Even though a DST – a Delaware Statutory Trust – sounds like it is primarily for Delaware businesses and residents, that’s not the case. Luckily everyone who fits the criteria no matter where they live in the U.S. can participate in this tax deferral program. Developed nearly 20 years ago, A DST is a legal trust (set up in Delaware) that allows one to hold title to one or more income properties and enjoy a potential passive income. It is an option for those looking to participate in a 1031 exchange. Properly structured, a DST allows an investor to sell an investment real estate asset and defer its taxation by purchasing a replacement property.
Examples of DST real estate include multifamily apartment buildings, self-storage, senior care facilities, grocery anchored shopping centers, single tenant net lease buildings (NNN), office buildings, industrial properties and warehouses. We have real time real estate listings available you can register for free to browse that give you an idea of what’s out there presently for you to consider.
What are some advantages of a DST?
Aside from being a passive investment with the ability to provide extra income and stave off a taxable event, a DST comes with other advantages as well!
DST Advantage #1 – No property management responsibilities
This can be an ideal investment strategy for owners who don’t want to deal with facility management, tenants, maintenance and property taxes. That work is handed off to a professional management team.
DST Advantage #2 – Monthly income potential could exceed original property
Capitalization rates are historically between 5 to 7% percent cash-on-cash return on your equity investment. (This, of course, is not a guarantee and could change at anytime…past performance never promises future results.) The DST seeks to deliver stable income potential generated from tenants while you enjoy income from the property as someone else manages it.
DST Advantage #3 – The potential for greater capital investment appreciation
This type of investment is good for investors who want to trade up to higher quality investment grade properties that are professionally managed, institutional type commercial property with credit worthy tenants. It provides individual investors the ability to compete with institutional investors on larger deals by pooling funds for larger properties than they normally could afford.
DST Advantage #4 – Did we mention the tax benefits?
Benefits include continuation of tax deferral – until its step-up in basis and new depreciation allowance – typically as much as 50% to 80% of potential cash flow sheltered from taxes.
DST Advantage #5 – Potentially short holding period
Many sponsors only hold the properties for about 6.5 years, so investors can take their net proceeds to exchange into a property of their own choosing or another program to further defer their taxes.
DST Advantage #6 – Portfolio diversification
Investors can spread their equity amongst multiple sponsors, offerings, geographic location, leases, tenants, asset classes, etc. along with property types (office, apartments, industrial, duplexes, shopping centers, retail, warehouse, malls, etc.)
DST Advantage #7 – It can be a back-up replacement vehicle
A DST can act as a backup if a primary replacement property does not close for whatever reason. For example, if the appraisal for the primary replacement property comes back for less than the “gain” needed to be sheltered, DSTs can accommodate spillover from a large transaction. If you don’t want to spend the time necessary to secure (as well as do the due diligence) on good quality replacement property and if you are having trouble finding good replacement property in a tight market, DSTs may be a good.
For more information about either of these investment opportunities, contact us for more detailed information. Visit our website for exchanges that are set up as tax-deferring investment strategies including DSTs, UPREITS and more.
Diversified Investment Strategies represents a team of experienced and trusted professionals specializing in real estate investment and services – including buying, selling, leasing, retirement planning and wealth growth and management through strategic, informed investment choices and a meticulous real estate investment analysis. As knowledgeable replacement property professionals, they help clients build a customized strategy that identifies suitable investments pursuing successful completion of a 1031 Tax-Deferred Exchange. Visit them at www.diversified1031.com or call 866-261-0104.
There are material risks associated with investing in DST properties and real estate securities including liquidity, 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 multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal. Past performance is not a guarantee of future results. Potential cash flow, returns and appreciation are not guaranteed. IRC Section 1031 is a complex tax concept; consult your legal or tax professional regarding the specifics of your particular situation. This is not a solicitation or an offer to sell any securities. DST 1031 properties are only available to accredited investors (typically have a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last three years) and accredited entities only. If you are unsure if you are an accredited investor and/or an accredited entity please verify with your CPA and Attorney.
Diversified 1031 does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstance.
Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Diversified 1031 is independent of CIS.