligence and non-compliance: All DSTs presented by RE/MAX Commercial are subject to a rigorous due diligence process in which the real estate investment company’s management is thoroughly reviewed, as is each individual DST offerings made available. However, failure to identify an issue may result in mismanagement or non-compliance in adhering to the IRS criteria established for a DST to qualify for tax-deferred exchange treatment.
Loan modifications may not be possible: Due to the structure of a DST, restructuring the financing of the property may not be possible without changing the legal ownership structure. DSTs mitigate this issue by utilizing master lease agreements between the trust and the real estate investment company.
Projected cash flow may not be consistent with actual performance:</b > As with any real estate property investment, cash flow levels are subject to market, economic, tenant and location risk. Projected cash flows are typically conservative in nature; however, they are not guaranteed.
Projected appreciation may not occur: As with any real estate property investment, asset appreciation is subject to market, economic, tenant and location risk. Appreciation may not occur at the end of the trust’s property holding period or the holding period may be extended beyond stated projections.
Interest rate risk: The value of real estate is heavily impacted by the current interest rate environment. Changes in current interest rates may increase uncertainty surrounding financing, leasing and appreciation.
Regulatory risk: DSTs are susceptible to changes in the IRS’s treatment of tax-deferred exchanges. Furthermore, the advantages of ownership of a beneficial interest in a DST for estate planning purposes may be eliminated based on changes in the Internal Revenue Code.
DST management costs and fees: DST structure provides for management fees to the sponsoring real estate investment company. These fees, while thoroughly disclosed upfront could serve to reduce cash flow levels below that of the stated projections.
One of the main objectives is to ensure any prospective DST investor is comfortable with the DST structure and is fully informed. Beyond the educational materials and conversations, all DST properties presented to clients will be accompanied by a Prospectus. This full disclosure document will provide detailed information on all relevant matters pertaining to the DST, including risk disclosures.
What is the Process and Timing?
The first step is to determine whether a 1031 Exchange is right for you. This decision is based on your financial and lifestyle objectives, the subject property and your tax liability, were a sale to occur. There are a number of key pieces of information that go into determining whether an exchange is worth considering. If an exchange is appropriate, then your objectives must be thoroughly discussed to understand whether DST ownership may be suitable. Generally, DST ownership can serve to address any of the following objectives:
- Diversify real estate holdings
- Increase potential income
- Increase depreciation to offset tax resulting from income
- Reduce management time and effort
- Simplify real estate for estate planning purposes
- Continued tax-deferral
- Own higher quality real estate
If you are interested in learning more about DSTs and whether they may be a good 1031 Exchange option for you, the next step is to contact us to schedule a free complimentary consultation. This can be done either via phone or an in-person meeting at our office. Either way, we would be pleased to educate you further on Delaware Statutory Trusts, discuss our process for performing due diligence on DST sponsors and their individual offerings, and assist you in selecting the offerings that will best position you to meet your objectives. We have multiple properties available for your consideration. Simply fill out the fields below and we will contact you. Alternatively, give us a call at 714-742-3700 for an immediate response.