A Delaware Statutory Trust (DST) is an investment vehicle that may be used as replacement property in a 1031 exchange to defer capital gains taxes and potentially enjoy passive income. DSTs are typically structured as private placement securities and are available only to accredited investors.
Because DSTs are not direct real property but beneficial interests in a trust, their sale is regulated under federal securities laws.
While real estate brokers assist clients in buying and selling real property, they generally cannot offer or sell DST investments, as these are considered securities under federal law. Realized 1031 has shared a guide detailing the nuances to address this inquiry.
The real estate broker, in a traditional sense, is a licensed professional who helps property owners and investors sell or buy properties. The broker has a lot of responsibilities, such as listing and selling the physical estate, representing their client, and negotiating with buyers or sellers.
There are more specialized real estate brokers, such as those that focus on 1031 Exchanges. However, real estate brokers are not licensed to offer or sell securities unless they also hold a valid securities license and are affiliated with a FINRA-member broker-dealer.
Delaware Statutory Trusts (DSTs) are a unique investment structure in that they qualify as real property for purposes of 1031 like-kind exchanges, yet are simultaneously treated as securities under federal law when interests are offered to investors.
Most DST offerings are conducted under SEC Regulation D, which allows for private placements exempt from public registration, provided certain conditions are met. While the Securities and Exchange Commission (SEC) doesn’t require DSTs to be registered, the latter is still obligated to follow certain rules and regulations.
A traditional real estate broker cannot sell DST offerings since they are only licensed to sell real property. There are scenarios where a real estate broker is allowed to sell investment products like DSTs. For example, a broker who is also a licensed registered representative with a broker-dealer can legally offer DST investments. The license is from FINRA and can be a Series 7, Series 63, or Series 82 license. Additional state-level licensing, such as the Series 63, may also be required, depending on the jurisdiction.
Some brokers may also choose to refer clients to licensed professionals. However, referral compensation must comply with strict SEC and FINRA guidelines. Generally, compensation for securities referrals is only allowed if the referring party is properly registered.
Attempting to buy DSTs from a broker without the proper credentials can lead to serious consequences, including fines and loss of tax-deferred status. As such, it’s important for investors to perform their due diligence in this matter. Always ensure that you are working with a registered representative who possesses the necessary licensing, knowledge, and expertise to navigate the complexities of DSTs and their associated regulations.
While real estate brokers are valuable resources when identifying traditional real property for 1031 exchanges, DSTs are classified as securities and must be offered by professionals licensed through a FINRA-member broker-dealer. Before engaging in a DST transaction, it is important to verify a professional’s licensing and registration status to ensure they are properly authorized.
The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
Article written by: Story Amplify. Story Amplify is a marketing agency that offers services such as copywriting across industries, including financial services, real estate investment services, and miscellaneous small businesses.
https://www.investopedia.com/articles/financialcareers/07/securities_licenses.asp