What is a Delaware Statutory Property?
Delaware statutory property investments in real estate ownership structures made by multiple investors. These investors hold undivided fractional interests in the holdings of the Delaware Statutory trust.
How does a Delaware Statutory Trust Work?
A DST is first established by a DST sponsor who identifies and acquires real estate properties. Individuals then invest in these properties, displacing the sponsor’s capital to purchase the property until the investors eventually own it. The investors hold a percentage of the ownership hence own a beneficial interest in the trust.
What is a 1031 Exchange?
DSTs are eligible for 1031 exchange. The 1031 exchange is a transaction that the IRS approved. This allows real estate investors to defer tax or capital gain taxes when an investment is sold. For a 1031 exchange to legally happen, interests from the sale must be reinvested into another property within 180 days of the closing date of the relinquished property. The property can be of equal or more excellent value.
Deferring taxes allows the investors to preserve their equity from the sale. Specific properties, however, are not considered under the 1031 exchange. These are primary residences, inventories, partnership interests, indebtedness, stocks, securities, and notes.
DST Explained
The dst 1031 exchange process begins with finding a qualified intermediary before you sell the property. You can then list the property you want to sell. Before selling the property, ensure you identify a potential replacement. You must do this within 45 days of the sale date of the first property.?
Once that is complete, you can now purchase the replacement property through payment and retitling of the property. This process has a deadline of 180 days from start to finish. If you acquire the replacement property before the first one sells, the property must be held by an exchange accommodation titleholder such as a qualified intermediary. You’ll get the title transferred to you when the first property sells.
Examples of DST exchange properties are retail centers, self-storage buildings, industrial DST properties, office DST properties, and hotel properties.
Pros of Delaware Statutory Trust 1031 Exchange
? Doing a 1031 exchange into a property allows you to be a beneficiary owner of real estate that is institutional-grade. For example, with as little as $25,000, you can invest into a professionally managed $100 million property.
? The 1031 exchange consists of tax deference. The IRS revenue ruling 2004-86 gives a DST investment beneficiary owner the right to 1031 exchange their interest upon the sale of the DST. You can then use your share of the sale to do a 1031 exchange into another like-kind property, thereby indefinitely deferring the payment of capital gains taxes.
? Investing in a DST relieves you of landlord duties such as termites, trash, and dealing with tenants that require you to deal with the day-to-day affairs of the property. Your role is to raise funds and due diligence.
? You can quickly diversify your real estate investment portfolio by owning multiple DSTs. There is no limit set for the number of DSTs you can invest in, thereby allowing you to spread your investments among different sponsors, assets, and geographical locations.
Cons of Delaware Statutory Trust 1031 Exchange
? A DST investment typically consists of several moving parties and moving parts. One misstep by any of the involved parties, whether the sponsor or a qualified intermediary, may affect your exchange process.
? A DST investment requires sufficient planning to ensure you don’t lose the benefits of conducting an exchange. Violating the rules of the 1031 exchange will put your investment at risk.
? Depending on the real estate asset you invest in, you will encounter business risks and effects of the economic forces. Hotel returns depend on the number of tourists, while office spaces are affected by vacancies.
? DST investments are hard to control. When you invest in DST, you are not allowed to interfere in the operations and decision-making. You may only request feedback now and then.
? Equity invested in DST’s is harder to convert to cash, making the properties illiquid.
Conclusion
Is a Delaware Statutory Trust 1031 Exchange right for you?
The answer to this question depends entirely on what your overall financial picture financial and lifestyle objectives are. You will first need to evaluate your dreams, focusing on your income, the property’s appreciation potential, and your risk tolerance. Work on your short-term and long-term goals and preferred investment timeline. Research on the available options, their benefits, and risks so you can make an informed decision.
