1031 Exchange – What Is a DST Or Delaware Statutory Trust?
What is a DST or Delaware Statutory Trust and what are the potential benefits to you?
Many of our clients are liquidating “self managed” real estate properties as they are no longer interested in handling the day-to-day management. In addition, since it typically helps mitigate risk to diversify their interests into multiple properties, as opposed to only owning a single property in a single market, when processing a 1031 exchange, choosing to use a Delaware Statutory Trust (DST) is a great option.
Put simply a Delaware Statutory Trust (DST) is a legal entity that is formed for the purpose of holding title to properties purchased. This trust will assign a trustee to handle the many day-to-day operations that are necessary and will own title to 100% of the interest in the property or properties acquired. In processing a 1031 exchange using a DST, your qualified intermediary (QI) would take the funds from liquidation of the initial property and place the funds into the DST and you would receive a beneficial interest in the newly formed trust.
A DST targets the following potential benefits:
- A DST gives you the ability to pool your funds from the sale of your property with the funds of other people to purchase some very impressive assets that, due to their size and uniqueness, are sought out by larger corporations that tend to sign longer and more profitable leases.
- The DST is the single owner and borrower. The lender only underwrites the DST, not each individual investor; therefore, the loan is nonrecourse to the investor. Investors purchasing a property on their own may have to arrange for financing and may be required to provide personal guarantees.
- The transfer of beneficial interests in a DST can be easier as there is generally less paperwork and time required than buying a property directly.
- A typical minimum investment of $100,000 allows more flexibility for investors to diversify their exchange into several properties compared to trying to purchase a property directly.
- The DST allows cash investors (non-1031) the option to complete a 1031 tax-deferred exchange when the current property is sold.
- Investors are not required to sign on guarantees for non-recourse carve-outs on the loan that they might have with direct ownership.
While having many potential benefits, the DST is not right for all investors as tax laws can change over time and, like real estate, a DST has limited liquidity. This is another reason why working with someone who has years of experience in dealing with all aspects of 1031 exchanges is a good idea.