The 411 on Alternative 1031 DST Exchanges

Many seasoned real estate clients are familiar with the alternative 1031 exchange structure known as a DST (short for Delaware Statutory Trust). This 1031 investment strategy provides numerous tax benefits and the opportunity for wealth creation in a simple, turnkey process. While most investors understand how they benefit from a 1031 exchange, they are much less clear about alternative investment strategies that can optimize diversification and potentially reduce risk.

Understanding the DST structure

In 1998, Delaware passed the Delaware Business Trust Act (renamed in 2002 as the Delaware Statutory Trust Act), which modernized state laws for trust creation and management to better suit investors. Key provisions:

• Real Estate Trust: Because management of the trust is dictated by the trustees and not the individual investors, DST owners benefit from passive real estate trust treatment rather than an actively owned business trust.
• Confidentiality: Delaware does not require filing the trust agreement with the state, which means these agreements can be kept confidential.
• IRS Recognition: In 2004, the IRS granted approval for DSTs to purchase real estate. This ruling enabled beneficial interest to be acknowledged as a replacement property in a 1031 exchange for tax purposes. DSTs can have up to 2,000 investors as beneficial owners.

Why investors use DSTs

Alternative 1031 DST exchanges can offer benefits not found in traditional 1031 exchange properties.

Asset diversification and personalized portfolio construction. In a DST structure, a real estate investment management firm serves as the sponsor, acquiring specified properties to attract investors. These properties are typically higher quality and generally diversified by property sector, investment manager (sponsor), and geography.

Institutional-quality property exposure. Most investors do not have adequate capital to purchase institutional-grade properties outright. Owning a fractional share in a diversified portfolio of DSTs can potentially reduce risk and enhance overall investment returns.

Tailored to individual risk profiles. By offering DST ownership interests to multiple owners, investors can tailor their DST selections and investment amounts to match their individual risk profiles and investment objectives. They can use exchange proceeds or invest cash as an alternative to stocks and bonds.

Advantages of DSTs

DSTs offer the investor a simple way to transition from active to passive ownership with income-producing real estate. The passive income from the beneficial interest can be used for retirement, lifestyle expenses, and other interests without the responsibility and burden of property management.

• Immediate closing: DSTs are pre-structured and existing investment programs that offer immediate identification and property closing. Many investors find it difficult to source, underwrite, and finance a 1031 exchange property within the 45-day identification timeframe. DSTs solve this problem directly.
• Diversification: Diversifying investments is the golden rule of any real estate investment strategy. By choosing a DST, investors can diversify away from one single investment into multiple DSTs.
• Lower minimum investment: Because a DST is open to multiple investors, the minimum investment required can be as low as $100,000 and tailored to suit individual needs and goals.
• Upgraded property holdings: DSTs can help investors offload unproductive or lower-quality assets and reinvest proceeds into a diversified portfolio of higher-quality, income-producing assets while maintaining 1031 tax deferral.
• Passive income: An investment in a DST means elimination of the terrible Ts of active real estate management: toilets, trash, and tenants. Investors can focus on asset allocation and overall portfolio management rather than day-to-day operations.

Is a DST right for your situation?

Petra Capital Properties specializes in purpose-built fractional 1031 DST programs. These pre-structured DST offerings begin at $100,000 and are personally constructed by the Petra team around each clients specific investment mandate, risk tolerance, and timeline. A Portfolio Design Session is the best way to determine whether a DST strategy fits your situation.