For “Cash” investors, a DST can be an attractive alternative for those seeking portfolio diversification, current income, no management responsibilities, the potential for capital appreciation, immediate and long term tax benefits.
In addition to adding institutional-grade real estate to a portfolio without needing millions of dollars to do so, a DST investment may provide benefits over investments, such as:
- Tax Sheltered Income: Your DST gives you the same tax benefits you’d get from direct real property ownership, including mortgage interest deduction. Many DSTs carry moderate leverage – generally 50%-60% loan-to-value financing – which can provide a source of income tax shelters as investors may claim their proportionate share of mortgage interest deductions.
- More income tax shelters, courtesy of non-recourse debt. It is important to note that any debt utilized by the DST is non-recourse to its investors. Even though as an investor, you do not need to go through any loan qualification process or sign personally for any debt, you can still include your proportionate share of debt in your investment basis. This potentially allows you to receive the benefits of depreciation allowances on a basis greater than your invested equity.
- Convenience. If your goal is to invest in real estate, you have to find a great property, strike a deal with the seller, conduct due diligence, go through escrow and the deal could still fall apart. DST investments are “prepackaged” real estate offerings. Due diligence is complete, the acquisition has closed, management and mortgage are in-place. No need to stress – DST offerings are essentially signed, sealed and delivered.
- Recurring monthly income. DST investments typically aim to make monthly distributions to investors. Due to its passive and recurring nature, some investors affectionately refer to this as “mailbox money”.
- Limited liability in case of trouble. Thanks to DST’s bankruptcy-remote provision, your personal assets aren’t impacted if the trust should go into bankruptcy. The most you stand to lose is your specific investment, not your other assets.
- Many exit options. Once the program is concluded and the asset sold, you can take your proceeds and pay taxes. Or, you can defer capital gains tax once again by exchanging into other DSTs, or a sole-ownership property. Or, some combination of the above options.
- Cost basis step-up. On death, there is a step up in cost basis to current market value, no income issues as with tax-deferred annuities upon death