How to invest in dst?
Delaware Statutory Trusts typically require a minimum investment of $100,000, and an investor can acquire or exchange into ownership in one or multiple DSTs. DST real estate is generally held for 3 to 10 years.
While it is regulated and sold as a security, at its core, DSTs are real estate, and the risks of any real estate investment apply. Real estate risk in this context is exactly equivalent to the real estate you presently own, including your own home.
A public REIT can be bought and sold at will, which means it could be held for as short or as long a period as the investor desires. DST offerings require a long term commitment, typically a 5-10 year time horizon, during which time an investor is not able to access their capital.
The DST 1031 Exchange is a solution for accredited investors desiring to insulate themselves from market volatility by exchanging a single property for a diversified portfolio of passive real estate. DSTs allow investors to manage concentration risk by purchasing pieces of quality real estate all over the US.
The typical range you can expect to see on DST investments will usually be a fixed percentage based on the expectations on projections of the DST portfolio of properties. The rate of return is anywhere from 5-9% on your cash-on-cash monthly distributions.
A DST is a fractional ownership structure that investors can use in a 1031 tax-deferred exchange. Since 2004, when a favorable ruling by the IRS allowed the use of them in 1031 exchanges, DSTs have become an alternative vehicle for investors conducting a tax-deferred exchange.
Sponsors earn compensation through fees and commissions that are included in the fees charged to investors. While all real estate transactions have costs, some investors think that the charges associated with DST investments are excessive.
Some 1031 exchange investors have wondered whether they can sell their investment properties and complete a 1031 exchange into a Real Estate Investment Trust (REIT). The short answer is yes, but investors must follow some complex steps to successfully complete the exchange.
If any income is earned from a DST, it is entered on IRS form E at the end of the tax year. This income is generally taxed as ordinary income. There are also deductions and depreciation that might reduce income tax burdens for a DST property.
A 721 exchange allows investors to avoid taxes and keep their wealth working for them in a tax- deferred exchange of their investment property for shares in a REIT. REITs are required to distribute 90% of their taxable income in the form of dividends paid to shareholders.
How do you qualify for a 1031 exchange?
The main requirements for a 1031 exchange are: (1) must purchase another “like-kind” investment property; (2) replacement property must be of equal or greater value; (3) must invest all of the proceeds from the sale (cannot receive any “boot”); (4) must be the same title holder and taxpayer; (5) must identify new ...
- Inability to raise new capital/refinance. Once the DST offering closes, there cannot be future contributions by current or new investors. ...
- Lack of personal control. DST's are passive investments. ...
You can continue to depreciate your new property or the DST properties. If your real estate is fully depreciated, then the basis gets carried over to the new property. For a CPA this is a very common transaction.
Objectives of 1031 DST Exchanges
A 1031 exchange is an IRS-recognized tax deferral strategy that allows an investor to sell an investment property and acquire a similar property with the intent to defer capital gains and depreciation recapture taxes.
The most fundamental way to assess a DST program is to start by focusing on something other than the program itself. Independent of the actual investment opportunity, it is of primary importance to thoroughly vet the sponsor to develop a comfort level before you do anything else.
While DST interests can be sold and transferred to an accredited investor, the most obvious purchasers of DST interests are other investors either in the same DST or outside investors who wish to acquire interest in the particular DST.
DSTs have a defined exit strategy, which means cash or an UPREIT. These are features not available to Tenants In Common (TIC). A cash exit strategy is the one previously described — the DST sells its properties and basically liquidates, returning principal to investors. An UPREIT exists as another exit strategy.
- Trade up in real estate value with one or more replacement properties.
- Reinvest all of your 1031 exchange proceeds from the relinquished property into the replacement property.
- Maintain or increase the amount of debt on the replacement property.
Many investors that are in a 1031 exchange that are tired of actively managing their investment properties and are looking to diversify* their 1031 exchange eligible equity as opposed to buying a single property again often ask themselves, “Can I 1031 exchange into a REIT?” The answer is yes—not directly—but indirectly ...
Under this law, the only investments that are eligible for use in a 1031 exchange are those that meet the definition of “real property” as set forth by the IRS. Stocks, bonds, and other types of assets are not considered real property by the IRS.
Is a 1031 exchange a good idea?
The 1031 exchange allows equity from one real estate investment to roll into another, while deferring capital gains taxes. And it's often one of the best methods for building wealth over time.
Delaware Statutory Trust Fees
One small piece of good news is that the State of Delaware does not charge any ongoing fees once a Delaware Statutory Trust is formed.
A Delaware Statutory Trust is a real estate ownership structure where multiple investors each hold an undivided fractional interest in the holdings of the trust. The trust is established by a professional real estate company, referred to as “DST sponsor”, who first identifies and acquires the real estate assets.
Description. Documentary Stamp Tax is a tax on documents, instruments, loan agreements and papers evidencing the acceptance, assignment, sale or transfer of an obligation, right or property incident thereto. [return to index]
Deadlines are crucial to 1031 exchanges. Investors must identify replacement properties for their relinquished assets within 45 days, and they must close on those properties within 180 days. Failure to meet either deadline could result in a disqualified exchange.
Certain property is excluded from the definition of IRC 721(c) property, including: Cash equivalents; ▪ Securities (as defined in IRC 475(c)(2) without regard to (c)(4)), or ▪ Tangible property with built-in gain of $20,000 or less.
A section 721(c) partnership is a partnership in which the U.S. taxpayer and one or more related foreign persons own 50% or more of the partnership interests. Section 721(c) also provides an out for partnerships that adopt a “gain deferral method”.
However, both an LLC or partnership (or any other entity for that matter) can do a 1031 exchange on the entity level, meaning the entire partnership relinquishes a property and the entire partnership stays intact and purchases a replacement property.
- Invest for the long term. ...
- Take advantage of tax-deferred retirement plans. ...
- Use capital losses to offset gains. ...
- Watch your holding periods. ...
- Pick your cost basis.
Because Section 1031 is a federal tax code, it is technically recognized in all states.