For many real estate investors, 1031 real estate exchanges are an attractive option for deferring taxes when selling investment properties. However, there is another option that can provide even more flexibility and tax benefits: the Delaware Statutory Trust (DST).
A DST is a type of trust that is specifically designed for holding and managing investment properties. They are structured in a way that allows multiple investors to pool their funds together and invest in a single property. This can make it easier for investors to diversify their real estate portfolios and possibly increase their returns. DSTs are an alternative investment that is also accredited.
One of the biggest advantages of using a DST for a 1031 exchange is that it allows investors to defer taxes on both the sale of their relinquished property and the purchase of their replacement property. Under the Internal Revenue Code Section 1031, when an investor sells an investment property and reinvests the proceeds in a similar property, they can defer paying capital gains taxes on the sale. However, to qualify for a 1031 exchange, the investor must identify their replacement property within 45 days of the sale and close on the property within 180 days.
A DST can make this process easier by allowing investors to pool their 1031 exchange funds together and purchase a fractional interest in a larger property. Investors can take advantage of the tax deferral benefits of a 1031 exchange while still investing in high-value, income-producing real estate.
In addition to the tax benefits of a 1031 exchange, DSTs offer several other advantages for real estate investors. For example, DSTs are typically managed by a professional trustee, which can relieve investors of the day-to-day responsibilities of managing a property. This can be especially beneficial for investors who are looking for a more passive investment opportunity.
DSTs also offer greater flexibility in terms of investment size and diversification. Unlike traditional real estate investments, which often require a large down payment and significant ongoing expenses, DSTs allow investors to invest small amounts of money in a variety of properties, typically as low as $100k. Investors are able to diversify their portfolios and potentially reduce their risk.
Another advantage of DSTs is that they can provide a steady stream of income. Since DSTs are typically invested in income-producing properties, investors can receive regular distributions from the trust. This can be beneficial for investors who are looking for a reliable source of passive income.
Beyond 1031 exchanges, DSTs can also be an attractive option for cash investments in real estate. Unlike a traditional real estate investment, where investors are responsible for managing the property and handling all expenses, a DST allows investors to participate in the real estate market without the same level of risk or responsibility.
Since DSTs are managed by a professional trustee, investors can benefit from the expertise of experienced real estate professionals. Investors who are new to the real estate market or who are looking for a more passive investment opportunity may find DSTs to be beneficial.
Another advantage of DSTs for cash investments is that they offer greater diversification. Rather than investing in a single property, investors can invest in multiple different DSTs and own a small percentage in a variety of income-producing properties, potentially reducing risk and increasing return.
DSTs also offer tax advantages for cash investors. Since DSTs are structured as trusts, they are considered pass-through entities for tax purposes. This means that the income generated by the trust is passed through to the individual investors, who are then taxed at their individual income tax rates. Additionally, because DSTs are typically invested in income-producing properties, investors may be eligible for additional tax deductions, such as depreciation and mortgage interest deductions.
The biggest advantage of using DSTs for your real estate exposure is when your DST goes full cycle, you have the option to 1031 into another DST and further defer the again. This is true even if you invested with cash. When the investor dies in the DST, the estate gets a step-up in cost basis, and the deferred gains are never paid. Of course if the investor decides to “cash out” taxes are owed even on the original deferred amount.
DSTs have become an indemand strategy recently due to the “swap until you drop” component. DSTs offer several advantages for 1031 real estate exchanges and cash investments in real estate. By allowing investors to pool their funds together and invest in income-producing properties, DSTs can provide greater diversification, tax benefits, and exposure to institutional-quality properties.
Like most alternative investments, the major downside is the lack of liquidity after you invest. Most DSTs have a 5-9 year lifespan and no liquidity during that time (sorry, even if the investor dies), so investing in a DST has benefits and several drawbacks as well.
Frederick Hubler is the founder and CEO of Creative Capital Wealth Management Group, a retainer-based wealth strategy firm specializing in alternative strategies located in Chester County, PA.
Securities are offered through Arkadios Capital. Member FINRA/SIPC. Advisory services are offered through Creative Capital Wealth Management Group. Creative Capital Wealth Management Group and Arkadios are not affiliated through any ownership.
This material was created for educational and informational purposes only and is not intended as tax, legal or investment advice.
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