Entering a Delaware Statutory Trust (DST)is a structure that allows eligible investors to hold fractional interests in institutional-grade real estate, often as part of a 1031 exchange. DSTs may appeal to those seeking portfolio diversification and passive ownership, but like all real estate investments, they carry risks. While these advantages are welcome, there’s always a question that lingers in the mind of investors: Do Delaware Statutory Trusts depreciate in value? The answer is yes, but it’s a scenario that requires an understanding of what depreciation entails.
Below, Realized 1031 has shared a guide to distinguish the two types of depreciation that happen on DST properties to help you out.
How DST Depreciation Happens
Depreciation is often associated with the loss of value of an asset, and this is true in most cases. However, depreciation has two meanings in DSTs: account depreciation and market depreciation.
Accounting Depreciation
The first type of depreciation is the one used for accounting purposes. Since this type is a paper loss, the value of the property remains unaffected. It allows investors to take tax deductions against income generated by the property, even though the market value may remain unchanged or even increase.
This type of depreciation follows a schedule, which is the allowed deduction amount per year based on the asset’s class life and the depreciation method chosen.
- Residential Properties: 27.5 Years
- Non-residential Properties: 39 Years
DST investors may benefit from these deductions proportionally based on their ownership share. It’s important to note that depreciation reduces the property's cost basis, which can result in depreciation recapture taxes when the asset is sold. This type of depreciation does not affect the property’s assessed market value or property tax bill.
Market Depreciation
This happens when the property’s value actually goes down because of various factors, not just regular wear.
- Property Type and Location: Just like any real estate, DST assets can fluctuate in value depending on market conditions, location desirability, and tenant demand.
- Broader Economic Conditions: Real estate markets are cyclical and can be affected by inflation, interest rates, supply-demand imbalances, or macroeconomic downturns.
- Asset Management: Although DST investors are passive, the sponsor’s ability to manage the property can influence operational efficiency and asset value. If the sponsor isn’t able to handle the role, then the property’s value may depreciate as a result.
While sponsors typically select stabilized, income-producing assets and employ long-term leases to mitigate risk, market depreciation remains a possibility and should be considered as part of a broader due diligence process.
Final Thoughts: Do DSTs Depreciate in Value?
DST properties can depreciate in two ways: accounting and market depreciation. The former refers to the scheduled depreciation due to expected wear and tear, and it’s often relevant for tax purposes. Meanwhile, market depreciation is the loss of value because of factors like market volatility and possibly ineffective asset management strategies. Learning the difference between the two can help investors better understand the potential risks and returns associated with DST investments.
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.
Sources:
https://m.economictimes.com/definition/depreciation
https://www.investopedia.com/articles/investing/060815/how-rental-property-depreciation-works.asp
