ABC's of DSTs

The Simple Solution for a 1031 Exchange. As a 1031 exchange investor, you might consider investing in a Delaware Statutory Trust. DSTs qualify for full tax deferral under IRC Section 1031 and offer a fractional approach to purchasing one or more institutional-grade properties in multiple industries, such as healthcare, multifamily, industrial, and essential services.

DST investment programs offer a pre-structured and diversified solution to the 1031 exchange process. Investment objectives include projected monthly cash flow, professional third-party management, and immediate closing. The multi-billion-dollar 1031 DST industry has grown in popularity as more investors seek access to high-quality, income-producing real estate with freedom from day-to-day property management.

1. Freedom from management responsibilities

DSTs are managed by professional, third-party firms. For investors transitioning from actively managing properties to passive ownership, this eliminates the burden of property management and replaces it with time for travel, family, and leisure. Ownership distributions from cash flow are paid monthly. Investors receive monthly operating reports and a year-end tax package directly from the management firm.

2. No personal liability

DSTs are offered as both all-cash and leveraged programs. For leveraged programs, the debt financing is non-recourse to DST investors. The Sponsor is the guarantor of all recourse obligations under the loan agreement. DST investors have no liability to their personal assets due to the bankruptcy-remote provisions of the DST. Additionally, since an LLC entity is not required to hold DST interests, investors do not have to incur annual state filings and the fees typically associated with co-ownership structures.

3. Ease of financing and debt replacement

The first mortgage for the DST property is obtained by the Sponsor and recorded on the property prior to investors taking ownership. DST investors are allocated their portion of the debt based on their pro-rata share of ownership. The DST eliminates the need for investors to obtain individual financing, as the DST is the single borrower. This in-place financing is set and secured with known rates and terms from day one.

4. Low investment minimums

Because a DST Private Placement Offering allows for fractional ownership, the minimum investment amounts are much lower than if an investor were to individually purchase a whole property. Most DST investments have a minimum equity investment requirement of just $100,000, making it easy to diversify across multiple DSTs.

5. Access to higher-value properties

A DST is a pooled-equity investment which allows investors to collectively purchase higher-value property by aggregating equity together. More combined equity means more buying power, and with that comes the opportunity to purchase properties that might otherwise be out of a single buyers reach. These higher-valued properties may also offer more stable tenancy and better long-term fundamentals.

6. Diversification strategy

DST investing enables maximum diversification. The low minimum investment requirement allows investors to make smaller investments in multiple DSTs rather than purchasing a single, sole-owned property. Many DSTs own multiple properties, which further enhances diversification and reduces the risk of sole-property ownership.

7. Tax benefits that flow through to investors

DST investors have direct ownership in the real estate through a Trust Agreement. The benefits of direct ownership, such as mortgage interest deductions and depreciation, flow through to individual investors on a pro-rata basis. This pass-through feature allows investors to reduce their individual tax liability on the distributions they receive from DST interests.

8. All transaction costs included in the offering price

All transaction costs are included in the total DST offering price. Costs for legal, financing, title, escrow, appraisals, third-party reports, commissions, loan reserves, and closing costs are bundled into the total DST offering price. This transparency eliminates the surprise costs that often arise in direct property acquisitions.

9. Protection against the 45-day identification deadline

The 45-day identification period is a short window for most 1031 exchange investors. Since DST investments are already acquired and ready for an investors exchange, the closing process into the DST can take as little as three business days. This expedited closing process greatly reduces the risk of missing the IRS exchange deadlines.

10. Estate planning flexibility

As investors begin to think about bequeathing investments to heirs, real estate investments can be tricky, especially when heirs are not experienced in commercial real estate. Upon transfer at death, heirs may receive distributions on a pro-rata basis. Each heir may choose what to do with their inherited portion of any proceeds individually. Heirs receive a stepped-up basis and can continue to exchange property interests, while another may choose to receive cash proceeds.