What Are the Potential Benefits of DST Ownership?
A Delaware statutory trust (DST)—a unique real estate investment vehicle that allows a group of individual investors to purchase fractional interests in a large commercial real estate asset—offers several potential benefits.
Investors have the opportunity to continue to invest in real estate without the headaches of active management.
DSTs provide investors with the potential for stable cash flow throughout the life of their investment. Returns can fluctuate based on market conditions.
A DST can be used by investors in a 1031 Exchange to defer capital gains on appreciated real estate.
Since the IRS qualifies DSTs for 1031 Exchange purposes, you can exchange out of a DST when it comes time to sell, and you’ll keep deferring taxes.
A property owner who conducts multiple 1031 Exchanges and makes unrealized gains on each exchange will be able to reinvest the deferred capital gains on each subsequent exchange. A property owner who holds exchanged property until death avoids the deferred tax liability and his or her heirs inherit the property with a “stepped-up” tax basis. Stepped-up basis refers to a tax policy that looks at the market value of assets at the time a person inherits them instead of the value when the prior owner purchased the assets.
Because capital gains taxes are deferred, the investor has a higher adjusted basis, creating greater leverage than if the tax liability was paid on a current basis. This may increase the investor’s available equity for reinvestment.
An investor can exchange property that has reached a plateau for one that is on an upswing. An unproductive property can be exchanged for an income-producing property. A property that has been depreciated can be exchanged for a more expensive property which has more room for additional depreciation.
Investors can exchange one property into many DST properties (subject to investment minimums), offering additional asset type and geographical diversification.
Individual investors can access ownership in larger commercial properties that have traditionally been accessible only to very wealthy individuals, pension funds, insurance companies, and other institutional investors.
Matching the amounts required by a 1031 Exchange via an individual property can be challenging. DSTs provide the flexibility to “right-size” an investor’s 1031 Exchange amount requirements in both equity and debt.
Individual investors do not need to be underwritten or qualify (other than being an accredited investor). The sponsor will generally be the signatory trustee of the DST. DST sponsors are established investment real estate firms with strong lender relationships, allowing them to obtain very favorable terms for their clients.
A DST is structured so that investors are protected from personal liabilities beyond the amount of their investment.
