First thing to know: A Delaware Statutory Trust (DST) can be used anywhere in the U.S. (not just in the state of Delaware).
A DST is a legally-recognized trust in which property is held, managed, and invested. DSTs allow investors to pool together their 1031 exchange proceeds into the trust, making it an attractive investment option.
DSTs are commonly organized and sold (appropriated) as securities that must be acquired via a securities agent, or broker. DST brokers ordinarily work with sponsors to help investors make an informed choice about whether or not DST property proprietorship interest is good for you.
We point out the Delaware Statutory Trust advantages primarily for California investors because it allows them to save money on taxes. If you’re an investor with, say, 1-3 properties and you’re looking for budget conscious options, the Series LLC may be the solution you seek.
That said, the DST is available to investors from all locations. Advantages include:
The typical range you can expect to see on DST investments will usually be a fixed percentage based on the expectations on projections of the DST portfolio of properties. The rate of return is anywhere from 5-9% on your cash-on-cash monthly distributions.
One factor to consider is Delaware Statutory Trust appreciation rate of return, which is impacted by supply and demand and is often the most overlooked yield on your investment. A 1031 DST is typically held for 10 years or more, during which time you should see an appreciation—unless there’s been an economic downturn—in the double digits.
Investors should understand Delaware Statutory Trust tax treatment and go over various DST taxation topics with their CPA and tax attorney prior to making any investment decisions.
When you purchase an interest in a DST 1031 exchange property, you will get a year-end operating statement that shows their pro-rata portion of the property's rental income and expenses. Your CPA will enter the numbers into Schedule E of your tax return, along with any other rental and commercial investments you own.
Your basis in property is a specific value assigned to property at various points in time. It's used in determining your periodic depreciation deduction for the property, and in computing gain or loss when the property is disposed of.
With a 1031 exchange, if you fully depreciated the property you sold, the basis from the property you recently sold will carry forward into the new DST property you purchase. If you still have basis in the property you sold, or if you purchased a greater value in the DST properties than you had in the property you sold, you can take advantage of depreciation deductions to shelter the income from the DST properties.
When owning DST properties out of state, you will need to file state income tax returns in that state unless the property is in a state with no income tax filing requirements, such as Texas or Florida.
When a DST investment property eventually sells, you are free to purchase any other type of like kind real estate. “Like-kind property” generally means both the original and replacement properties must be of “the same nature or character, even if they differ in grade or quality.” In terms of real estate investing, you can exchange almost any type of property, as long as it’s not personal property. Many investors end up 1031 exchanging back into more DST properties when it is time to reinvest.
Many investors that are at or near retirement have already paid off their properties in full. Taking on more debt is not wise, especially considering the 1031 exchange rules. One of the 1031 exchange rules requires investors to purchase property of equal or greater value.That’s why investors who have paid off their properties in full should invest in DST properties that are all-cash/debt-free if they are able to do so—not using leverage/loans reduces the risk of loss.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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