The Delaware Statutory Trusts (DSTs) are legal trusts created under the Delaware law for the purpose and benefits of a business. DSTs provide flexible solutions for investment owners in deferring capital gains tax while reducing active management.
The following are the main significant benefits of DSTs:
1. 1031 Eligibility
An investor must have direct ownership in a property to qualify for a 1031 exchange. Because DSTs are treated as direct ownership of real estate under the IRS tax code, they are eligible for 1031 exchanges, both when you put a principal investment or when the Trust liquidates.
2. Cheaper and easier financing
Under the DST, the lender is signing into the trust only as a borrower. For this reason, the borrower can easily obtain an essentially better financing option in contrast to a Tenant in Common (TIC) arrangement.
In a DST structure, there is no apparent need for individual investors to be qualified since the loan is obtained by the trust. Additionally, their participation in the trust will not affect their credit rating, these are non-recourse loans to the investor.
3. Limited personal liability
Under a DST structure, investors have limited liability to their personal assets due to DSTs bankruptcy-remote provision. To put it simply, if the trust would fail and go to bankruptcy, the investors will only lose their investment in the trust. That means that any potential creditors of the trust would not reach the other assets of the investors, as prohibited by the DST provisions.
4. Lower minimum investment
The maximum investor count for a private DST offering could potentially reach 499 investors. As a result, the investment amount will be divided among the investors, leading to a significantly lower minimum investment.
Cash investments under DST can be as low as $25,000, and 1031 exchange minimums are usually at $100,000.
5. No need for unanimous investors approval
Under the DST structure, there is no need for the unanimous approval of the investors to address any unexpected developments. Here is an example to illustrate the importance of this freedom:
Multiple TIC structures were unsuccessful in making the necessary course of action due to the disapproval of some investors, also known as rogue investors. DST offerings, on the other hand, provide additional protection to investors by giving the signatory trustee the power to take important decisive actions in the event of a loss.
DSTs are also able to diversify into multiple investments rather than a single collective one. The number of allowed DST investors is not limited, and they can always exchange into different properties. Because of this, there can be diversification by sectors and the locations of the properties.
For example, an investor can invest in an apartment property, a Walgreens store, an office building, and more, within a single 1031 exchange.
Delaware Statutory Trusts can be a better option versus traditional holding and acquiring a property for some 1031 exchange investors. Because of its different combinations of advantages, through DSTs, investors can be a more effective real estate investment solution.
Looking to enter into DSTs or a 1031 exchange? Get in touch with us today, and we’ll gladly help!