Delaware Statutory Trusts (DSTs) offer a one-of-a-kind investment opportunity. DSTs, which are a type of fractional ownership, enable investors to expand their reach to larger properties in a quick and simple process. These trusts allow real estate investors to reap the benefits of ownership without having to take on property management responsibilities. They also qualify as a 1031 exchange, which provides significant tax benefits.
DSTs, on the other hand, will not appeal to all investors. These investments provide limited control and are subject to certain risks. Furthermore, due to their illiquid nature, they are only suitable for those looking for a long-term commitment. Consider the benefits and drawbacks of a Delaware Statutory Trust before deciding when and how to invest. Discover whether investing in a Delaware Statutory Trust is right for you.
Before delving into the benefits and drawbacks of a Delaware Statutory Trust, it’s critical to first understand what a DST is. A DST is a type of real estate investment in which multiple investors each own a portion of a property. In many cases, each individual investor could not afford to buy the entire property on their own. DSTs broaden investor capabilities in this way, allowing access to benefits that would otherwise be unavailable.
Investors in a DST have the right to receive distributions from the trust’s operations, which can be either rental income or the eventual sale of the property.
Benefits Of Delaware Statutory Trusts
For a variety of reasons, DSTs have become a popular investment option among real estate investors. Whether you’re looking for a 1031 exchange alternative or simply don’t want to deal with the tenants, washrooms, trash, and other responsibilities that come with traditional real estate ownership, the benefits of DSTs are plentiful.
Offer 1031 Exchange Eligibility
One of the main benefits of a DST is that it can serve as a 1031 exchange, giving the investor access to special tax benefits. Section 1031 of the United States Internal Revenue Service (IRS) Code outlines a taxpayer’s ability to defer capital gains taxes by swapping one property for another. The properties must be “like-kind”, which is defined as “similar in nature, character or class.”
Property must be held for use in trade, business or investment to qualify as like-kind. When you make a 1031 exchange, you keep your investment growing rather than paying out large portions to capital gains taxes. Since there are no restrictions on how many 1031 exchanges you can accomplish, you can defer your tax liability for as long as you wish.
Allow for the deferral of capital gains.
A 1031 exchange enables investors to defer capital gains, lowering their tax burden. You can defer payments forever with continuous investing. Instead of paying a substantial amount of every sale proceeds, you can keep your money working for you. You can continue to accumulate wealth by purchasing larger and better residences. DSTs are an easy way to accomplish this.
Professional management is in charge.
One of the reasons you might prefer a DST investment over other real estate options is that DST properties are managed by skilled specialists. The decision-making authority is held by a professional real estate business, which is suitable for investors who are not real estate professionals.
With DSTs, you can rest assured that the relevant managerial responsibilities will be handled by experts. Managing tenants, maintaining property upkeep, and doing routine maintenance are among these responsibilities.
Provide an Effective Form of Real Estate Fractional Ownership
A DST is a type of fractional ownership that permits a group of unrelated people to partake in a high-value asset that would otherwise be beyond of reach. This strategy allows investors to acquire larger, more expensive properties than they might otherwise afford while avoiding the risk of going over their financial limits. The opportunity to invest in large properties allows you to reduce risk by diversifying your portfolio into more commercial ventures while also reaping the benefits of investing in larger assets.
DST is a Fair Investment.
Another benefit of a DST is that it provides all investors with equal rights to the property. Because all investors benefit from property gains, DSTs have a significant advantage in terms of equity. Other sorts of investments may or may not grant equal rights. For example, a corporation’s stockholders do not own the company’s real estate.
Allow you to diversify your investment portfolio
Diversification is essential for any investment portfolio since it reduces risk while increasing the potential for higher returns. Diversification is possible with DSTs since small investments can be made in high-value properties. You may be able to invest in numerous DSTs or include a DST in a bigger portfolio because the entrance fees are cheaper than if you were purchasing entire properties. DSTs are a simpler asset to handle because decision-making is left to the property management staff.
Cons Of Statutory Trusts In Delaware
DSTs have potential drawbacks, despite the fact that many investors find them useful and desirable. DSTs, like any other investment, come with risks that must be considered. Furthermore, a DST’s nature as a fractional investment with limited ownership may not be appealing to many investors. Before selecting whether or not to invest in a DST, you must first grasp its potential drawbacks. The following are some of the potential drawbacks of DSTs:
When you invest in a DST, the IRS prohibits you from having direct operational control of the property, which means you have no decision-making authority. This constraint prevents investors from pursuing competing goals. This stipulation irritates some investors, who would prefer to invest in properties that allow them to gain operational control.
Restricted control, on the other hand, can be advantageous. Investors with huge portfolios or non-real estate skills will not have the time or ability to take on managing responsibilities. These investors won’t have to worry about that part of real estate investing with a DST. Furthermore, entrusting authority to real estate management professionals may assist secure the investment.
Risks of Execution
Execution risks are also associated with Delaware Statutory Trusts. DST 1031 exchanges necessitate completing a transaction in a short period of time, which, while advantageous to investors, leaves little room for error. A single blunder could render the exchange unviable. Again, working with an expert partner with a track record of successful 1031 exchanges is the best way to mitigate this risk. They can assist you in understanding the process and selecting a reputable intermediary.
Lack of liquidity
Another disadvantage of DSTs is their lack of liquidity. While liquid assets can be sold or exchanged for cash at any time, DSTs and other real estate investments typically necessitate a long-term commitment. Investors seeking a quick return should consider other options, such as a publicly traded Real Estate Investment Trust (REIT).
Before deciding on a DST, consider whether you are able and willing to hold the investment for the duration of the programme, which can last anywhere from five to ten years on average. If you decide to sell your ownership before the programme ends, you may have difficulty finding a buyer and agreeing on a price.
Requirement for Accredited Investors
You must be an accredited investor to invest in a DST. According to the Securities and Exchange Commission (SEC), an accredited investor must have a yearly income of $200,000 or more, or a joint income of $300,000 or more. Accredited investors must have a net worth of at least $1 million, regardless of income. Investors who do not meet these criteria must seek out alternative investment strategies.
One of the most difficult challenges for 1031 Delaware Statutory Trust investors is that the IRS and Congress have imposed stringent regulatory restrictions on all 1031 exchanges. It can be difficult to ensure that your 1031 exchange is in accordance with IRS regulations, and failure to do so may result in financial and legal penalties. Make certain that you have a thorough understanding of 1031 exchanges and the restrictions that apply to them.
Keep in mind that tax laws and restrictions are always subject to change, so it’s critical to stay informed throughout the life of your investment. Working with a reputable partner who specializes in like-kind exchanges is beneficial to investors.
Connect to our experts at Investment.net for any further guidance.