Understanding the Delaware Statutory Trust

Apartment and other commercial real estate investors of management intensive real estate assets have always longed for the day when they can wash their hands of tenants, toilets, and trash for passive investment options. For these 1031 exchange buyers selling these management intensive assets, the Delaware Statutory Trust (DST) has presented an intriguing avenue for reinvestment of their exchange funds. 

Understanding 1031 Exchange:

A 1031 exchange, named after Section 1031 of the Internal Revenue Code, allows property owners to defer capital gains taxes by reinvesting the proceeds from the sale of a property into a like-kind property. This tax-deferred exchange is a powerful tool for investors seeking to preserve wealth and build a more robust real estate portfolio.

DST Investments Explained:

Delaware Statutory Trusts are a type of legal entity that enables multiple investors to pool their funds for ownership in real estate properties.  They are unique opportunities for investors to purchase fractional interests in large commercial real estate assets that typically would be well beyond their financial abilities as an individual investor. DSTs have gained popularity among 1031 exchange buyers for several reasons:

Diversification:

• DSTs offer investors the ability to diversify their real estate holdings without the burden of direct management responsibilities. This is particularly appealing to those who wish to move away from the day-to-day operations of managing apartment buildings.

Access to Institutional-Grade Properties:

• By participating in a DST, investors can gain access to institutional-grade properties that might be otherwise out of reach for individual buyers.  This allows for investment in larger, higher-quality assets that have the potential for stable income and appreciation. Class A apartment buildings, Single Tenant NNN portfolios, Industrial Assets are just a few examples of the inventory available to 1031 exchange buyers.

Passive Income:

• DST investments provide investors with a source of passive income. Rental income generated by the underlying property is distributed to investors on a regular basis, offering a steady cash flow without the need for active involvement in property management.

Professional Management:

• DSTs are typically managed by professional asset management companies, relieving investors of the responsibilities associated with day-to-day property management. This can be especially appealing for those looking to enjoy the benefits of real estate ownership without the hands-on work.

Considerations for 1031 Exchange Buyers:

While DST investments offer numerous advantages, it's essential for 1031 exchange buyers to carefully consider the following aspects:

Due Diligence:

• Conduct thorough due diligence on the DST sponsor, property, and terms. Understand the risks associated with the investment and ensure it aligns with your financial goals and risk tolerance.

Limited Control:

• Investors in a DST have limited decision-making control. The trust's sponsor makes most operational decisions, so it's crucial to be comfortable with a more passive role in the investment.

Exit Strategy:

• Consider the exit strategy of the DST. Investors should be aware of the terms and conditions for selling their interest in the trust and whether the structure allows for flexibility in the future.

Conclusion:

DST investments present a compelling option for 1031 exchange buyers looking to capitalize on the tax benefits of the exchange while diversifying their real estate portfolio. As with any investment, thorough research, due diligence, and consultation with financial and legal professionals are essential. By carefully navigating the world of DSTs, investors can potentially unlock new opportunities for growth, income, and long-term wealth preservation in the ever-evolving real estate market. If you would like a comprehensive market analysis of your investment real estate and a 1031 exchange analysis please contact us at thejamesgroup@lyonstahl.com.

‍