What is a DST?
DST(Delaware Statutory Trust) is a legal entity founded under Delaware law that permits investors to possess undivided fractional ownership interests in professionally managed institutional-grade real estate offers in the United States. Individuals or entities can own the interests, and DSTs are only offered and available to accredited investors and entities.
Key Takeaways
- DSTs are eligible 1031 exchange replacement property options that allow investors to purchase partial ownership of a group of Grade-A performing real estate assets.
- DSTs can help you earn regular passive income, diversify your investments, defer capital gains taxes and allow you to eliminate landlord liabilities.
- Moreover, DSTs can offer complete replacement from your relinquished property and act as a back-up plan, when planning to do a 1031 Exchange.
The top 10 reasons why individuals prefer DSTs as 1031 exchange replacements:
1) Potential Better Overall Returns and Cash Flows
Many real estate investors may not be earning as much money as they believe. To calculate cash flows, investors can take their net rental income from Schedule E, add back depreciation, and subtract the principal component of their payment. Then reduce that figure by the property’s market value. For example, if one had net rental income of $50,000, depreciation of $10,000, and principal payment of $10,000, the net total would be $50,000. If the property is worth $1 million, the investor will receive a 5% cash flow. DSTs may provide a higher income flow and risk-return profile while providing an investor with a passive option.
2) Tax Planning and Preserved Step-Up in Basis
DSTs provide the same tax benefits as real estate that an investor would own and control. DST investors are charged a proportionate part of depreciation and amortization. DSTs can be traded into another DST in the future using a 1031 exchange. DST holds a duration range between five and seven years. When considering DSTs as a 1031 exchange alternative, consult with your tax consultant for more information and particular tax advice.
3) Diversification
Within a single DST structure, many DST holdings possess various assets. For example, an investor could swap one apartment building for a portfolio of 5 to 10 Walmart stores or Walgreens, as well as other single-tenant triple net leases inside a DST structure.
Did You Know? Apart from helping you defer the capital gains taxes and conduct a successful 1031 exchange, a DST can also be a great option if you are looking to expand your portfolio and diversify your investments.
4) No More Need to Manage Properties
We occasionally hear of an aged client who no longer has the health, time, or interest to handle their real estate interests. DSTs can provide an excellent passive choice while still allowing you to invest in real estate.
5) Freedom
Passive investing provides elderly real estate owners with the time and liberty to travel, pursue other interests, spend more time with family, or relocate to a location far from their current real estate assets.
6) As a Backup Plan
An investor may be unable to find a suitable replacement property for their 1031 exchange in a competitive real estate market. DSTs are an excellent choice and should be named/identified in an exchange for that reason alone. After selling a property, a real estate investor has 45 days to find a replacement and 180 days to close before the IRS cancels the tax-free transaction.
7) Capture Equity in a Competitive Market
When markets are at all-time peaks, investors may take their profits and reinvest them using the leverage provided by a DST offering.
8) Protect the Family
A family is exposed when just one spouse understands how to manage real estate investment assets. Passive DSTs effectively outsource management, which can protect a family if one spouse loses the ability to look after their interests.
9) Avoid Recurring Repairs on Actively Managed Property By Going Passive
Real estate investors are aware that they may have to replace pricey roofs and air conditioning units, perform foundation repairs, face potential lawsuits, and incur other unexpected expenses as a result of investing in real estate. DSTs may shield investors from these types of unforeseen costs.
10) A Significant Aspect of Retirement and Estate Planning
DSTs can offer a number of retirement, tax, and estate planning benefits. To mention a few advantages, DSTs can give investors and their retirement planners passive income, the elimination of personal liability, flexibility, the ability to manage cash flows, and asset transfer.
