The Delaware Statutory Trust (DST)
What is a Delaware Statutory Trust (DST)
When a taxpayer sells investment property and would like to utilize Internal Revenue Code Section 1031 to defer the tax on that sale, the taxpayer may find it challenging in today’s market to locate a suitable replacement property. One possible solution for certain taxpayers, particularly “accredited investors” (high-net-worth individuals and certain entities, as defined in Regulation D of the Securities Act of 1933) is to acquire an interest in a Delaware Statutory Trust (DST) as replacement property to complete the exchange. A DST is a type of trust formed under Delaware law. Provided that the DST’s governing documents conform to the requirements of Revenue Ruling 2004-86, a DST taxpayer’s ownership interest in the DST is treated as a fractional interest in the property owned by the DST. Consequently, if the DST owns like-kind replacement property, a taxpayer can acquire a fractional interest in the DST to complete the tax-deferred exchange.
An ownership interest in a DST, sometimes called a “beneficial interest” or “DST units” is an indirect way of owning investment real estate. This can be appealing to taxpayers who are interested in acquiring a managed real estate investment. The trustee of the DST initially purchases the property and holds title to the property. A sponsor structures the investment and arranges for the issuance of beneficial interests in the DST. Although interests in the DST are treated as securities under federal securities laws, they are treated as ownership of real estate and thus like-kind pursuant to §1031. The sponsor typically arranges the bank financing for the purchase of the property, and coordinates the property management. In order to comply with applicable securities laws, the sponsor will generally provide a written document known as a Private Placement Memorandum (PPM) to the taxpayer. The PPM provides information about the property, area demographics, tenants and leases, financial projections, risks of the investment along with additional information about the sponsor, and other disclosures.
Steps to take when purchasing a DST:
DST PROS:
- Same full capital gains tax & depreciation recapture deferral as with “traditional” 1031.
- No more tenant hassles, maintenance problems, evictions, etc.
- Opportunity to exchange into NNN properties with Investment Grade tenants (Walmart, CVS Pharmacy, Family Dollar, Banks, etc.).
- Targeted monthly income for retirement.
- Built-in debt replacement (non-recourse).
- Low minimums allow for diversification into multiple DSTs of different Asset Classes (Multi-Family, NNN, Self-Storage, Student Housing, etc.).
- Easy process to close. Electronic signatures on documents.
DST CONS:
- Entire sale proceeds must be reinvested (including relinquished debt).
- Only works for Investment Properties. (No Primary Residences, Businesses, Stocks, etc.)
- You cannot “touch” the proceeds, or you risk disqualifying yourself. A Qualified Intermediary is required.
- 45 days to ID, 180 days to close.
- The decision to sell in the future (go “full-cycle”) is entirely at the discretion of the Trustee.
- Not liquid. No secondary Market.
- Will require continued deferral upon sale of asset.
- Distributions are taxed as ordinary income.
DST Offerings Examples
NECESSITY RETAIL
Net-Lease Portfolio 58 DST
The Portfolio consists of 25 properties net-leased to 8 recession-resilient tenants that are diversified across 5 industries and 14 states, including: CVS Pharmacy, Dollar General, Walgreens, Family Dollar, Hobby Lobby, etc.
SENIOR HOUSING / HEALTHCARE
Inspired Senior Living of Largo DST
The Offering is an 87-unit Assisted Living & Memory Care Senior Community located in Largo, Florida. The Property contains 62 assisted living units and 25 memory care units and has a total licensed capacity of 143 beds.
MULTIFAMILY / STUDENT HOUSING
CF Summerfield Multifamily DST
The Portfolio is a 478-unit apartment community located in Landover, Maryland. It consists of eight four-story residential buildings surrounding two parking garages.
OFFICE / INDUSTRIAL
Government Lease Holdings DST
The Portfolio consists of three Federal Bureau of Investigation Field Offices & one National Archives and Records Administration Repository.
Four Reasons to Consider a DST:
1. No Property Management Headaches
- DST properties are typically professionally managed, removing the burdens of “landlording” from our shoulders.
- All maintenance, tenants, evictions, etc. are handled for us.
- Investors simply receive targeted monthly income from the DSTs.
- No more “Terrible T’s.”
2. DSTs Make Great Back-Up Properties
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3. Quality Properties, Leverage & Access to Tax-Free Proceeds
- DSTs can offer exchangers properties they might not otherwise have access to.
- Investors can choose from properties in different cities and Asset Classes for added diversification.
- DSTs often provide built-in, non-recourse debt to replace mortgages from the Relinquished Properties, without the purchaser having to go back to a lender.
- Certain Classes of DSTs allow investors to withdraw some of their exchange proceeds without tax consequences.
4. Avoid Taxable Gains on Boot
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