DSTs - Passive Investment Benefits


Income Streams and Tax Benefits

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Passive Investment Benefits:

An attractive advantage that Delaware Statutory Trusts (DSTs) have is that they allow for passive income benefits. This means that investors in DSTs do not need to actively participate in any of the investment decisions. Instead, all of the decision making is done and handled by the trustees and/or the designated management companies. These decisions might include deciding which management company to use or deciding whether to incur expenses for modifying the property.

Additionally, for investors that have or had rental properties, they know the difficulties that might arise from dealing with tenants and their occupants. Tenants might not pay their rents on time or might violate some of the rules for the property. In that case, investors may have to personally deal with the issues or hire a management company to take care of the problem. In any event, it will be more stressful for investors who have to actively and directly deal with renting out the property.

On the other hand, by investing in a DST, investors will not be directly involved with the management of the properties. As a result, investors will be able to earn passive income from a DST.

Below are some specific Passive Investment Benefits from DSTs:

Investors and beneficial owners of DSTs will each receive monthly checks. These monthly checks can help investors increase or supplement their income. For some investors looking to retire soon or who have already retired, this potential monthly income might be an attractive benefit. Investors will not have to worry about any property management responsibilities, but will still be able to enjoy a monthly income stream. It should be noted that the monthly income streams will reflect the pro-rata share of an investor’s interest in the DST.
Potential Tax Deductions
Due to the structure and tax treatment of DSTs, tax benefits flow down to the individual beneficial owners. One of the tax benefits that may be enjoyed and taken advantage of is the ability for beneficial owners to take deductions on their income taxes.

As a result, beneficial owners of a DST are able to shelter their income by taking their pro-rata share of deductions on their income taxes. By taking the deductions on their income taxes, beneficial owners will be able to reduce their taxable income and therefore reduce their tax liability. While this benefit is not a direct and tangible investment benefit like a passive income stream, being able to take deductions on income taxes will allow investors to keep more of their money in their pockets instead of having to pay more taxes.

Deferment of Capital Gain Taxes
One of the main reasons that DSTs have grown in popularity as an investment vehicle is the potential use of a 1031 like-kind exchange. By using a DST as a like-kind property, investors will be able to defer the capital gains taxes on the proceeds from the sale of a property. The ability to defer paying taxes on the capital gains from the sale of a property might be attractive for those with property that have appreciated a lot and/or are looking for a way to diversify their real estate investment portfolio.

In any event, if an investor is not looking to cash out on the proceeds from a sale of an investment property, then electing to use a DST as a like-kind property will be beneficial. Similarly, like the benefit of potential tax deductions, being able to defer capital gains taxes is not a direct and tangible benefit, but it will allow investors to keep more of their money.

Potential Tax Deductions

Similar to directly owning real property, the properties held by DSTs will have the potential to appreciate in value over time. Depending on the trust documents, this appreciation of the properties may be realized by the beneficial owners according to their pro rata share in the DST if and when the properties are sold. This investment benefit, however, would likely not be the main reason for investing in a DST since the DSTs are known to be long-term investments. The selling of the properties held by a DST would likely come years down the road, and therefore any appreciation distributed to the beneficial owners would come then.

It is also important to note that once the property or properties are sold by the DST, any appreciation realized by the beneficial owners will be included in the distribution. Beneficial owners will then have the ability to exchange into another DST to avoid paying taxes. They of course will also have the ability to pay the capital gain taxes and take their money.

Ability to Diversify and Reduce Investment Risks
Like any other investment vehicle, there is risk involved when investing in a DST. One potential passive investment benefit of DSTs are, however, the ability for investors to diversify their investment portfolio with different DSTs. Investors have the ability, through 1031 like-kind exchanges, to invest into multiple DSTs. This allows investors to invest in various types of property like residential apartment buildings or commercial shopping centers. By doing so, investors reduce their risk of losing all of their investments if the DST fails for some reason.

This ability to reduce the risk of losing money is another passive investment benefit that DSTs offer investors.

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