When it comes to 1031 exchange investments, Delaware Statutory Trusts (DST) are slowly gaining prominence. These arrangements can provide a plethora of benefits that traditional 1031 exchanges might not offer. A DST allows the individual investor to assume a fractional ownership of a larger income-producing property where the investor’s responsibility is limited to their share of ownership. Navigating delaware statutory trust 1031 can be a different ball game than regular real estate investments, and we’re here to provide that clarity.
What is a Delaware Statutory Trust (DST) for 1031 exchanges?
Unlike a traditional 1031 exchange, DSTs allow individuals to acquire fractional ownership over a larger asset without possessing legal ownership of the property. A specific Sponsor or Trustee owns and manages the property on behalf of the investor. DST properties can range from multifamily apartments, shopping centers, office buildings, and any other commercial real estate asset.
How does Delaware Statutory Trusts (DSTs) work for 1031 exchanges?
Delaware Statutory Trusts or DSTs allow 1031 investors to invest in large commercial properties that would require significant amounts of capital to acquire. In a DST, the investor owns shares in the asset rather than the property. The DST will typically acquire a property, manage the property, and then distribute the rental income to the shareholders according to the percentage of the investor’s ownership. A DST is entirely passive, meaning that the investor has no say in the way the asset is managed.
What are the benefits of using a Delaware Statutory Trust for 1031 exchanges?
One of the benefits of DSTs is that they’re much easier to manage as opposed to a direct ownership structure. A passive investor can sell their share of the DST through the sponsor or through exchanges without facing additional legal or financial issues. DST in comparison to traditional real estate investments provides a sense of diversification in property types, location, and management. DST’s asset pools have a broader scope, and inflation can aid in capital appreciation of the property owned by the DST.
What are the risks of investing in Delaware Statutory Trusts for 1031 exchanges?
As a passive investor in a DST, the investor will have limited control over the asset. The manager will make all decisions regarding the property, and investors only have voting rights under specific circumstances. DST’s suffer management fees, which can impact the investor’s profitability. Unless distributed, income generated by a DST is taxed to the investor. Additionally, If the property loses value, investors risk losing their principal investment. DSTs may not be the perfect investment for everyone, and it’s essential to evaluate the risks proactively.
Delaware Statutory Trusts have become a popular option for 1031 exchange investors. However, DSTs have their unique set of benefits and risks, and it’s vital to analyze your investment objectives, tolerance for the standard of risk, and the available alternatives. Educate yourself, ask questions, and consult with professionals to figure out if Delaware Statutory Trusts are suitable for your investment strategy. Fortunately, with proper understanding and guidance, Delaware Statutory Trusts for 1031 exchanges can be an excellent way to passively invest in commercial real estate.