Many of our clients are familiar with tax deferred #1031 Exchanges, where their investment property is exchanged into another, like kind property. Our #1031 Exchanges into Delaware Statutory Trusts (DSTs) follow the same rules and have identical tax benefits.
The most important difference is that in 2004 the IRS ruled that a fractional interest in a professionally managed trust (s) with hundreds of millions dollars of real estate, also qualifies as "like kind" replacement property. Hence, a typical investor today would exchange the sales proceeds into multiple DSTs instead of physical properties. Initially used by Ultra-wealthy investors, DSTs have now become the replacement vehicle of choice in such exchanges.
PROFESSIONALLY MANAGED PROPERTIES
DSTs allow investors to acquire partial ownership in a trust holding multi-million dollar properties that otherwise would be out-of-reach. They are professionally managed by experts in their fields and generally of Institutional quality. The investor, according to IRS rules, has no responsibility or liability as to the trusts or properties and will never face assessments (though there is the possibility of capital calls).
INVESTORS KNOW WHAT THEY ARE GETTING
Unlike investing in a blind pool R.E.I.T., DST investors clearly know what properties and asset classes they are investing in. They know their distribution rates, property location, history, reserve accounts, demographics, occupancy rate, actual income, lease terms and many other relevant details that are fully disclosed in the Private Placement Memorandum (PPM).
STEADY CASH FLOW POTENTIAL
DSTs are set up to strive for monthly Cash Flow distributions. With the right allocation among DSTs, an investment portfolio could generate additional depreciation to shelter some of the income received.
Diversification of an investment portfolio is perhaps the most important tool for mitigating risks. It is also one of the few financial factors that we can control. What Is more productive: tying up capital in a single property, in one location, or diversifying the holdings across multiple DSTs, different markets, asset types , income streams and lease terms, to name just a few?
Each DST sponsor has an exit strategy for their DSTs which we would communicate to our clients. The decision to sell the property (properties) after a certain number of years depends mostly on the sponsor's assessment of the optimum valuation at that time. If that sale is successful, and when that happens, investors will typically have the choice of taking their cash out or exchanging it again to continue the tax deferral. (See Potential Risks below for more information)
Experience has shown that passing on an apartment property or vineyard, for example, to several heirs often leads to serious disagreements and family fights. Also, passing on commercial properties with its management responsibilities to a non-involved spouse can create unwanted stress. It is much simpler to pass on percentage ownerships in professionally managed, passive DSTs so that each heir can decide what to do with the money when it becomes available.
All investments have inherent risks including those that are common to real estate investments. Specific risks include, but are not limited to:
To discuss the use of DST’s in #1031 exchanges, call Dieter Thurow at 707-431-8898 or send a confidential email to Dieter@dthurow.com