A Delaware Statutory Trust is a real estate ownership structure where multiple investors each hold an undivided fractional interest in the holdings of the trust. A DST sponsor is the real estate company behind the trust. Triple net lease (NNN) properties and tenancy-in-common (TIC) agreements may offer similar benefits to a DST, but have some notable differences as well. A 1031 Exchange, named for Section 1031 of the U.S. Internal Revenue Code, is a transaction approved by the IRS that allows real estate investors to defer the tax liability or capital gains taxes on the sale of investment property. By acquiring high-quality institutional property in cities with strong projected growth, DSTs can focus on seeking to preserve investment value and greater income potential for investors. This can allow investors to own professionally managed properties . First National Realty Partners is one of the countrys leading private equity commercial real estate investment firms. By the end, readers will have the information needed to determine if a DST is a suitable fit for their own investment objectives. Delaware Statutory Trusts: An Innovative 1031 Exchange Solution What's a DST? As Chief Exchange Strategist, Austin leads the firms team of licensed 1031 Exchange advisors and analysts. All of these details are important for investors to note when choosing and vetting a potential DST investment. 1, 102 N.E. The trust is established by a professional real estate company, referred to as DST sponsor, who first identifies and acquires the real estate assets. Through these private placement programs, IPCC has raised more than $5.5 billion in equity from over 9,000 investors. Delaware Statutory Trusts typically require a minimum investment of $100,000, and an investor can acquire or exchange into ownership in one or multiple DSTs. Any unused cash reserves held upon the sale of the property must be distributed to the trust investors. For additional information please contact, Add a header to begin generating the table of contents, For example, one DST may own a portfolio of class A multifamily apartments, while another may own an industrial building like an. DST investments are offered by a wide variety of real estate investment companies, including private equity firms. Given the DST Sponsor has already acquired the properties within a Delaware Statutory Trust, investors can purchase the beneficial interests in the trust quickly compared to many other replacement property options. Given the DSTs unique legal structure, there are several scenarios in which DST investors should consider their potential tax liability: income and capital gains, depreciation, 1031 Exchanges, and the requirement to buy a property of equal or greater value. Real Estate Tip: 1031 Delaware Statutory Trusts | Kiplinger Such offers are only made through the Sponsors Private Placement Memorandum (PPM) which is solely available to accredited investors and accredited entities. They are formed with private trust agreements under which real property is held, managed, administered, invested, and/or operated.. Delaware Statutory Trust (DST) Risks & Fees - 1031 Exchange Marketplace The weighted average lease term of portfolio is 12 years. Non-recourse debt. Once the relinquished property is under contract, the investor can engage a Qualified Intermediary to facilitate the exchange. The statutory definition of "Statutory Trust" generally incorporates the common law concept and the modern requirements of a written instrument and the filing of a document with the secretary of state. Why Every Real Estate Investor Should Know About DSTs That piece of commercial real estate produces a regular stream of income and, if the investment is successful, a big capital gain when the property is sold at the end of the, At the end of each tax year, DST real estate investors receive two documents from the transaction, An operating statement that details their pro rata share of the propertys rental income and expenses. As the amount of invested funds increases, the trusts ownership decreases, and the properties are wholly owned by the investors. Capital gains taxes, which are owed any time an investor makes a profit from the sale of a property, can lead to a major tax liability that can greatly reduce the profits generated. The investor is not underwritten for the debt on the property owned by the DST. Delaware Statutory Trust: 16 Important Things You Need To Know A-51.An employer contributing to HSAs of employees who work full-time for less than twelve months, satisfies the comparability rules if the contribution amount is comparable . Low minimum investment: DSTs typically have a minimum investment of $100,000 for 1031 exchangers and $25,000 for cash investors. Please speak with your own tax and legal advisors for advice/guidance regarding your particular situation. DSTs are also a popular passive real estate investment offering ownership in institutional-quality properties with minimal landlord responsibilities. Calculating the tax liabilityon the property you are selling is generally the first step in the Exchange process. The real estate sponsor is responsible for organizing . Trustees can only make capital expenditures to the underlying real estate for purposes of normal maintenance, repair and non-structural capital improvements. There are four scenarios in which investors should be aware of the tax implications of a DST investment: income and capital gains, depreciation, cost basis, and future 1031 exchanges. There is no limit to the number of 1031 Exchanges that an investor can complete. How Does a 1031 Exchange Work? As a result, available investment capital can be spread across multiple DST properties, which lowers overall risk and increases. The DST sponsor has total control over the length of the investment and the exit. The taxes applied to taxable gains are as follows: Section 1031 of the U.S. Internal Revenue Code, diversification among different DST property types, No additional capital contributions after DST offering closes, Trustees cannot renegotiate DST loan terms, Trustees cannot reinvest DST sales proceeds, Capital expenditures are limited to standard repairs, Cash reserves must be invested in short-term debt, Cash must be distributed to beneficiaries on a current basis, request access to our catalog of open DST offerings, Sponsor property acquisition due diligence, Marketing and distribution costs (commissions), Sourcing a tax opinion letter to confirm that the trust qualifies for 1031 purposes, Commissioning a third-party due diligence report, The exchange must be set up before a sale occurs, The exchange property must be of equal or greater value for full tax deferral, The property owner must pay depreciation recapture tax and / or capital gains tax on boot, The taxpayer that sold the relinquished property and acquired the replacement property must be the same, The property owner has 45 days following the close of the relinquished property to identify replacement properties. Some real estate investors have long understood the importance of taking advantage of legal tax breaks and tax deferral options. ExchangeRight strategically acquires and manages long-term, net-leased assets backed by investment-grade corporations that operate in the necessity-based retail and healthcare industries. The trust cannot enter into new leases or restructure leases unless due to tenant bankruptcy or insolvency. Another important milestone within the 1031 Exchange timeline is the180-Day Rule. Nearly all commercial real estate property types are held as DST properties, including the four major property typesmultifamily, office, industrial and retailas well as niche property types, like senior housing, medical office and self-storage. Sponsors typically review many properties and complete all financial modeling, environmental reporting, appraisals, and other due diligence before selecting assets that will be held within trusts. The IRS limits the number of co-investors in a TIC agreement to 35, per Revenue Procedure 2002-22. Delaware Statutory Trust (DST) Tax Treatment & Reporting | FNRP The investor is still responsible for management of the common areas, like parking lots or outdoor dining areas, and for hiring vendors, like security and janitorial staff. Black Creek has about 67 million square feet of national footprint across 29 markets. DST real estate is generally held for 3 to 10 years. However, DSTs typically close within 3 to 5 business days following the sale of the relinquished property a significant advantage considering strict 1031 exchange rules and deadlines. It is not uncommon to see discounts ranging from 20% to 30%, which can serve to reduce potential estate taxes. DST real estate is generally held for 3 to 10 years. From an investors standpoint, Delaware Statutory Trusts may offer a less complicated and expedient closing process than other passive real estate options. A Delaware Statutory Trust (DST) is a specialized type of trust, formed under Delaware law, for the specific purpose of conducting business. All Rights Reserved, For individual real estate investors, there are a number of strategies that can be used to defer, which allows investors to defer taxes on the sale as long as they reinvest the proceeds into a replacement property that is considered to be , Under IRS rules, the replacement property must be identified within 45 days of sale and the transaction must be closed within 180 days. Over the last two decades, commercial real estate (CRE) has taken an esteemed seat at the investment table alongside equities, bonds and cashand it is clear why. Bluerock Value Exchange(BVEX) is a national sponsor of syndicated 1031 exchange offerings with a focus on Class A assets that can deliver stable cash flows and have the potential for value creation. See if Delaware Statutory Trusts are right for you. Delaware Trust - Trust and Estate | Northern Trust The investor is shielded from personal liabilities beyond the amount of their investment, similar to an LLC or corporation. Following the exchange, not only did Howard and Lee Anne achieve their objectives of diversification, full tax deferral, elimination of active management, but they also acquired a portfolio that produced $172,200 of annual income (a 5.59% return on equity). A Delaware Statutory Trust is a specialized type of company formed for the purpose of real estate investment. . This industrial DST property is a triple net lease commercial property located in the Midwest. Internal Revenue Bulletin: 2004-33 | Internal Revenue Service Consider consulting a 1031 Exchange Advisor before selling your investment property to ensure compliance with1031 Exchange rules, a detailed understanding of your tax liability, and availability of suitable DST properties that seek to meet your financial and lifestyle goals. The portfolio offers a total of 430,757 rentable sq. Listen. Understanding Delaware Statutory Trusts (DSTs) - SmartAsset Howard and Lee Anne acquired a 10-unit apartment building for $850,000 in a Seattle neighborhood on January 1, 1992. As part of their due diligence process, DST investors must research the firms structure and how it can impact the success of the investment. Through a step-up in basis, beneficiaries can defer capital gains, depreciation recapture and net investment income tax upon the death of an owner. What is a Delaware Statutory Trust? | Harvard Business Services For example, if the relinquished property has a value of $1MM and a mortgage of $500M, there is $500M in equity. Once the DST property has been acquired, a number of parties perform due diligence on the property and trust structure. Posted by Clay Schmidt on Dec 17, 2021 Some real estate investors have long understood the importance of taking advantage of legal tax breaks and tax deferral options. Individual investors then purchase interests of ownership within the trust. In most cases, this effort involves: Once the purchase transaction is closed, the sponsor will arrange for a related subsidiary to act as the master tenant responsible for all leasing and property management/asset management activities. How Does a Delaware Statutory Trust Work? . Then, the sponsor offers shares to investors. But, to complete the purchase they need capital, which is where real estate investors come into play. When a Delaware Statutory Trust investment is used as a replacement property in a 1031 Exchange, the investors cost basis from the relinquished property carries forward into the new DST property in which they purchase a fractional interest. In theory, they could be completed indefinitely for maximum tax deferral. Statutory Trust vs. Common Trust Once the properties are identified and the purchase is complete, the trust then opens up the investment pool. Delaware Statutory Trust Fees: An Investor's Guide by FNRP If there is any disagreement about a major decision, the sponsor will prevail. it wasnt fully depreciated), or if they purchased DST properties with a greater value than what they sold, they can use depreciation to reduce the amount of taxable income produced by the property. At First National Realty Partners, we leverage years of expertise and hundreds of transaction repetitions to minimize a propertys tax liability for our investors. Get instant access to all of our current and past commercial real estate deals. Nestled adjacent to a golf course, the community offers a unique live-work-play opportunity for residents. With an intentional focus on finding world-class, multi-tenanted assets well below intrinsic value, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in. The reason that DSTs are popular with real estate investors seeking tax deferral is that IRS Revenue Ruling 2004-86 states that a DST investment qualifies as a like kind replacement property in a 1031 Exchange. Real Estate Transition Solutions is constantly analyzing DST sponsors and offerings to recommend 1031 Exchange properties that seek to align with each investors financial and lifestyle goals and replacement property preferences. DSTs are sophisticated investments, and to invest in one, you must be an accredited investor,which the SEC typically defines as an individual with a net worth (excluding ones primary residence) of $1 million or an average annual income in excess of $200,000 for the last two years for an individual or $300,000 for a couple filing jointly. While the 1031 Exchange tax benefit can be significant, it is common for real estate investors to experience difficulty finding a suitable replacement property in such a short period of time. Understanding what these trusts are and how they can provide tax relief is a tool for real estate investors. To defer tax, the proceeds from the sale of the relinquished property must be reinvested into another like-kind replacement property of equal or greater value within 180 days of the closing date of the relinquished property. When owning property out of state, you typically will need to file state income tax returns in that state. It is a method used to help manage investment risk. DST investments can be closed as quickly as 5 days, which easily satisfies this time requirement. The information herein has been prepared for educational purposes only and does not constitute an offer to purchase or sell securitized real estate investments. : Finally, the popularity of DSTs is closely tied to the fact that they can be used as a replacement property in a 1031 Exchange. In general, you must identify replacement property(ies) within 45 days from the date of sale, and close on the purchase of the replacement property(ies) within 180 days. The Tale of Two DSTs - Delaware Statutory Trust vs Deferred Sales Trust One of the most popular is known as a 1031 Exchange which allows investors to defer taxes on the sale as long as they reinvest the proceeds into a replacement property that is considered to be like kind to the sold property. Under IRS rules, the replacement property must be identified within 45 days of sale and the transaction must be closed within 180 days. Because there is some complexity to their creation, DSTs are set up . Investors in a TIC property agreementdirectly source, acquire and operate the property. Copyright 2023. Delaware statutory trusts are formed as private governing agreements under which either (1) property (real, tangible and intangible) is held, managed, administered, invested and/or operated; or (2) business or professional activities for profit are carried on by one or more trustees for the benefit of the trustor entitled to a beneficial interes. Several properties will be carefully analyzed by the DST sponsor before selecting the best property for an offering. : Sponsors have the expertise, experience, and industry relationships needed to correctly set up the DST and find suitable properties for real estate investors. At First National Realty Partners, we actively work with our investors to minimize tax liability whenever possible. While the 1031 Exchange tax benefit can be significant, it is common for real estate investors to experience difficulty finding a suitable replacement property in such a short period of time. Delaware statutory trust - Wikipedia To learn more about our current investment opportunities. DST sponsors may or may not be a private equity firm. DST investors own a beneficial interest in a trust, which owns a piece of commercial real estate. DSTs differ in terms of property types and quality, portfolio size, the terms of the master lease agreements and the quality of the sponsor. 2023 Baker Tilly US, LLP, Investment in professionally managed institutional grade assets. Shows Delaware Statutory Trusts: Pros and Cons by Carl Zoellner Using Delaware Statutory Trusts (DSTs) in California In this episode of Coffee with Carl, attorney Carl Zoellner discusses how Delaware statutory trusts can be used in California and the benefits of this strategy. This office DST is a large 11-story absolute net lease office building located in the Midwest suburbs. What Investors Need to Know About 1031 Exchanges and the Delaware Any differences between these two values may trigger a taxable event. How Does a Delaware Statutory Trust Work? The relinquished property was valued at approximately $3,200,000 and was producing a net income of $110,000 per year and a return on equity of 3.4%. A trustee of the DST initially purchases the property and takes title. The portfolio included an allocation of: The portfolio had a total loan-to-value of 55%. The DST sponsor develops a plan for building a portfolio of assets, which may focus on a specific sector or asset class. A Delaware Statutory Trust (DST) is a real estate investment vehicle that provides individuals access to commercial investment properties that can be significantly larger than what they could acquire on their own. Passco Companies is directed by a team of dedicated senior real estate professionals whose experience in the business averages 38 years, and who, collectively, have acquired over $35 billion in investment real estate. In part two of our investors guide to a 1031 exchange via a DST series, learn how to execute a 1031 exchange, calculate boot and document identified replacement properties. Hypothetical example(s) are for illustrative purposes only and are not intended to represent the past or future performance of any specific investment. Each of these are discussed in detail below. As long-term, income-focused investments, DST performance is largely dependent upon the tenants ability to pay rent. Once you are comfortable with the types of replacement properties available, select a realtor/broker to get your existing investment property (relinquished property) listed and under contract. The trust is exempt from SEC registration and sells shares only to institutional investors, such as large pension funds, or accredited investors. Not all DST investments can be marketed directly to the public because of SEC regulations. A Delaware Statutory Trust is a specialized type of company formed for the purpose of real estate investment. Delaware Statutory Trusts solve a lot of the headaches of owning and managing rental properties, but real estate investors are looking at them for more reasons than just that. : DST investments are only available to accredited investors, who meet certain income and net worth requirements. This presents a few notableDST risksincluding lack of liquidity, interest rate risk, and changing market conditions. How does a DST work? Understanding the tax liability on your relinquished property is generally the first step in the1031 Exchange process. This allows real estate investors to defer paying capital gains taxes on the sale of an investment property, often resulting in significant savings. When the sale of the property closes, the qualified intermediary holds the proceeds from the transaction and releases the proceeds to acquire the selected replacement property. For individual real estate investors, there are a number of strategies that can be used to defer capital gains taxes on the profitable sale of an investment property. Diversification does not guarantee a profit or protect against a loss in a declining market. Delaware welcomes out-of-state trust funds and . The Delaware Statutory Trust Act. It is critically important to note that 1031 Exchange rules, and the internal revenue code in general, can be very complex and may be applied differently to each individual taxpayers situation. The 255 private placement programs include 716 property acquisitions and 120 property dispositions among 44 states servicing over 12,500 investors. : DST investments are only available to accredited real estate investors, who meet certain income and net worth requirements. Delaware Statutory Trusts can be a versatile real estate investment opportunity that investors have available to them. At the end of each tax year, DST real estate investors receive two documents from the transaction sponsor: In other words, the income and capital gains received from the DST is mixed with an investors other sources of income and deductions to determine their income tax liability in a given year. By providing your email and phone number, you are opting to receive communications from Realized. This article was originally published on April 12, 2021 and updated on June 21, 2023. Under the IRSs property identification rules for 1031 exchanges, investors can reinvest the proceeds from an investment property sale into multiple DSTs, creating immediate investment diversification among different DST property typesand locations. Even though investors eventually obtain a majority or total ownership of the properties, the Sponsor is still obligated to handle all of the management necessary for the properties that are held within the trust. The Ultimate Guide to a 1031 Exchange DST ft. spanning across 5 acres. As part of their due diligence process, DST investors must research the firms structure and how it can impact the success of the investment. What is a Delaware Statutory Trust and Why Should You Consider It? Delaware statutory trusts allow for a type of 1031 exchange that makes an opportune vehicle for passive investing in real estate. For the average investor, however, commercial real estate can feel financially out-of-reach and management intensive. If an investor has multiple DST properties, in multiple states, they may have to file multiple state tax returns. The biggest challenge of investing in a DST may be in finding one. Less original purchase price plus capital improvements, Equals net sales proceeds less original tax basis, Equals federal capital gains and net investment income tax plus state capital gains tax, Equals tax applied to accumulated depreciation. Identifying a suitable replacement property can be a challenging and stressful process. Alternative investments have higher fees than traditional investments and they may also be highly leveraged and engage in speculative investment techniques, which can magnify the potential for investment loss or gain and should not be deemed a complete investment program. Any rehab or improvements that need to be performed on the property, the process of advertising the property to attract tenants, repairs, maintenance, rent collection, and other aspects of property management are all the responsibility of the trust. This can mean that individual investors require a larger equity stake to buy into the property, and it can be challenging to acquire large, institutional-grade assets with only 35 investors. All the debt was 10-year fixed rate debt that was non-recourse with interest rates ranging from 2.84% 3.85%, depending on the offering.