Real Estate Investors have been hearing more about Delaware Statutory Trusts (DSTs) as a tool for reducing taxes in investment real estate transactions. You might be wondering what they are, and what role they might play in reducing your tax liability. To get some answers, I met with Katelen Weisenberger, Vice President Central California for Kingsbarn Real Estate Capital to discuss how using DSTs might be able to benefit my clients.
As a real estate investor, you are probably already aware that a 1031 exchange is a powerful tool that allows you to defer capital gains taxes on the sale of an investment property by reinvesting the proceeds into a new, like-kind property. While there are several options for replacement property in a 1031 exchange, one option that has become increasingly popular in recent years is a DSTs. In this blog post, we'll explore the role that DSTs can play in a 1031 exchange.
What is a Delaware Statutory Trust (DST)?
A DST is a legal entity that is created under Delaware law. It is a form of ownership structure that allows multiple investors to own fractional interests in a property. The DST holds legal title to the property, and the individual investors own beneficial interests in the trust. The DST is managed by a trustee or sponsor, who is responsible for managing the property and making investment decisions.
How does a DST fit into a 1031 exchange?
When a real estate investor sells a property and reinvests the proceeds in a new property through a 1031 exchange, they must identify potential replacement properties within 45 days of the sale and complete the exchange within 180 days. One option for replacement property is a DST.
Investing in a DST allows the investor to own a fractional interest in a professionally managed, institutional-grade property without having to purchase an entire property on their own. The DST sponsor or manager is responsible for the day-to-day management of the property, which can be a significant benefit for investors who do not have the time or expertise to manage a property on their own.
In addition, investing in a DST can help investors diversify their real estate portfolio. DSTs may offer exposure to different property types and locations than the investor's existing properties, which can help spread risk and potentially increase returns.
From a tax perspective, investing in a DST through a 1031 exchange can offer potential tax benefits. By using a 1031 exchange to invest in a DST, the investor can defer capital gains taxes on the sale of their existing property. Additionally, DSTs may offer other potential tax benefits, such as depreciation deductions and the ability to write off expenses related to the investment.
One issue that many investors fear is a failed 1031 exchange which occurs when a seller is unable to secure a replacement property in time. According to Katelen Weisenberger, 40-60% of all 1031 Exchanges do not succeed. Having a DST identified as a potential replacement property can be a good back-up plan incase other desired replacement properties don't work out. DSTs can also be a good option rather than paying taxes on the boot of a 1031 Exchange.
It's important to note that investing in a DST carries inherent risks, and investors should thoroughly research and evaluate any investment opportunity before making a decision. DSTs are not suitable for all investors and may have specific suitability requirements that must be met. Investors should consult with their financial and tax advisors to determine if a DST is a suitable investment for their particular circumstances.
Please reach out to me at email@example.com or at 415.710.4047 if you would like to discuss your options for buying or selling investment property here in Marin County, California, or for an introduction to an agent in my network in your local market.