According to National Real Estate Investor, the dividend yields on private REITS have averaged 7% to 8%. This means the trustees of the DST cannot ask the investors for more money. That piece of commercial real estate produces a regular stream of income and, if the investment is successful, a big capital gain when the property is sold at the end of the, At the end of each tax year, DST real estate investors receive two documents from the transaction, An operating statement that details their pro rata share of the propertys rental income and expenses. Because every tax situation is unique, DST investors should work with a qualified CPA to ensure that all tax requirements are met with regard to their DST investment. : Real estate investors have no say in the day to day management of the property. At First National Realty Partners, we leverage years of expertise and hundreds of transaction repetitions to minimize a propertys tax liability for our investors. Given a DST's legal structure, co-owners are entitled to profits earned from the property (such as rent) without any management responsibilities, making DSTs advantageous in constructing multi-investor commercial real estate offerings. Posted by Clay Schmidt on Dec 17, 2021 Some real estate investors have long understood the importance of taking advantage of legal tax breaks and tax deferral options. Delaware law permits trustees to withhold information about the trust from beneficiaries for a designated period of time dictated by the trust instrument, and does not require a trustee to file trust agreements in court or register trusts with a public agency like other states. Corporate Forms and Certificates for a Statutory Trust. Their depreciation benefit was set to expire on June 30, 2019. So, this means that the value of the replacement property must be at least $1MM and the investor must invest all $500M equity earned from the sale of the relinquished property. A typical DST sponsor is a real estate investment company who leverages their experience, relationships, and resources to organize and market the DST offering. A Delaware Statutory Trust is a real estate ownership structure where multiple investors each hold an undivided fractional interest in the holdings of the trust. If the sponsor happens to be a private equity firm, they typically bring significant value to the deal in the form of: Real estate industry relationships to find the best properties at the most attractive prices. The U.S. Supreme Court on Thursday bolstered the ability of employees to obtain accommodations at work for their religious practices, reviving a lawsuit by an evangelical Christian former mail . In order to successfully complete a 1031 Exchange, there are a number of 1031 exchange rules that investors must follow. Under Delaware law, a DST is a specialized type of trust that is formed for the purpose of conducting business. A Deferred Sales Trust is a legal method for deferring capital gains even though you sell your appreciated property instead of exchanging it. So much so, that we recommend assessing potential replacement properties before listing your relinquished property. For the average investor, however, commercial real estate can feel financially out-of-reach and management intensive. Due to the large purchase price of typically $30 million to $100 million, these assets would otherwise be unattainable for a typical individual investor, but are accessible through the fractional ownership offered by a DST. As a result, DSTs often own high-quality assets with credit-worthy Fortune 1000 companies as tenants. DSTs have a comparatively low minimum investment requirement, usually $100,000, making it easy to diversify across multiple assets to help mitigate risk. A Delaware Statutory Trust (DST) is a legally recognized trust that is set up for the purpose of business. Through a 1031 exchange, investors can exit a management-intensive asset and shed landlord responsibilities without foregoing the benefits of owing investment real estate. Although their structure is different, there are some similarities between how DSTs and private equity investments are taxed. Once the properties are identified and the purchase is complete, the trust then opens up the investment pool. As Chief Exchange Strategist, Austin leads the firms team of licensed 1031 Exchange advisors and analysts. Each of these are discussed in detail below. : DSTs are income driven real estate investments, which make them particularly sensitive to interest rate changes. The investor's guide to a 1031 exchange via a DST - Baker Tilly To learn more about our current real estate investment opportunities, click here. Capital gains taxes, which are owed any time an investor makes a profit from the sale of a property, can lead to a major tax liability that can greatly reduce the profits generated. If you are an Accredited Real Estate Investor and would like to learn more about our investment opportunities, contact us at (800) 605-4966 or info@fnrpusa.com for more information. The agreement can be set up at any time, either by investors making a joint purchase or by an existing owner looking to recapitalize the property through co-ownership. In general, you must identify replacement property(ies) within 45 days from the date of sale, and close on the purchase of the replacement property(ies) within 180 days. Then, the clock starts ticking. These forms pass the Adobe Accessibility Standard, 508 Federal Standards and WCG Guidelines. What is a Delaware Statutory Trust and Why Should You Consider It? Identifying and selecting replacement properties should be based on key objectives including risk tolerance, cash flow and appreciation goals, liquidity, desire for management control, and estate planning needs. One aspect of investing in a Delaware Investment Trust is the potential opportunity to earn truly passive income. Typically, DSTs own high-quality institutional property, which may allow for greater income and appreciation potential. By the end, readers will have the information needed to decide if a DST investment is suitable for their personal investment objectives. When owning property out of state, you typically will need to file state income tax returns in that state. on the DST structure and the relative risks and benefits to determine if this investment type is suitable for their own real estate objectives. Because investor situations and objectives vary this information is not intended to indicate suitability for any particular investor. BENEFITS OF THE STRUCTURE The DST is an estate planning tool rather than a traditional corporate entity, and is treated accordingly under the law. If there is any disagreement about a major decision, the sponsor will prevail. Any unused cash reserves held upon the sale of the property must be distributed to the trust investors. A Delaware Statutory Trust (DST) is a specialized type of trust, formed under Delaware law, for the specific purpose of conducting business. How Does a DST Work? As with any type of income-oriented real estate investment, investors may be subject to future vacancy rates and interest rate fluctuations, which could reduce cash flow potential and price appreciation. 2023 Baker Tilly US, LLP, Investment in professionally managed institutional grade assets. Most REITs feature institutional quality properties including hotels, shopping malls, apartment complexes, and healthcare facilities. Tax deferral allows DST investors to preserve all of the equity from the sale of their relinquished property so it can continue working for them in their new DST replacement property. Ninety percent (90%) of the new basis could be depreciated. Although there are structural differences between DST investments and those offered by private equity firms, there are some similarities between how they are taxed. You swap it. Once you are comfortable with the types of replacement properties available, select a realtor/broker to get your existing investment property (relinquished property) listed and under contract. Purchasing full ownership of an NNN asset requires substantial funds, often tying up a significant amount of capital in a single property. For example, income and capital gains produced by the underlying commercial properties are treated as ordinary income and subject to income tax and capital gains are subject to capital gains tax. This is a particularly attractive benefit for independent investors with major life changes aheadfor example, those entering retirement, growing a family or planning for an estate transfer. DST real estate is generally held for 3 to 10 years. Alternative investments are often sold by prospectus that discloses all risks, fees, and expenses. Over the last two decades, commercial real estate (CRE) has taken an esteemed seat at the investment table alongside equities, bonds and cashand it is clear why. DSTs are a separate legal entity, formed with private trust agreements, under which real property is held, managed, administered, invested, and/or operated., Investors like DSTs because they can provide passive monthly income, portfolio diversification, and generally have low minimum investment requirements when compared with other, Perhaps most importantly, Delaware Statutory Trust properties are popular with individual investors because, states that a DST investment qualifies as a , . The information herein has been prepared for educational purposes only and does not constitute an offer to purchase or sell securitized real estate investments. If not for the DST structure, these properties would otherwise be unattainable for an independent investor to purchase via a 1031 exchange. A Delaware Statutory Trust is a specialized type of legal entity that is formed for the specific purpose of owning, managing, or investing in real estate. Each of these are discussed in detail below. A DST is a legal entity formed under Delaware law that allows investors to take a fractional ownership interest in professionally managed real estate throughout the United States. Since its inception, Passco Companies has become a recognized provider of investment real estate opportunities. Therefore, the debt does not show on your credit report. While the 1031 Exchange tax benefit can be significant, it is common for real estate investors to experience difficulty finding a suitable replacement property in such a short period of time. Then, the sponsor offers shares to investors. Passco Companies is also recognized locally on the 2019 lists: Fastest Growing Private Company and Top Private Companies by theOrange County Business Journaland one ofInc. 5000s Fastest-Growing Private Companies in America in 2018. A Delaware Statutory Trust (DST) is a trust formed under the Delaware statutory trust law that allows passive, fractional ownership in real estate while qualifying as a "like kind" real estate replacement property under Section 1031. A guide to Delaware State Trusts. Low minimum investment: DSTs typically have a minimum investment of $100,000 for 1031 exchangers and $25,000 for cash investors. The45-Day Rulerequires that your replacement property be identified within 45 days of the close of your relinquished property (by calendar day 45, your qualified intermediary must be notified of the identified replacement property). A Delaware Statutory Trust is a specialized type of company formed for the purpose of real estate investment. To defer tax, the proceeds from the sale of the relinquished property must be reinvested into another like-kind replacement property of equal or greater value within 180 days of the closing date of the relinquished property. , a detailed understanding of your tax liability, and availability of suitable DST properties that seek to meet your financial and lifestyle goals. Investors own a beneficial interest in the trust. For this reason, it is always a good idea to consult a CPA, investment advisor, and/or qualified tax attorney before making major investment decisions. As a 1031 exchange-qualifying transaction, DSTs are strictly regulated. At the end of each tax year, DST investors receive a 1099, which details the income earned from the investment. Changes to the internal revenue code could materially impact the invest in DSTs for tax purposes narrative. At First National Realty Partners, we leverage years of expertise and hundreds of transaction repetitions to minimize a propertys tax liability for our investors. As an illiquid investment with fractional ownership, a CPA is able to discount a DST investment when calculating the value of the total estate. A Delaware Statutory Trust may have up to 100 investors (sometimes more) with each investor owning a beneficial interest in the trust, which, in turn, owns the underlying asset. The pros include: While these benefits can be significant, they must be weighed against the potential cons of the DST structure. Understanding what these trusts are and how they can provide tax relief is a tool for real estate investors. The trust is established by a professional real estate company, referred to as DST sponsor, who first identifies and acquires the real estate assets. The reason that DSTs are popular with real estate investors seeking tax deferral is that IRS Revenue Ruling 2004-86 states that a DST investment qualifies as a like kind replacement property in a 1031 Exchange. At Real Estate Transition Solutions, our licensed 1031 Exchange Advisors diligently analyze all DST sponsors and offerings to ensure investment options presented align with our clients objectives. The DST consists of 27net leaseessential retail properties located throughout the nation. A Delaware Statutory Trust is a specialized type of legal entity that is formed for the specific purpose of owning, managing, or investing in real estate. High marketing fees and commissions along with the lack of regulatory scrutiny and liquidity are considered potential drawbacks of private REITs. Individual investors then purchase interests of ownership within the trust. How a Delaware Statutory Trust Works | DST Investment Non-recourse debt. . Established in 1968, Inland Private Capital Corporation (IPC) is recognized as an industry leader in securitized 1031 Exchange transactions and offers a variety of private placement real estate investment solutions to accredited investors as an alternative to traditional stocks and bonds. This information is transferred to schedule E of their tax return and it is subject to income tax. Delaware Statutory Trusts typically require a minimum investment of $100,000, and an investor can acquire or exchange into ownership in one or multiple DSTs. It should be noted there are DSTs that include liquidity via a 721 UpREIT. For example, one DST may own a portfolio of class A multifamily apartments, while another may own an industrial building like anAmazon Distribution Centeror net lease real estate with corporate guaranteed retail tenants like Walgreens or Whole Foods. Consider consulting a 1031 Exchange Advisor before selling your investment property to ensure compliance with. The same goes for DST properties unless the property is in a state with no income tax filing requirements, such as Texas or Florida. Under IRS rules, the replacement property must be identified within 45 days of sale and the transaction must be closed within 180 days. As with any investment, there are several underwriting and administrative costs a DST incurs when acquiring real estate and structuring the trust. The portfolio included an allocation of: The portfolio had a total loan-to-value of 55%. One of the most popular is known as a 1031 Exchange which allows investors to defer taxes on the sale as long as they reinvest the proceeds into a replacement property that is considered to be like kind to the sold property. The $3,008,000 of exchange proceeds acquired $6,844,444 of replacement property and thus $3,764,444 of new basis for depreciation. As you can see, this is far from a truly passive investment. . Benefits of this DST structure include passive income, fractional interest in high quality properties, and tax deferral. Delaware Statutory Trust Fees and Commissions DSTs are sophisticated investments, and to invest in one, you must be an accredited investor,which the SEC typically defines as an individual with a net worth (excluding ones primary residence) of $1 million or an average annual income in excess of $200,000 for the last two years for an individual or $300,000 for a couple filing jointly. Delaware Statutory Trust (DST) Tax Treatment & Reporting | FNRP Individual results may vary. Austin Bowlin, CPA is a Partner at Real Estate Transition Solutions (RETS), a national real estate investment advisory firm specializing in 1031 Exchange strategies and Delaware Statutory Trust investments. The value of the investment may fall as well as rise and investors may get back less than they invested. They have no say in the day to day management of the real estate. DST sponsors may or may not be a private equity firm. Although all DSTs adhere to these regulatory requirements, not all of them are created equal. Less original purchase price plus capital improvements, Equals net sales proceeds less original tax basis, Equals federal capital gains and net investment income tax plus state capital gains tax, Equals tax applied to accumulated depreciation. The Pros and Cons of Delaware Statutory Trusts A DST can own one or multiple properties and each DST will generally own a single property type. Client portfolio example is hypothetical and for illustration purposes only. The properties are 100% leased to 8 differenthigh-quality tenants,all with proven track recordsand strong financials. In some states, capital gains taxes can be as high as 42.1%, including federal capital gains tax, state capital gains tax, depreciation recapture tax and net investment income tax. As these investors begin putting money into the trust, they obtain a percentage of ownership based on their investment. In the early 20th Century it pioneered separating the duties between corporate trustees and their investment advisors. DST exchanges rarely fail because the real estate has already been vetted and acquired by the DST sponsor. The sponsor then establishes a group of trustees to manage the overall investment structure. (DST) is a popular choice for individuals looking to defer capital gains taxes on the profitable sale of an investment property. In most cases, this effort involves: Once the purchase transaction is closed, the sponsor will arrange for a related subsidiary to act as the master tenant responsible for all leasing and property management/asset management activities. In addition to rent, utilities and interior maintenance, the tenant also pays common area maintenance fees, property taxes and property insurance.