Real estate investors traditionally use 1031 exchanges to defer capital gains tax by reinvesting in “like-kind” properties. However, strict rules apply, such as reinvesting 100% of net sales proceeds, acquiring equal or greater debt, identifying replacement property within 45 days, and closing within 180 days. In today’s market, these criteria can be challenging. After jumping through all those hurdles, the investor must still actively manage the property and deal with market, tenant, legal, and other risks.
What is a Delaware Statutory Trust?
A Delaware Statutory Trust (DST) provides an alternative to “whole property” 1031 exchanges. Investors can roll sale proceeds into a DST, holding fractional ownership in institutional-quality assets. The capital gains tax deferral is the same as with a whole property 1031 exchange. Sometimes, investors combine strategies, investing in whole property and a DST.
One of the key benefits of DSTs is capital preservation, as investors can defer capital gains tax, with the possibility of continuous deferral through reinvestment. The ability for quick movement complements this, as DSTs offer pre-vetted real estate, enabling sellers to align with IRS timelines swiftly. Moreover, DSTs provide access to a broader inventory of carefully vetted real estate.
Investors also appreciate the lack of active management required with DSTs, as the sponsor is responsible for managing the holdings. This passive approach is further enhanced by built-in sponsor financing and the absence of personal liability for the debt associated with the property. Lenders typically underwrite the sponsor, usually a reputable institutional real estate company, rather than individual investors, making the financing process more straightforward.
Furthermore, DSTs open doors to high-quality assets that might otherwise be out of reach for individual investors. This access to institutional-quality assets, combined with the fractional ownership model, breaks down barriers to entry. Finally, DSTs offer diversification by providing various investment options across different geographic regions. This diversification can reduce the risk associated with local economic downturns, making DSTs an attractive option for investors seeking both stability and growth in their real estate portfolios.
The DST model provides tremendous flexibility, opportunity, and investment diversity for those looking to take full advantage of benefits typically associated with traditional 1031 exchanges.
DST investments can be closed quickly by investors – often in a matter of days. For the accredited investor under a tight deadline to deploy the proceeds from a 1031 sale, investing in a DST can be a great option. DSTs offer a flexible and attractive alternative to traditional 1031 exchanges.
Securities offered through Arkadios Capital, member FINRA/SIPC. Advisory Services offered through Arkadios Wealth. Perch Wealth and Arkadios are not affiliated through any ownership.
This material does not constitute an offer to sell, solicitation of an offer to buy, recommendation to buy, or representation as the suitability or appropriateness of any security, financial product or instrument, unless explicitly stated as such. This information should not be construed as legal, regulatory, tax, personalized investment, or accounting advice.
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