1031 Exchange investors looking for diversification and non-management ownership can purchase interests in Delaware Statutory Trusts (DSTs) that hold title to one or more investment properties. Other benefits of the DST are the following:
- Interests in the trust can be purchased, sold and otherwise transferred without affecting title. Allowable transfers include donations to charity and transfer to heirs as specified in wills.
- Sellers of their interests in DSTs are eligible to invest the proceeds in other real estate investments via 1031 exchange.
- Interests in DSTs are also available to buyers looking to satisfy 1031 exchange requirements.
- As with an LLC, DSTs provide liability protection to investors in the trust.
- Each DST may own one or more properties, and up to 499 investors may invest in a single DST (though most DST trustees limit the number of investors to fewer than 499).
- Investors do not have voting rights over the operation of property owned by a DST. Instead, a DST trustee (also known as an asset manager or sponsor) maintains 100% of the managerial duties of the asset(s) held by the DST.
DST held properties are passive real estate investments that have professional asset management firms overseeing property acquisition, due diligence, loan sourcing when financing, asset management, property management when not triple net (NNN) leased, and property disposition.
This type of investment structure was created in Delaware in 1947, and in 2004 the IRS issued Revenue Ruling 2004-86 which permits real estate investors to perform a 1031 exchange into and out of a DST that holds title to real estate. Today, DSTs are used for fractional 1031 exchange investments, offering investors an alternative way to benefit from management-free ownership while still potentially deferring up to 100% of the taxes that would otherwise be due from the sale of an investment property.
A Delaware Statutory Trust (DST) is a legally recognized trust that is set up for the purpose of business, but not necessarily in the U.S. state of Delaware. It may also be referred to as an Unincorporated Business Trust or UBO.
DST Investments are offered as replacement property for accredited investors seeking to defer their capital gains taxes through the use of a 1031 tax deferred exchange and as straight cash investments for those wishing to diversify their real estate holdings. The DST property ownership structure allows the smaller investor to own a fractional interest in large, institutional quality and professionally managed commercial property along with other investors, not as limited partners, but as individual owners within a Trust.
Each owner receives their percentage share of the cash flow income, tax benefits, and appreciation, if any, of the entire property. DSTs provide the investor the potential for annual appreciation and depreciation (tax shelter), and most have minimum investments as low as $100,000, allowing some investors the benefit of diversification into several properties.
The DST ownership option essentially offers the same benefits and risks that an investor would receive as a single large-scale investment property owner, but without the management responsibility. Each DST property asset is managed by professional investment real estate asset managers and property managers. It used to be that only large institutional investors such as life insurance companies, pension funds, real estate investment trusts (REITS), college endowments and foundations were able to invest in these properties. Now as a viable 1031 exchange replacement property option through a DST, individual investors have the ability to invest in a diversified selection of institutional quality, investment property types that they otherwise could not purchase individually. DST Investments are located throughout the United States.
Property types may include multifamily apartment communities, office buildings, industrial properties, multi-tenant retail, student housing, assisted living, hotels, self-storage facilities, medical office, single tenant retail properties and others .