Investors in Delaware Statutory Trusts (DSTs) should be aware of the tax implications in various scenarios, including income and capital gains, depreciation, cost basis, and future 1031 exchanges. Here is a detailed explanation of each scenario:
Income & Capital Gains:
DST investors own a beneficial interest in a trust that owns commercial real estate. They receive an operating statement detailing their share of rental income and expenses. The dividend income received from the investment is reported on a 1099 tax form and included in Schedule E of the investor’s tax return, subject to income tax.
Depreciation allows investors to expense a portion of a property’s value each year to account for its physical deterioration. When a DST investment is used as a replacement property in a 1031 Exchange, the investor’s cost basis from the relinquished property carries forward. Depreciation can be used to reduce taxable income if there is remaining basis or if the DST properties purchased have a greater value.
Tax Treatment of Future 1031 Exchanges:
There is no limit to the number of 1031 exchanges an investor can complete. If a DST investment is successful and the property is sold for a profit, the sale proceeds can be reinvested in another DST offering to extend tax benefits.
Buying Properties of Equal or Greater Value:
To complete a 1031 Exchange successfully, the value and equity in the replacement property must be equal to or greater than the relinquished property. Any differences may trigger a taxable event. It is crucial to consult with a CPA, investment advisor, or qualified tax attorney to navigate the complexities of 1031 Exchange rules.
DST Tax Reporting:
DST investors receive a 1099 form detailing income, capital gains, and distributions earned from the investment. This information is reported on the investor’s individual tax return. If the DST property is located in a different state from the investor’s residence, they may need to file a separate state income tax return. Working with a CPA is essential to meet all DST tax obligations.
Tax Treatment & Private Equity Real Estate: