DSTs ( FAQ )
Delaware Statutory Trust (DST)
Here are common questions and answers.
1031 like-kind exchanges
Tax benefits - income, deductions, and appreciation
If you are interested in getting started with or are curious about
Delaware Statutory Trusts (DSTs).
Here are ten common questions and answers about DSTs:
Like any investment vehicle, there are inherent risks in investing into a DST. For DSTs, the level of risk depends on the type of property being managed by the DST and the location of that property. The risk level for residential properties are lower than that of commercial properties because of the potential tenants and market conditions. Additionally, the location of the property dictates the amount of inherent risk for a specific DST.
DSTs can be funded directly from the funds of investors, however, the more common way is through the use of 1031 like-kind exchanges. Since the Internal Revenue Service has recognized DSTs as eligible like-kind properties, many investors decide to identify at least one DST during the identification period of a 1031 exchange. It should be noted, however, that once the offering period has closed, DSTs do not have the ability to accept more investments from existing investors or outside sources.
DSTs are typically moderate to long term investments with a range between 5 to 10 years. As a result, an investment in a DST is considered as an illiquid investment with little opportunity to sell on the secondary market. While there are ways for a DST to end or shorten its investment period, investors should be aware of the time range for a given DST when deciding whether a DST is the best option for their plans and goals.
One major characteristic of DSTs is that they are used as a means of generating passive income. This is because the decisions of a DST are governed and influenced by the trust agreement. As a result, investors are not involved in the decision making of the DST nor are investors required to directly interact with DST’s property and/or tenants. DSTs have the ability to make unilateral decisions with respect to properties as long as it is aligned with the guidelines provided in the trust agreement. DSTs allow investors to truly capture passive income.
Investors are not personally liable for the debts of DSTs. This is due in part to lenders viewing the DST as the sole lender for any loans taken out by the DST. As a result, investors are not required to co-sign or sign personal guarantees. This is also true for any liabilities that may arise in connection with a property held and/or managed by the DST. Investors have the added peace of mind that their personal assets are safe.
In addition to the ability to use DSTs for 1031 exchanges, investors also enjoy the tax benefits of real property ownership which is passed down to the individual investors. This means that each investor receives a proportionate share of the income, deductions, and appreciation from the property held by the DST. Additionally, since the interest in a DST is a tangible benefit, an investor’s heir or beneficiary is able to receive the stepped-up basis and therefore avoid having to pay taxes on the deferred capital gains. As an estate planning tool, a DST may be a viable option.
Investors can expect a monthly rate of return between 4-9% depending on the type and location of the properties held by the DST. Properties like residential apartment buildings are less risky and will have a rate of return closer to 4%. Commercial properties, on the other hand, such as shopping malls will be more risky and will have a rate of return closer to 9%. In addition to a monthly rate of return, properties held by the DST may appreciate over time and the appreciation can be captured by the investors if the DST decides to sell the property.
Unlike other investment vehicles with lower caps on the number of investors allowed, DSTs typically allow for a larger amount. This translates into the possibility of DSTs having hundreds of investors. As a result, the minimum investment amount can be dramatically lower than other investments. For cash investors, the minimum investment may be around $25k. For investors using a 1031 exchange, the minimum investment may be closer to $100k. The lower minimum investment amounts prevents investors from over-extending themselves and allows investors to invest in multiple DSTs.
Under the trust agreement, most DSTs are required to make monthly payments and disbursements to its investors at their proportionate share. As noted, the amount of these payments and disbursements are directly related to the income and profits generated by the properties held and managed by the DST. As a result, DSTs provide investors with a great opportunity for a passive-income stream to supplement their other income or to assist during retirement.
If you are interested in getting started with investing in a DST, we recommend scheduling a consultation with us to go over your options and to ensure that a DST is the best option for you. If you have additional questions or inquiries about DSTs, we also recommend reaching out to us in order to assist you. A professional will help you decide if a DST is right for you and will guid you through each step.
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