DST – Tax Treatment and Benefits
Delaware Statutory Trusts (DSTs) are mainly used by investors as a real estate investment. Specifically, because the Internal Revenue Service (IRS) has recognized DSTs as real property, DSTs are eligible for 1031 like-kind exchanges. Investors will use 1031 like-kind exchanges in order to defer the taxes that would be owed on the capital gains received from the sale of real property. Instead of paying any capital gain taxes, investors can roll the capital gain into and invest in a DST.
Below are some things to note about the tax treatment and benefits that investors need to know about before investing into a DST.
Recently, the IRS has approved the use of DSTs for 1031 like-kind exchanges. As a result, investors looking to get out of managing investment properties can now sell and roll the proceeds from their investment properties into a DST. Using a DST for a 1031 like-kind exchange provides the same benefits as any other like-kind properties of equal or lesser value. Therefore, investors looking for a passive investment into real estate management can now defer paying any capital gains on the sale of their investment properties.
The ability for DSTs to avoid double-taxes is attractive to investors because this allows more of the money generated from the property or properties to end up going to each beneficial owner. More money ends up going to the beneficial owners because the DST does not have to pay any sales or business taxes on the revenues prior to distributing the money to the beneficial owners. Any investor would like to receive the greatest return possible, so the fact that DSTs are like pass-through entities is definitely an important and attractive feature.
In addition to the expenses incurred by the DST in operating and managing the property or properties, a DST may also incur losses for the year. If that happens, then beneficial owners will be able to claim their pro rata share of the DST’s losses for a given year. This allows beneficial owners another way to reduce their taxes owed and shelter their income from the DST and other sources of income.
If the investor, prior to selling their investment property, fully depreciated the property, then that property’s basis will roll over into the DST. If, on the other hand, the investor did not yet fully depreciate the investment property, then the investor will still be able to take the depreciation deductions from the investment into the DST. This will allow the investor to further reduce their tax liability and shelter their income from the DST and other sources.
Another possibility for being able to take depreciation deductions from the DST is if the DST was greater than the value of the investment property sold in order to complete the 1031 like-kind exchange. In that case, an investor will also be able to take the depreciation deduction and reduce their tax liability and shelter the income from the DST and any other sources.
MAKE AN APPOINTMENT REQUEST
Select which days work best for you, and we will get back to you. Mandatory fields are marked with an asterisk (*).