What is a Delaware Statutory Trust and Why So Many Real Estate Investors Are Interested in Them?

What is a Delaware Statutory Trust

By Matt McFarland, Vice President, and Thomas Wall, Associate, Kay Properties & Investments

We recently attended an Apartment Owners tradeshow and were surprised to hear many experienced investment property owners ask us the same questions throughout the afternoon. That’s why we thought it might be a good idea to write about what exactly were the three most commonly asked questions we heard during that conference that relate to DST 1031 exchanges, including:

  • What is a Delaware Statutory Trust and what are the associated risks?
  • What can a Delaware Statutory Trust do for me?
  • Do I have to have a Delaware address to invest in a Delaware Statutory Trust?

First, of course you don’t have to live in Delaware to invest in a “Delaware Statutory Trust”. Delaware was the state where the law defining a DST and its structure was created, and what’s so special about this real estate investment vehicle is that it’s blessed by the IRS to qualify as “like-kind” investment property for the purposes of a 1031 exchange.Internal Revenue Code (IRC) Section 1031 allows investors to postpone paying tax on the gain of a relinquished property by reinvesting the proceeds in similar property as part of a qualifying like-kind exchange.

What is a Delaware Statutory Trust?

A Delaware Statutory Trust is a real estate ownership structure that allows multiple investors to each hold an undivided beneficial interest in the holdings of the trust. The term “beneficial interest” means that investors hold a percentage of the ownership, and no single owner can claim exclusive ownership over any specific aspect of the real estate. The laws of DSTs allow the trust to hold title to one or more investment properties that can include commercial, multifamily, net lease, retail, office, industrial, self-storage, etc.

Potential Benefits of a Delaware Statutory Trust

1. Eliminating the day-to-day headaches of property management

Many participant investors in DST 1031 properties are at or near retirement and are tired of the hassles that real estate ownership and management often bring. They are tired of the proverbial “3 T’s” of multifamily residential real estate: tenants, toilets, and trash, and just want to move away from actively managing properties. The DST 1031 property provides a 100 percent passive ownership structure, allowing investors to enjoy retirement, grandkids, travel, and leisure, as well as to focus on other things they are more passionate about instead of property management headaches.

Obviously, as with all forms of real estate investments, there is an underlying level of risk that investors should be aware of including things like economic downturns, vacancies, tenant repairs, etc.

2. Tax deferral using the 1031 exchange

Many of our clients have wanted to sell their apartments, rentals, and commercial properties for years but haven’t been able to find a property to exchange into and just can’t stomach the tax bill after adding up federal capital gains tax, state capital gains tax, depreciation recapture tax and the Medicare surtax. The DST 1031 property solution can potentially provide investors an ability to move from an active to a passive role of real estate ownership on a tax-deferred basis while still potentially receiving passive income. Also, because a 1031 exchange has very tight timelines (45 days to identify exchange property and 180 days to complete the exchange), DST investors can close quickly and complete their exchanges within 3 to five days as opposed to having to wait 30, 60, 90 days to purchase another outside property.

Investors are strongly encouraged to consult their CPA and tax attorney regarding the potential tax advantages as well as risks associated with any DST 1031 exchange properties. Furthermore, investors are encouraged to read the entire Private Placement Memorandum (PPM) for a full discussion of the risks and business plan of each offering.

3. Increased cash flow potential

Many investors of real estate may be unhappy with the amount of cash flow they are receiving due to recent eviction moratoriums, under-market rent structure, multiple vacancies and/or that the raw or vacant land is sitting idle and unproductive. DST 1031 exchange properties provide an opportunity for investors to potentially increase their cash flow on their real estate holdings via a tax deferred 1031 exchange. This potential passive cash flow can come about from regular monthly payments from their DST 1031 investments.All real estate investments provide no guarantees for cash flow, distributions or appreciation as well as could result in a full loss of invested principal.

4. Portfolio diversification* by geography and property types

Often, 1031 investors are selling a property that comprises a substantial amount of their net worth. They want to reduce their potential risk and instead of buying one property (such as another apartment building) or a singleNNN building (such as a Walgreens or Taco Bell) they decide that investing into a diversified portfolio of DST 1031 properties with multiple locations, asset classes (property types) and tenants is a better fit for their goals and objectives. Still, investors should also understand that diversification does not guarantee profits or protect against losses.

For more information on DST 1031 exchanges, please visit www.kpi1031.com or call 1-855-899-4597. Kay Properties is considered one of the nation’s leading expert advisory firms on DST 1031 exchanges.

*Diversification does not guarantee profits or protect against losses.