To become a successful investor, the rule of thumb is to know how to diversify the portfolio of your investment projects so that the risks of investors’ economic loss could be minimized. In essence, Delaware Statutory Trust (DST) is one of the prevalent tools for investments. Its benefits can be amplified in conjunction with the 1031 Exchange.
Suitability and Credibility
Nowadays, it is not difficult to find a DST for an investor to lay his or her money on. But a suitable one specifically tailored to the investor’s financial situation as a whole can take a lot of effort to get. Each DST investment comes with its own level of risk. Depending on an investor’s own financial situation, it demands lengthy analysis and thorough consideration to conclude the right one. When we say the right one, we mean a DST that is more than just the most high-end and profitable. The underlying risks and returns associated with a DST investment must be put into the context of the investor’s overall investment portfolio. Even though the financial background of each investor needs to be assessed individually, the general process of selecting the right and decent DST is basically the same across the board. First and foremost is to evaluate the due diligence reports from various sources as thoroughly as you can. A professional adviser is highly recommended in this regard. When a DST investment project is put on an investor’s desk, the chance is that it most likely has been evaluated by multiple parties independently. For example, if a DST acquired a loan from a bank, the bank must have conducted its own due diligence upon the property to ensure it is worth the value as it claims. Usually, the bank will have a report to prove such a process has been completed. Investors could request this report as an authentication of the credibility of the DST property. If an investor is considering investing in a DST presented by a broker-dealer, he could be more assured about the credibility of the DST in theory. The dealer determines whether a DST property is safe and appropriate for its representatives to offer to the clients. Consequently, the broker-dealer will enter into and sign the selling agreement. For this reason, a broker dealer will indeed need to conduct due diligence to assess the DST. However, always be aware that the broker dealer’s satisfaction on a due diligence assessment does not guarantee the 100% safety and profit return of the investment, though it adds an extra degree of assurance. One may have heard of the Financial Industry Regulatory Authority (FIRA), a well-known private and self-regulatory organization. It is influential in terms of the regulation on brokerage investment firms. It oversees around 4,250 brokerage firms, 162,155 branch offices, and approximately 629,525 registered securities representatives across the United States. Among its membership qualifications, FIRA expressly requires the adequate skills of “providing customers with information about investment strategies, risks and rewards, and communications relevant to the market, investment, and research data to customers.” In general, the process of due diligence for a broker-dealer could include an examination of the Real Estate Provider (Sponsor), analysis of the properties, analysis of the market, analysis of DST program structure, and evaluation of 1031 tax compliance. As explained earlier, it is possible that a broker-dealer could reject the offering of a DST based on the outcome of the analysis. Indeed, for the same DST property, different broker-dealers might come to different conclusions.
Proper Document with the Right Person
On another note, don’t forget to pay close attention to the DST agreement as well. Trusts, in general, have a strong contractual feature. In other words, the trust agreement you signed would be a very weighty consideration when any disputes arise in the future. The DST agreement could include procedures or information, such as the appointment process of the trustee, the powers that the trustee hold, and how the dividends are distributed. Make no mistake that there are several default rules in the statutes that could apply to many disputes, provided that the trust agreements are silent. However, if there are express terms stipulated in the agreement, they would almost certainly trump those statutory default rules. Besides, the records of the trustee or the DST sponsor need to be scrutinized, too, since he or she will be the person handling the operational aspect of the DST every day, including all the repairs and necessary maintenance to keep the property in its best shape.
Don’t Fall out of the 1031 Exchange Umbrella
As mentioned before, the financial interests through a DST are usually maximized by coupling with the 1031 Exchange. The 1031 Exchange allows an investor to defer his Capital Gains Tax payment from jumping from one property investment to another. It sounds fantastic, but various qualifications are coming with it. For the purpose of diversifying the investment portfolio under the coverage of 1031 Exchange, some general rules can be reminded here briefly. First, since December 31, 2017, only buying or selling real properties are qualified for the purpose of the 1031 Exchange. Once that requirement is satisfied, the investor needs to ensure that the properties exchanged are like-kind. It means that the properties have to be of “the same nature or character, even if they differ in grade or quality.” For example, swapping a rental property with a gym space would be allowed. Please note that properties that involve stocks, bonds, notes, securities, and interest in partnerships are excluded. Properties involved in the Exchange must be bought and sold for investment or business purposes only. So in principle, rental property is qualified but not your personal primary home. However, if part of your primary house is operated for the purpose of investment or business purposes, then that portion might be covered by the 1031 Exchange. In addition, the value of the property you purchased must be at least the same or more than the one you sold for the Exchange. Lastly, the strict timeline. First, within the duration of 45 calendar days, since the property owner sold the original property, he must correctly identify up to three potential like-kind properties. Second, the identified property or properties must be purchased within 180 days for the purpose of the 1031 Exchange.
In sum, so long as the rules and the principles are closely followed, 1031 DST is an outstanding tool for diversifying its investment portfolio.