A Delaware Statutory Trust (DST) operates as a legal trust formed under Delaware law, designed to facilitate collective real estate investment. Through this structure, multiple investors pool funds to purchase a beneficial interest in the trust, which in turn owns and manages one or more income-generating properties. Instead of directly owning real estate, investors hold fractional interests in the DST, entitling them to a proportionate share of the trust’s income, tax benefits, and appreciation.
The structure’s passive nature, coupled with access to institutional-grade real estate, makes DSTs appealing to investors seeking consistent income and tax advantages, though it’s crucial to understand the risks and restrictions involved.
What is a Delaware Statutory Trust (DST)?
A Delaware Statutory Trust is an investment vehicle that makes high-quality real estate accessible to a larger range of investors. The trust is formed by a real estate company, then individuals invest in the trust. The group of investors all own shared interests but don’t own a specific fraction of the property. This way, no investor can claim full ownership.
DSTs are used to purchase various types of real estate. DST properties are typically of institutional quality and are normally inaccessible to individual investors. DSTs allow individuals to purchase ownership of these high-quality assets for a much lower minimum investment.
How Does a Delaware Statutory Trust Work?
To better understand how a Delaware Statutory Trust works, it’s important to explore the roles of the trust sponsor, the operational structure, and the benefits and limitations it offers to investors. Let's take a look.
Formation and Structure of DST Properties
DSTs are first created by a real estate company, referred to as the DST sponsor. It identifies potential properties for the trust and carefully vets them before including them. A DST may finance, find a property manager, and identify a tenant before creating the trust agreement.
Once the properties are selected and the trust is formed, the DST coordinates with broker-dealers to raise equity and identify investors. The governing trust agreement is formed, allowing the DST sponsor to act as a trustee on behalf of the beneficiaries. The investors become the beneficiaries and own beneficial interest in the trust. The DST sponsor holds and manages the assets, and investors receive passive income based on the income of the trust.
Operational Procedures
Income is generated for the DST and its investors through rent payments and property sales within the trust. DST investors are paid regularly, making these trusts a great form of passive income. The sponsor does all the hard tasks, including managing the properties, completing the paperwork, and executing sales and purchases.
The DST sponsor is typically an expert real estate company, meaning it thoroughly vets every property before including it in the trust. Investors can rest assured all due diligence is being completed. However, before investing in a trust, investors should research the sponsor’s track record with DSTs and understand its experience and areas of expertise.
1031 Exchange and DSTs
One of the biggest advantages of a DST is that it’s eligible for a 1031 exchange. 1031 exchanges allow investors to defer paying taxes on income generated from real estate if the capital is used to invest in a like-kind property. If investors get capital gains from a property, they can defer paying taxes on it by investing in a DST trust as a replacement property.
Benefits of a DST
A Delaware Statutory Trust (DST) offers numerous benefits that make it an attractive investment vehicle, particularly for individuals seeking passive income and tax advantages. Some key benefits include:
- Passive Ownership: Investors are not responsible for day-to-day property management, as professional sponsors handle all operations, including leasing, maintenance, and tenant relations.
- 1031 Exchange Eligibility: DSTs qualify as like-kind property under IRS rules, allowing investors to defer capital gains taxes when reinvesting proceeds from the sale of a property.
- Diversification: By investing in a DST, individuals can access institutional-grade properties such as commercial buildings, multifamily units, and industrial facilities, often spread across various geographic locations and sectors.
- Lower Entry Costs: Unlike directly purchasing real estate, a DST enables investors to acquire fractional ownership of high-value assets with lower upfront capital requirements.
- Limited Liability: Similar to other trust structures, investors’ personal liability is limited to their initial investment in the trust.
Risks of a DST
Delaware Statutory Trusts have many benefits, but there is no such thing as a perfect investment. DSTs aren’t without risks, and their structure may not be compatible with every portfolio.
- Illiquid: DSTs are illiquid. Once an investment is made, it is nearly impossible for investors to exit the trust before its set time horizon.
- Lack of Control: Active investors may not like the lack of control. DST sponsors handle all aspects of asset management, and the beneficiaries don’t have a say or any control. Investors need to do their due diligence and ensure they trust the sponsor before signing the trust agreement.
- Impact of Market Fluctuations: Many investors like that these trusts provide exposure to high-quality assets. However, even institutional-grade properties aren’t free from the impact of market fluctuations. If the real estate market has a drastic downturn, the trust may not provide the expected performance.
Include Institutional-Quality Assets in Your Portfolio
Real estate is an enticing market for many investors. However, it can be hard to select and find high-quality projects and funds to invest in. DSTs help individual investors get exposure to properties that are typically reserved for institutional investors. With their income structure and tax advantages, they may be a good fit for certain portfolios. Before investing in any new vehicle, it’s a good idea to consult with your advisor for personalized advice.
Frequently Asked Questions
What is the purpose of a Delaware Statutory Trust?
The purpose of a Delaware Statutory Trust (DST) is to provide a legal structure for passive real estate investment, allowing multiple investors to pool resources and own fractional interests in income-producing properties.
What is the difference between a 1031 exchange and a Delaware Statutory Trust?
A 1031 exchange is a method, while a DST is one type of eligible investment vehicle for completing a 1031 exchange.
Does a Delaware Statutory Trust file a tax return?
About Savannah Munholland
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