There are few things as satisfying as getting to learn about new tools to help our clients. We were so excited to have Maestro Wealth Advisors share with us for today's blog post and we were even more excited to have walked about with new information ourselves! Whether you are a new or seasoned investor, this information about DSTs is invaluable!
Many professionals in the real estate industry conduct 1031 exchanges. Sometimes a deal can either be made or lost based on having enough flexibility in the design of the exchange to allow a client to succeed in the match up of the value of the property and the leverage on the property.
For real estate professionals, an asset you can use to “true up” the exchange may, in many cases, be a DST. Having the ability to do an exchange with a property that may be less than the current property up for sale and the new exchange property allows you to customize the new property and get the values balanced properly.
Delaware Statutory Trusts (DSTs) allow owners of real estate to sell their investment real estate and potentially defer capital gains taxes.
DSTs are derived from Delaware Statutory law as a separate legal entity and formed as private governing agreements for the purposes of managing, administering, investing, and/or operating real, tangible, and intangible property; or business or professional activities for profit that are carried on by one or more individuals who act as trustees for the benefit of a party who is entitled to a beneficial interest in the trust property.
Though Delaware Statutory Trusts are not new, in 2004, the IRS came out with an official Revenue Ruling detailing how a DST could be structured in such a way that it would qualify as a property replacement vehicle for 1031 Exchanges.
Well known to real estate investors, a 1031 like-kind exchange allows you to defer the capital gains tax on the sale of investment property by reinvesting the proceeds into a similar qualifying property.
As a result, DSTs have become an investment vehicle for investors who want the benefits of owning real estate without becoming a “landlord”, as well as current real estate investors who no longer want the responsibilities of being a landlord.
How do DSTs work?
A property is identified and acquired under a DST by a sponsoring real estate investment firm. The same firm, also acting in the capacity as the master tenant, opens the trust for potential investors to purchase a beneficial interest. In this realm an accredited investor would have an opportunity to own a beneficial interest in a property that would normally be out of reach to them from an investment standpoint.
Additionally, they would also benefit from a professionally managed property without any of the associated landlord responsibilities.
What is the difference between a DST and a REIT?
While DSTs and REITs have some similarities and both invest in real estate, there are some major differences:
- A DST qualifies as a 1031 like-kind exchange to defer the taxes on the sale of your highly appreciated property, a REIT does not.
- A REIT typically owns more properties than a DST.
- A REIT can be integrated to diversify part of your qualified retirement plan, a DST cannot.
- A REIT can be a publicly traded entity, or a private placement investment. A DST is a private placement investment.
- A REIT generally is more liquid than a DST.
- A DST qualifies as a 1031 like-kind exchange. That means you may be able to defer your tax bill AND still be invested in an income producing property.
Can anyone invest in a DST?
No, in order to participate in a DST an investor must be an Accredited Investor.
An Accredited Investor is defined as having a minimum of 1 million dollars of net worth (excluding the value of the investors primary residence) and or annual income of at least $200,000 individual, or $300,000 as spousal income.
Can I get regular income from a DST?
Yes, each DST quotes a different yield which comes from collected rents. You will receive monthly net rent checks from each DST investment
Can I leave a DST to my heirs?
Yes, a DST is an easily divided asset you can leave to your heirs as part of your legacy plan. Additionally, a DST typically receives the “step-up” in cost basis if an owner passes away and is the owner of the property.
What are the internal management fees?
Generally, the DST Sponsor charges a percentage of gross rents (not of property value) as their property management fee.
Can I receive rent escalations?
Yes, depending on the property type. Additionally, when the property is eventually sold you will receive your share of any appreciation and repair reserve balances.
What types of properties are available?
Here is a list of the possible property types available. Usually there are 2-4 DST types available at any given time.
- Apartment complexes
Would I invest in just one property?
Not normally,one DST might own 4 apartment complexes in 4 states. DSTs have a minimum investment of $100,000 each, so you would likely want to diversify into several DSTs.
What yields could I expect?
Usually about 4-5.25% net of fees on equity, plus appreciation on the DSTs.
What are the benefits of a DST?
- Receive passive income from real estate minus the work
- Own shares of major commercial real estate properties that currently produce income
- Cash out the equity on your highly appreciated property into an income producing property AND potentially defer your capital gains with a 1031 exchange
- Get the benefits of real estate ownership and income without the stress and hassles of property management
- Create an easily dividable asset for your heirs
So, as a tool to come alongside your 1031 exchange efforts, a DST can improve the probability of successfully completing a property exchange by providing flexibility and a way to balance the values and leverage for your clients.
Interested in exploring creative ways to leverage your real estate investments?
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