1031 Knowledge Base

Understanding Delaware Statutory Trusts. DST's are an efficient way to reinvest your 1031 proceeds

26 Aug, 2019
By: Ray Simmons

Why This Is Important

A Delaware Statutory Trust, or DST, has become a very effective tool for helping real estate investors accomplish their goals in 1031 exchanges. In fact, it is so effective that I feel my web page would be incomplete without a brief explanation of what a DST is. That being said, almost all the goals that can be accomplished with a DST can also be accomplished with other types of real estate.

What Is a DST?

A DST is a vehicle that can be used to exchange different types of real estate. A company called “the sponsor” acquires a property and sells off portions to real estate investors like yourself. For example, you could purchase a small interest in a 160-unit garden apartment complex. You would own the property, along with up to 499 other investors. In most DSTs, there are 75 or fewer investors.

The Benefits of DSTs

DSTs and their forerunners, TICs, started out as a way for real estate investors to exchange out the management (and maintenance) responsibilities of real estate ownership. DSTs not only allow you a lot more freedom but also provide more cash flow than smaller investments owned by a single person. They allow you to acquire debt in an exchange without being liable for it. Additional debt creates trade-up basis, which can be useful in creating more deductions to shelter boot and/or cash flow and save money on taxes.

DST vs. Partnership

A DST has many investors owning a single property. As such, many people first learning about DSTs think it’s a partnership. It is not. Rather, a DST is a special kind of investment trust that allows for common investment in an asset. Unlike with a DST, you can’t exchange into a partnership.

The IRS states that as long as you follow the rules for an investment trust, it will not be considered a partnership. They place many restrictions on investment trusts. Investors in a DST have to be completely passive. They can’t manage, refinance, or invest more money into the property.

Sponsors build safeguards into investment trusts to protect investors in the event of unforeseen circumstances. For example, if the property needs to be refinanced, there is a procedure to take the property out of the DST.

Conclusion

DSTs are both another way of owning real estate and a very effective tool for tax planning. Whether or not they are the right tool for you depends on your circumstances. One key decision to make when planning an exchange is what type of property is appropriate. As you read through the case studies on this website, you will see that many times, a DST can be helpful, but it is not always the right choice.

Your referral partner, who is listed above, and I would both be happy to have a conversation with you to discuss what types of property are most appropriate in your situation. Simply give one of us a call to set up a conference time. If you would like more specific information on DSTs, I can also refer you to people who sell them whom you will find very helpful.

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