What is a Delaware Statutory Trust

Delaware statutory trust

Delaware statutory trust

Interested in getting involved with a Delaware statutory trust, but don’t know where to start? DST investments can be a great way to build equity and use leverage to increase returns. DSTs can even offer tax advantages to those involved. That being said, there are many details and considerations to pay attention to before getting involved in a DST.

The first step to investing in a DST is to know how to define it:

A Delaware statutory trust is a legally recognized trust that is set up for the purpose of business. A DST does not need to be set up in Delaware, nor even in the U.S.A. In some instances, DSTs are referred to as an Unincorporated Business Trust or UBO.

The main distinguishing factor of a DST is that it is formed as a private governing agreement under which property is held, managed, invested, and operated by a small group of trustees.

You can think of a DST as a limited partnership (LLC) where multiple owners invest money together into an asset that is managed by a master partner. Similar to an LLC, the DST provides owners with limited liability and divides income through the minority owners.

At Kay Properties, we specialize in DST investments. You can view our free listings of DST 1031 properties here. In this post, we’ll explain the meaning of DST and how you can make your own DST investment.

What is a DST in Real Estate?

Delaware statutory trusts are often used in real estate investing to allow multiple investors to pool money together in exchange for small holdings of the trust.

In 2004, the IRS ruled that ownership interests within a DST qualify as a like-kind property that can be used in a 1031 exchange out of a DST. This allows real estate sellers to defer capital gains.

DSTs require an appointed trustee to reside over the DST investment. Other investors, apart from the appointed trustee, do not have decision making power within the investment. The appointed trustee also has limited power over the investment.

What is a DST 1031 Exchange?

In a DST 11031 exchange, the property seller is allowed to move funds from an asset’s profit into a new like-kind property without paying capital gains taxes.

1031 exchanges are often thought of as tax-deferment agreements because any seller that enters into a 1031 exchange will technically need to pay the capital gains tax on disposition of the asset. 

In some instances, the capital gains tax can be completely avoided if the following instances occur:

  • If the capital gain is continually rolled into new 1031 exchanges until the seller is deceased. In this case, the heirs of the deceased will claim the asset and their tax basis will be reset in a non-taxable event.
  • If the capital gain is added to an asset which becomes the seller’s primary residence then the seller may avoid up to $500,000 in capital gain tax if the primary residence is later disposed.

Typically, DST 1031 exchanges have a minimum investment of $100,000. This allows investors to diversify their exchange proceeds throughout multiple properties. The normal loan to value of a DST 1031 property is 50% however it is not uncommon to see DST properties offered all cash/no debt to minimize financing risks.

Rules of DST Investments

Delaware statutory investments are subject to governing laws. The following laws state what can and cannot be done in a DST investment:

  1. The trustee cannot accept future equity contributions after the offering is closed. This includes equity contributions from existing DST investors.
  2. No additional debt financing can be procured for the investment. No new terms may be negotiated on existing loans.
  3. Proceeds from the sale of the investment may not be reinvested. All proceed must flow back to the investors of the DST.
  4. Capital expenditure of the property can only be made by the trustee for the following reasons: (1) normal maintenance and repairs of the property, (2) small, non-structural capital improvements, (3) capital expenditure as required by law.
  5. Between distribution dates, all liquid cash held by the DST can only be invested in short-term debt obligations.
  6. Liquid cash held by the DST must be distributed to the investors on a regular basis.
  7. No new leases or lease renegotiations may be entered into by the trustee, unless approved under a master leasing agreement at the inception of the DST. The trustee may, however, execute a new lease if the existing tenant defaults on its lease.

What to Know When Considering a DST

Because of the nature of the trustee and investor relationships within a Delaware statutory trust, it is important to choose your investors wisely. A competent trustee will be the difference between success and failure in your DST.

If for some reason the trustee feels the DST is at risk of losing the property because of management issues, the trustee can convert the DST into an LLC within control provisions. When this happens, DST investors will be forced to pay the capital gains tax immediately. 

Finally, when considering a DST property, keep in mind that the limited controls offered within a DST make certain types of investments more efficient. 

The easiest properties to manage under a DST include properties where minimal leasing and management is required. This can include single tenant or triple-net leased properties that do not have a near-term lease expiration. 

Current DST 1031 Properties

Kay Properties currently has a wide array of DST properties available in our listing service. Our marketplace showcases DSTs from over 25 sponsor companies. We also offer a wider array of custom DSTs available to Kay clients. 

Kay Properties team members collectively have over 150 years of real estate experience, are licensed in all 50 states, and have participated in over 30 Billion of DST 1031 investments. Contact us to learn more about how we can help you in your next DST investment.