Sometimes referred to as like-kind exchanges, a §1031 exchange allows a person to sell one property and invest the proceeds from that sale into the purchase of another property—without paying any capital gains taxes on the sale of the first property.
But what if you want the tax deferral of a §1031 exchange without the headache of a replacement property you have to manage? Even better, what if you could have the benefits of the §;1031 tax deferral and a passive investment? A knowledgeable real estate lawyer might suggest a §1031 exchange utilizing a Delaware statutory trust (DST) as the solution.
What Is a DST?
A DST is a legal entity created under the statutes of Delaware to hold the title to a single or multiple income-producing commercial properties. DSTs can own office buildings, apartments, retail spaces, industrial parks, and other types of property.
Similar to a real estate investment trust (REIT), a DST normally holds titles to several properties. The goal is for the properties to appreciate and produce income shared among the DST sponsor and the owners of the DST. The investor’s interest in the DST is called a beneficial interest, and this interest entitles them to a pro-rata share of appreciation and income of the DST’s assets.
Why Would I Invest in a DST?
Perhaps the most attractive thing about a DST is the owner’s passive participation in the trust. Investment property normally involves active management, whereas DSTs allow an investor to own an income-producing investment property without having to actively manage it.
DSTs also have other benefits including, but not limited to:
- Liability protection. DSTs provide liability protection to investors. Investors’ personal assets held outside the DST are shielded from a DST’s liabilities.
- Low minimum investment. DSTs usually have relatively low minimum investment requirements, making them options for even “mom-and-pop” property investors.
- Diversification. DSTs can own property in many different regions and across various asset types.
- Non-recourse loans. DST investors aren’t normally required to execute indemnities or loan guarantees.
Rely on the Expertise of Real Estate Professionals
So why is it necessary to have skilled real estate attorneys guide you through the DST process? It provides an assurance that the transaction is structured properly: from drafting your purchase contract through closing your §1031 exchange and replacement properties. By partnering with professionals, you gain peace of mind that your investments are backed by sound recommendations and effective professionalism for the future of your assets.