Diversification is a crucial part of a well-designed investment portfolio. Savvy investors have long sought to diversify their portfolios through commercial real estate. Real estate can offer investors many potential benefits, such as tax-deferred income and asset appreciation that are not correlated with strong market performance. Diversification from uncorrelated assets also potentially reduces overall investment risk.

You can take advantage of these potential benefits by investing in a Delaware Statutory Trust (DST). DST investors buy fractional interests in institutional grade assets which are generally out of reach for many solo investors. DST offers come pre-packaged – they’ve already been purchased by a DST sponsor, so you don’t have to do time-consuming and expensive due diligence. DST assets are also professionally managed, so you won’t have to worry about the ongoing tasks and concerns associated with direct ownership of the property.

Perhaps more importantly, however, DSTs provide investors with capital gains tax shelter, a benefit that is not available with some real estate investment products. With accessible minimum investment amounts and tax-deferred eligibility through 1,031 exchanges, DSTs can offer some of the most attractive benefits of direct ownership and can help manage the potential drawbacks typically associated with publicly traded investment vehicles. .

What are Delaware Statutory Trusts?

Delaware Statutory Trusts (DST) provide individual investors with access to institutional grade investment property which may be much larger than the assets they would be able to acquire on their own. These are the same professionally managed properties that are typically owned by REITs, pension funds, endowments, sovereign wealth funds, and insurance companies. Assets can cover a range of property types, such as:

  • Self-storage facilities
  • Industrial warehouses and distribution facilities
  • Multi-family apartments
  • Offices and shopping centers
  • Medical office buildings

DSTs provide 1031 exchange eligibility for investors upfront and also upon exit, a benefit typically unavailable with other fractional ownership structures. DSTs can potentially provide a recurring, tax-efficient monthly income that can be offset by taxes payable through depreciation deductions.

Since DSTs are prepackaged and have accessible minimum investment amounts, accredited investors can use this investment vehicle to create diversified investment portfolios that help manage and potentially reduce their risk profiles.

What are 1031 exchanges?

A 1031 swap is an investment strategy that allows investors to sell their investment property and defer any potential capital gains tax by reinvesting the proceeds in similar replacement assets.

In addition to capital gains taxes, investors can also defer tax obligations such as recapture of depreciation and surcharges from the Affordable Care Act. Since the IRS allows 1,031 subsequent exchanges every time you sell investment property, you can potentially continue to grow your wealth tax-free. Investors can use the 1031 exchange process to exchange properties until death, after which they can bequeath their interests to their heirs, who can receive a one-time mark-up that can effectively eliminate any capital gains liabilities.

There are two key deadlines you should know about on 1031 exchanges. First, you only have 45 days to identify up to three replacement assets. Second, you have 180 days to close, so you should definitely plan ahead before you sell your investment property.

Benefits of 1031 DST Exchanges

There can be many advantages to investing in a Delaware statutory trust. In addition to being eligible for 1,031 exchanges, DSTs have the potential to speed up the exchange process through prepackaged offerings of institutional grade assets. These assets are often of better quality and larger than what investors could afford on their own. Additionally, DSTs remove a potential stumbling block for 1031 investors by allowing you to invest the exact amount needed to meet the “like-for-like” exchange requirement. You can also invest in multiple Delaware statutory trusts to create portfolio diversification across different asset classes and geographic locations. Finally, DST investments that incur debt usually have mortgage financing in place. These loans are however non-recourse, which protects your assets apart from the DST loan.

Potential disadvantages of DST

There are some Potential risks and disadvantages with Delaware Statutory Trust 1031 exchange properties. Investors cannot raise new capital from additional investors after the initial offering closes, so large capital expenditures such as resurfacing parking lots or replacing roofs can erode investor returns. Investors are also relinquishing personal control over their investments – DST properties are professionally managed. You will not have any influence on how the property is managed or operated. Another concern is illiquidity. Wait times for DSTs are typically between five and ten years. Although there is a secondary market for the sale of DST interests, there can be no assurance that you will be able to dispose of your interests at a fair price.

How to defer capital gains taxes by completing a DST 1031

Three steps are required to complete the 1031 exchange process and ensure eligibility for capital gains deferral after the sale of an investment asset.

1: Prepare in advance. Seek advice from your tax advisor and accountant to ensure that a Delaware Statutory Trust 1031 exchange is in line with your investment objectives. They can also help you better understand your minimum investment and loan-to-value requirements.

You will need to engage a Qualified Intermediary (QI) to hold the proceeds from your abandoned investment property in receivership until you find a suitable replacement. The Qualified Intermediary will also coordinate all administrative requirements to complete the 1031 exchange.

2: Find a replacement asset. DST properties are generally sold through registered brokers. However, they usually only offer a handful of DST investment opportunities. Due to regulatory changes, Realized now offers an online marketplace where 1,031 exchangers can browse a much wider range of real estate investments.

3: Complete the process. Once you have selected a suitable replacement property, you will need to verify that you meet the requirements of an accredited investor. If approved, you will make a deposit which secures your position in the DST investment. After that, you will inform your IQ of your replacement asset. The IQ prepares and fills out all the paperwork necessary to release your 1031 funds to the escrow agent responsible for closing the replacement asset. All these steps must be completed 180 days after the sale of your abandoned asset.

Should you invest in a Delaware Statutory Trust 1031 stock exchange?

Due to their longer holding times, DSTs may be better suited to patient investors willing to sit on the sidelines and have their assets managed by others. Conversely, some DST investors want to get out of the landlord game and are drawn to the prospect of fractional interest in professionally managed, institutional grade commercial properties.

Some investors conduct DST 1031 swaps to diversify their real estate holdings, while others just want to protect their income from capital gains tax after the sale of their investment properties.

DSTs, while more illiquid than some types of real estate investment vehicles, allow investors to build diversified commercial real estate portfolios while retaining direct tax benefits – primarily the deferral and amortization of capital gains. Whichever scenario you find most appealing, be sure to consult with your tax and financial advisor to determine the course of action that best suits your investment philosophy.

This material is for general information and educational purposes only. The information is based on data collected from sources which we believe to be reliable. It is not guaranteed as to its accuracy, does not claim to be complete, and is not intended to be used as the primary basis for investment decisions.

The actual amount and timing of distributions from the Programs are not guaranteed and may vary. There is no guarantee that investors will receive any distributions or return of their capital. These programs cannot guarantee that it will be able to pay or maintain Distributions, or that Distributions will increase over time.

Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.


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