10 Reasons to Consider DSTs
If you’re considering real estate investing or changing your real estate strategy, maybe you’rewondering why there is so much chatter about Delaware Statutory Trusts (DSTs). A DST is a legalentity created as a trust under Delaware statutory law. IRS Revenue Ruling 2004-86 opened theway for eligible DST investments to qualify as the replacement property in a 1031 exchange. Hereare 10 of the reasons why we keep talking about DSTs.
1. No management responsibilities for you.If you’ve owned rental real estate in the past, you know that property management istime-consuming and stressful. Some investors find that it can be a major relief to hand overthe management and the decision-making responsibilities to a professional team ofexperienced managers.
2. Invest the amount you want to invest.Too often in real estate investing, investors over-extend themselves financially to acquire asuitable investment property. With a DST you can invest the amount that is right for you andacquire the percentage of the property you can afford. Note that there are minimuminvestments in DSTs, typically $25,000 - $100,000 for 1031 exchange investors.
3. Acquire investment-grade, high-value properties.Most real estate investors cannot afford to invest in multi-million-dollar properties on theirown. DSTs provide a unique opportunity for investors to acquire partial ownership andexperience the benefits only found with these types of properties.
4. Opportunities for diversification.Because you can choose the amount you invest in a DST, you can split your investment amongmultiple DST properties, giving you an opportunity to diversify your real estate portfolio.
5. A legecy for your heirs.If you have intentions of creating a portfolio of income-generating investments that willoutlive you and continue to provide for your heirs long after you’re gone, a DST could be aworthy investment candidate. As with all 1031 exchange-qualified investments, your heirs willreceive a step-up in cost basis when they receive your DST assets so they will not have toinherit the previously deferred capital gain liabilities.
6. Cash flow.DSTs are permitted to keep a reasonable amount of cash reserves to be prepared in the event theproperty requires repairs or faces unexpected expenses. However, all earnings and proceeds above thereserve amounts must be distributed to the beneficiaries on a regular basis and within the expectedtime frame.
7. Investors do not have to qualify for the debt.Investors do not have to qualify for the property’s mortgage loan. The DST is the only entityliable for the mortgage loan and it is nonrecourse to the investor. Investors do not have toprovide personal documentation for loan approval and do not have to worry about otherpersonal assets or liabilities affecting the status of the loan.
8. No stress over exchange deadlines.Because an investment in a DST can close very quickly, investors do not have to worry that theacquisition transaction won’t close on time or that they won’t be able to acquire a chosenproperty because of the competition in the market.
9. 1031 exchange backup plan.1031 exchange investors can include a DST property among their three candidate propertiesidentified during their identification period. If they cannot acquire their first two choices ofidentified candidate properties in time to meet their deadlines, the DST property remains anoption that can close very quickly to meet the exchange deadline.
10. Eliminate boot.Many 1031 exchange investors do not want to pay capital gains taxes on boot due to theirreplacement property costing less than the value of their relinquished property. Because DSTinterests can be acquired for lower amounts than most investment properties, the remainingvalue, or boot, can be used to acquire a percentage of a DST property as a second replacementproperty in the 1031 exchange.