Much of what we write about focuses on exchanging from a real estate holding into a Delaware Statutory Trust (DST). Thanks to Internal Revenue Code, Section 1031 and Delaware’s statutory law, you can defer capital gains taxes from the sale of your property, without stressing to find a “like” property in a 45-day period. Additionally, that DST gives you the perks of property ownership, while avoiding the “terrible Ts” of toilets, trash and tenants.
What if you don’t have a property, but you do have cash? Well, that DST is also an interesting investment option, especially if you want to add real estate holdings in your portfolio. All that’s required is status as an Accredited Investor and a minimum investment amount, which can be as low as $25,000. Such investment may buy a partial ownership interest in a large-scale, professionally-managed property. In addition to adding institutional-grade real estate to your portfolio without needing millions of dollars to do so, a DST investment may provide you with:
- An income tax shelter. Your DST gives you the same tax benefits you’d get from direct real property ownership, including mortgage interest deduction. Many DSTs carry moderate leverage – generally 50%-60% loan-to-value financing – which can provide a source of income tax shelters as investors may claim their proportionate share of mortgage interest deductions.
- More income tax shelters, courtesy of nonrecourse debt. It is important to note that any debt utilized by the DST is non-recourse to its investors. Even though as an investor, you do not need to go through any loan qualification process or sign personally for any debt, you can still include your proportionate share of debt in your investment basis. This potentially allows you to receive the the benefits of depreciation allowances on a basis greater than your invested equity.
- Convenience. Think about this. If your goal is to invest in real estate, you have to find a great property, strike a deal with the seller, conduct due diligence, go through escrow . . . and the deal could still fall apart. DST investments, by contrast, are “prepackaged” real estate offerings. Due diligence is complete, acquisition has closed, management and mortgage are in-place. No need to stress - DST offerings are essentially signed, sealed and delivered.
- Recurring monthly income. DST investments typically aim to make monthly distributions to investors. Due to its passive and recurring nature, some investors affectionately refer to this as “mailbox money”.1
- Limited liability in case of trouble. Thanks to the DST’s bankruptcy remote provision, your personal assets aren’t impacted if the trust should go into bankruptcy. The most you stand to lose is your specific investment, not your other assets.
- Plenty of options upon exit. Once the program is concluded and the asset sold, you can take your proceeds and pay taxes. Or, you can defer capital gains tax once again by exchanging into other DSTs, or a sole-ownership property. Or, some combination of the above options.
As with any investment, however, you need to be aware of some risks.
- Say goodbye to liquidity. Don’t forget that, whatever else it might be, the DST is a real estate investment. Real estate property is considered an illiquid asset. Though you may be receiving cash flow, you won’t have access to any proceeds until the asset is sold, and the program concludes, which could involve a span of 7-10 years. If you need ready access to your cash, the DST is not going to be helpful.
- You don’t have a voice. You’re a silent partner. Investors in a DST do not have a formal vote regarding property operations or dispositions. As such, you don’t have a say in who leases the property, what capital improvements should be made, when the asset should be sold, or anything else concerning the property. Investment in a DST requires a great deal of confidence in the sponsor; which is the entity heading up the trust.
Still, if want to park your cash in a real estate property, but don’t want the hands-on effort of finding, maintaining or selling it, a DST could be your answer. If you’re interested, consult with a trained financial professional, or contact us at Realized.For more information on Realized’s programs, resources and additional information contact us at 877-797-1031, or log on to https://www.realized1031.com/.