What is a Delaware Statutory Trust and Why So Many Real Estate Investors Are Interested in Them?
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e recently participated in the 50th Annual Apartment Association of Orange County Trade Show & Conference, in Costa Mesa, and were pleased to see so many people stopping by our booth asking about Delaware Statutory Trust 1031 exchanges. However, because we found ourselves answering the same questions again and again from some very experienced investment property owners, we thought it might be a good idea to write about the three most commonly asked questions we heard 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.
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Apartment News
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 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
www.aaoc.com
November 2021
BY MATT MCFARLAND, VICE PRESIDENT, AND THOMAS WALL, ASSOCIATE, KAY PROPERTIES & INVESTMENTS
aware of including things like economic downturns, vacancies, tenant repairs, etc. 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 taxdeferred 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. Increased cash flow potential Many investors of real estate may be unhappy with the amount of cash flow
