The Delaware Statutory Trust (DST) 1031 exchange investment strategy is catching the eye of many real estate investors across the United States. Several factors contribute to this surge in popularity, including aging demographics, lackluster returns from conventional banking investments, and the desire to defer capital gains taxes associated with real estate appreciation. Notably, since 2004, approximately $20 billion has been amassed through securitized 1031 co-ownership, primarily structured as Delaware Statutory Trusts, as reported by Globest.com. This trend underscores the appealing aspects of DSTs, which offer a range of benefits to investors.
However, as is the case with any real estate-related investment, Delaware Statutory Trusts have their set of risks as well as benefits. Prospective investors are advised to diligently study the offering’s Private Placement Memorandum to comprehend the complete business strategy and risk factors before contemplating an investment.
Readers can learn more about exactly what is a DST Property in this article.
This article delves into the potential advantages accessible to investors utilizing DSTs for their 1031 exchanges, along with a few drawbacks that should be considered. Before exploring the merits of a DST, it’s pivotal to clarify the concept of a DST 1031 exchange.
Advantages of a DST 1031 Exchange:
A Delaware Statutory Trust stands as an entity qualifying as “like-kind” real estate, crucial for successfully completing a 1031 exchange, and thereby deferring capital gains taxes when relinquishing an investment piece of property. There are several advantages of a 1031 exchange Delaware Statutory Trust properties for real estate investors, especially the following:
- Liberation from Active Management: The burdensome trio of active real estate management, comprising tenants, toilets, and trash, can be eliminated by investors who opt for Delaware Statutory Trusts. The appeal lies in the potential for a passive income stream, particularly enticing for those transitioning from an active real estate management role through a 1031 tax-deferred exchange. DSTs provide an avenue to secure a professionally managed, institutional-grade asset via a 1031 exchange, potentially yielding monthly income without the entanglements of active property management.
- Ability to Invest in Long-Term Triple Net Leased (NNN) Properties: A significant boon of DST investments is the access they offer to triple net leased (NNN) properties with lease terms spanning 5 to 20 years. This confers the advantage of a potentially stable long-term income stream, free from the complexities and uncertainties of lease renegotiation.
- Non-Recourse Debt: DSTs predominantly feature non-recourse debt, minimizing an investor’s liability towards the lender. This protective measure shields an investor’s other assets, investments, etc., in case of investment failure, adding a layer of security, particularly relevant for retirees.
- The Potential for Greater Diversification* with Smaller Investments: DSTs afford investors the opportunity to partake in institutional-grade real estate with smaller investment amounts. In contrast, comparable high-quality triple net leased properties typically necessitate a substantial minimum investment. This not only broadens DST access but also enables risk dispersion across multiple assets rather than concentrating it in one property.
*Diversification does not guarantee returns and does not protect against loss.
Disadvantages of Delaware Statutory Trust (DST):
Among some of the benefits of DST 1031 exchanges as outlined above, there also exists a set of associated risks. As always, it is strongly recommended that investors meticulously study the risk section of the Private Placement Memorandum (PPM) and consult tax and legal advisors before considering a DST 1031 investment.
- Absence of Guaranteed Monthly Distribution or Projected Appreciation: As with all investments, there’s no certainty regarding monthly distribution, returns, or appreciation. Nevertheless, the performance of DST properties, being rooted in real estate, tends to exhibit less correlation with stock and bond markets, making them an appealing avenue for investment diversification.
- Inherent Risks in Real Estate Investments: Investing in real estate invariably involves material risks, including unforeseen vacancies, market fluctuations, interest rate volatility, ownership and operational risks, financing uncertainties, and broader economic instabilities. Moreover, the intricacies of how a DST sponsor acquires and finances underlying real estate can introduce additional risk factors that necessitate keen scrutiny.
- Passive Nature of Beneficial Interest: A noteworthy concern surrounding Delaware Statutory Trusts is their exclusively passive management structure for investors. Recognizing this, the IRS Revenue Ruling 2004-86 mandates that DST investors maintain a passive stance toward real estate, imposing specific limitations on the DST trustee to safeguard investor interests.
Dubbed “The Seven Deadly Sins” of DST investments, the IRS has established a stringent framework governing DST trustees and safeguarding investors’ rights. These guidelines encompass:
● Prohibition of future contributions post-DST offering closure.
● Restrictions on debt renegotiation or initiation.
● No reinvestment of proceeds without individual investor choice.
● Mandatory distributions of cash received (excluding reserves).
● Limited capital expenditures for specific purposes.
● Constraints on investing reserves in short-term debt obligations.
● Restrictions on lease negotiations, with certain exceptions.
While Delaware Statutory Trust investments strip investors of direct managerial control, they benefit from the DST trustee’s adherence to the IRS regulations, outlined in the Seven Deadly Sins. Consequently, selecting the best Delaware Statutory Trust 1031 advisory firm becomes pivotal when contemplating such an exchange.
For comprehensive insights into DSTs and 1031 exchanges, a visit to www.kpi1031.com where readers can access an extensive list of resources including current articles, informative videos, and the ability to subscribe to The DST Digestmagazine. Additionally, by completing a form on the website, one can obtain a free book on Delaware Statutory Trust properties and 1031 exchanges, along with a complimentary list of current 1031 DST properties.
About Kay Properties and www.kpi1031.com
Kay Properties and Investments is a national Delaware Statutory Trust (DST) investment firm. The www.kpi1031.com platform provides access to the marketplace of DSTs from over 25 different sponsor companies, custom DSTs only available to Kay clients, independent advice on DST sponsor companies, and real estate research and analysis on each DST (typically 20-40 DSTs). Kay Properties team members collectively have over 200 years of real estate experience and have participated in over 30 billion of DST 1031 investments. Past performance does not guarantee or indicate the likelihood of future results. Diversification does not guarantee profits or protect against losses. All real estate investments provide no guarantees for cash flow, distributions or appreciation as well as could result in a full loss of invested principal. Please read the entire Private Placement Memorandum (PPM) prior to making an investment. This case study may not be representative of the outcome of past or future offerings. Please speak with your attorney and CPA before considering an investment.
There are material risks associated with investing in real estate, Delaware Statutory Trust (DST)properties and real estate securities, including illiquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short-term leases associated with multifamily properties, financing risks, potential adverse tax consequences, general economic risks, development risks and long hold periods. All offerings discussed are Regulation D, Rule 506c offerings. There is a risk of loss of the entire investment principal. Past performance is not a guarantee of future results. Potential distributions, potential returns, and potential appreciation are not guaranteed. For an investor to qualify for any type of investment, there are both financial requirements and suitability requirements that must match specific objectives, goals, and risk tolerances. Securities offered through FNEX Capital, member FINRA, SIPC.