Overview of DST for 1031 Exchange

What Is a Delaware Statutory Trust (DST) for a 1031 Exchange?

A Delaware Statutory Trust (DST) is a trust that can hold real property for investment. Investors generally acquire beneficial interests in the trust rather than direct title to the underlying property. A properly structured DST interest may serve as replacement property in a Section 1031 exchange when the transaction and offering meet applicable requirements.

How Is a DST Different From a TIC?

A DST gives investors a beneficial interest in a trust that owns the real estate. A tenancy-in-common (TIC) arrangement generally gives each co-owner an undivided interest in the property itself. Both structures may be eligible for use in a Section 1031 exchange, but eligibility depends on the structure and transaction. Compare the governing documents and discuss the structure with qualified tax and legal advisers.

For a broader overview of the trust structure, see Cornerstone’s Delaware Statutory Trust overview.

How Does a DST Work for Investors?

By investing in a DST, you gain beneficial ownership interest in the trust, which holds fee simple ownership of the real estate. While you won’t have the right to use or possess the property, you do get to co-own it with other qualified investors. And as a beneficial owner, you have the right to participate in your proportional ownership share of the subsequent profits, including projected cash flow, potential appreciation, and tax-deductible depreciation.

What Does a DST Offer Investors?

The DST opens doors to larger, institutional-quality properties that may have been unattainable on an individual basis. With lower minimum investment amounts, you can diversify your portfolio across different property types, locations, and investment strategies, minimizing risk and potentially increasing returns. Additionally, the DST offers capital gain tax deferral, professional management, potential monthly income, nonrecourse debt, limited liability, and access to national credit tenants. All these advantages are presented in a fully regulated, underwritten, and transparent private security offering.

When Can a DST Be Used in a 1031 Exchange?

A properly structured DST interest may be treated as replacement property in a Section 1031 exchange when the trust and transaction meet applicable requirements. Revenue Ruling 2004-86 describes a specific DST structure, not every DST. A qualifying exchange may defer recognition of gain, but it does not eliminate tax, and the ruling does not guarantee treatment for every transaction.

What Requirements Still Apply?

Section 1031 generally applies to real property held for investment or business use. A deferred exchange generally requires identifying replacement property within 45 days and completing the exchange within 180 days, or by the due date of the tax return including extensions, if earlier. A qualified intermediary generally holds the exchange proceeds and facilitates the exchange; the exchanger should not receive or control those proceeds. A qualified tax adviser evaluates the applicable tax treatment. Review the current risks of a 1031 exchange and available properties information before considering next steps.

Primary sources: IRS Revenue Ruling 2004-86, IRS Instructions for Form 8824, and IRS Revenue Procedure 2002-22. Revenue Procedure 2002-22 addresses conditions for certain undivided fractional interests in rental real property; it is not authority for every TIC arrangement or DST.

How Does the Passive Investment Structure Work?

Another significant advantage of investing in a DST is the potential for passive income. DST investments follow a passive investment structure, where experienced asset managers or sponsors handle the day-to-day operations. This allows you to enjoy the benefits of real estate ownership without the hassles of property management, making it an attractive option for those seeking a more hands-off approach.

What Types of Real Estate Can a DST Hold?

DST investment properties encompass a wide range of options, including luxury apartment communities, Amazon distribution centers, industrial warehouses, corporate headquarters, hospitality venues, medical offices, student housing, assisted living facilities, and NNN retail stores. Multifamily DSTs, which make up half of the current offerings, include both Class A properties with modern amenities and Class B properties with potential for additional value based on a value-add strategy.

What Is the History of Delaware Statutory Trusts?

Delve into the rich history of DSTs, which can be traced back to 16th-century English Common Law. However, it wasn’t until the Delaware Statutory Trust Act of 1988 that DSTs gained legal recognition as separate entities. This act offered freedom from common law restrictions and provided liability protection comparable to limited liability companies or partnerships.

Which Laws Shape DST Investments?

While DSTs are a relatively new concept, they have benefited from over 100 years of legislative and judicial landmarks in the United States. These milestones include the adoption of Section 1031 in 1921, the Securities Act of 1933, the landmark case of SEC v. W.J. Howey Company in 1946, the Delaware Statutory Trust Act of 1988, IRS Revenue Ruling 2004-86, and the 2017 Tax Cuts and Jobs Act that preserved 1031 exchanges for real property. These laws have shaped DSTs into a secure and lucrative real estate investment option with exceptional ownership structures.

Who Can Invest in a Syndicated DST?

Syndicated DSTs are private placement offerings exempt from SEC registration under Regulation D of the 1933 Securities Act, available exclusively to accredited investors. With investment minimums as low as $25,000, you can access stabilized institutional-grade properties valued at over $100 million. Register with us to explore our comprehensive listings of DST properties available for 1031 exchange, each undergoing a rigorous due diligence process.

What Should Investors Know About DSTs?

In summary, the DST offers a revolutionary investment opportunity that combines the tax benefits of real estate with the due diligence and full disclosure of securities. Experience the future of real estate investing with the Delaware Statutory Trust.