If you are here, I’m hoping you already know that capital gains taxes on investment real estate can be deferred through 1031 exchanges. One way to take advantage of this strategy is through Delaware Statutory Trusts (DSTs), which provide several benefits for investors.
Benefits of using a DST in a 1031 exchange:
The main benefit of investing in a DST is diversification. DSTs offer access to a portfolio of different properties and asset classes, reducing an investor’s exposure to market risk. Additionally, DSTs are professionally managed so investors can focus on other things, and it can benefit those who need more time or resources to manage properties themselves. Lastly, DSTs can also reduce the amount of hands-on involvement required in the investment, which can be especially appealing to passive investors.
Risks associated with DSTs in 1031 exchanges:
While DSTs can provide numerous benefits, some risks are also associated with them. One of the primary risks is the need for more control investors have over the properties in the trust. DSTs can also be illiquid, making it difficult to exit the investment if needed. Lastly, there is always the possibility of losing the principal if the properties in the trust perform differently than expected.
Factors to consider before investing in a DST:
Before investing in a DST, it is essential to consider several factors. The management track record of the sponsor is crucial, as it can provide insight into how well they manage the properties in the trust. Additionally, it’s essential to consider the location and market trends of the properties in the trust, as this can impact their performance. Finally, investors should be aware of the fees and expenses associated with a DST, as these can impact overall returns.
While DSTs can be helpful in a 1031 exchange, they are not without risk. Investors should carefully consider the benefits and drawbacks of investing in a DST and thoroughly research potential investment opportunities. However, with careful consideration and due diligence, DSTs can provide a valuable option for real estate investors looking to defer capital gains taxes.