What is a Delaware Statutory Trust?
A Delaware Statutory Trust is a legal entity designed to hold institutional investment real estate that is actively managed by professional real estate firms. DSTs allow individual investors to perform a tax-deferred 1031 Exchange into a “beneficial interest” of the trust, also referred to as a “fractional interest” in a larger property or portfolio of multiple properties. Each individual DST is property-type specific. Typically, DSTs hold the following property types: multi-family apartments, essential net-lease retail, self-storage, net-lease medical office, industrial properties, student housing, senior housing or memory care.
DST managers, also referred to as the “Delaware Statutory Trust sponsors”, acquire the DST real estate and take care of all management activities, including structuring the DST, securing the long-term financing, day-to-day management decisions, financial and tax reporting, and the ultimate sale of the DST properties.
DSTs, as we know them today, were established through the Delaware Statutory Trust Act in 1988. Beneficial interests in Delaware Statutory Trusts were approved as “like-kind” real estate by the IRS in 2004 through the release of IRS Revenue Ruling 2004-86. The revenue ruling created a much-desired option for investment real estate owners who want to defer capital gains tax on real estate investment property through a 1031 Exchange, but do not want to assume the responsibility of day-to-day management. Furthermore, the Revenue Ruling allowed individual investors to pool their capital to own larger, higher-quality properties that would be too expensive for most single investors to acquire by themselves.
How Does an Exchange for DST Real Estate Work?
A DST 1031 Exchange begins with a professional real estate firm acquiring institutional quality DST real estate to be included in the trust. Once acquired, the trust is structured to allow accredited Investors the option to purchase beneficial interests in the trust with either cash investments or 1031 Exchange proceeds. Delaware Statutory Trust sponsors manage the DST property for the duration of the DSTs’ life, generally 3-10 years. Once the DST property is sold, the investors receive all sales proceeds and can choose to either pay tax on their proceeds, perform another 1031 Exchange into any investment property, or a combination of the two.
Delaware Statutory Trust Pros and Cons
For accredited* investment real estate owners who are considering selling their appreciated property, it may be beneficial to consider a DST as a replacement property when utilizing a tax-deferred 1031 Exchange. DSTs provide a unique and flexible solution to investment real estate owners looking to defer capital gains tax on real estate investment property while eliminating the active management of directly owned, Fee-Simple Property.
The following characteristics of DST ownership make these “fully structured and available” properties an option worthy of consideration for Exchange proceeds:
- DSTs are qualified 1031 Exchange properties
- Ownership requires no active management
- DST real estate tends to be high-quality “institutional” real estate
- DSTs often have low minimum investments
- Exchange proceeds can be diversified among multiple DSTs
- DST real estate has competitive potential cash flow, generally paid monthly to the owners
- DSTs have very low risk of not closing and invalidating an Exchange
Delaware Statutory Trusts are investments in real estate subject to the same market, leasing and competitor risks of traditional property. Most DSTs are illiquid and are more appropriate for long-term investments – typically 10 years or greater.
For a more comprehensive look at DSTs, including reviewing any associated risks, download our FREE guide, “Investing in Delaware Statutory Trust (DSTs)”.
* Defined by SEC as an individual with net worth (excluding primary residence) of $1,000,000+ or annual income in excess of $200,000 for last two years for an individual or $300,000 for a couple filing jointly.