Do Investors Own the Property in a Delaware Statutory Trust?

Posted Oct 24, 2023

Do Investors Own the Property in a Delaware Statutory Trust?

The Delaware Statutory Trust (DST) is a legal entity formed in the state of Delaware. The idea behind this structure is that the trust buys and manages real estate assets. Accredited investors then purchase fractional shares of that trust.

So, do investors own the property in a Delaware Statutory Trust? According to the IRS, the answer is yes; DST investors are considered direct owners. But investors don’t own the property outright. Instead, investors are the beneficiaries. The trust holds the assets, while investors receive potential benefits. One of these can include the designation of direct property ownership.

The advantages of a direct ownership designation include the following:

1031 Exchange

The IRS Revenue Ruling 2004-86 identifies DST interests as real property for a like-kind exchange. This means that investors can target DSTs as 1031 exchange replacement properties – as long as they are equal or greater value to the relinquished properties. When executed successfully, exchanging into a DST could mean a deferral of capital gains and depreciation recapture taxes on the sale of real estate.

The potential advantage here is that it can be easier for 1031 exchange investors to identify DSTs as replacement properties instead of identifying and closing on physical properties within the strict deadlines set for like-kind exchange execution.

Investor Protection

Because DSTs are formed based on statutory trust rules under Delaware law, investors are not exposed to their debt or other obligations. Under these rules, the trust owns the assets and manages operations. The investors/beneficiaries own fractional shares of the trust. 

Any income generated by the trust-held real estate might be distributed to beneficiaries based on the per capita ownership. Or that income could pay for the properties’ maintenance or repairs. But that income can’t buy more property for the trust. 

Furthermore, sponsors may not accept additional capital once the DST’s offering period is complete. In most cases, sponsors also can’t renegotiate loans or leases—tenant bankruptcy is one exception. A DST sponsor will typically have a master lease in place overseen by a tenant who cares for the properties and interacts with subtenants. 

Passive Investment in Real Estate

Fractional ownership through DST participation can provide passive real estate investment opportunities. This might be attractive to those who like the idea of real estate ownership but don’t want to participate actively in managing it. 

DST participation also allows investors to own more than one property, helping with portfolio diversification. For example, an individual might sell a small commercial building and re-invest the proceeds into a DST with different real estate assets. That individual would spread their investments across asset types or geographic regions, helping to potentially mitigate portfolio risk.

DST Investor Requirements

Delaware Statutory Trusts are restricted to accredited investors. The Securities and Exchange Commission (SEC) identifies accredited investors as those who have:

  • An income of $200,000 for an individual or $300,000 for a couple for the two most recent years, accompanied by an expectation of a similar level for the current year; or
  • An individual or couple net worth exceeding $ 1 million (excluding the value of a primary residence; or
  • Advanced financial expertise, like specific investment securities licensing as a Registered Representative or Registered Investment Advisor.

DST Property Ownership

The takeaway from the above is that investors can – and do – own property in Delaware Statutory Trusts. The IRS considers DST beneficiaries as owners, which is essential for tax purposes. The DST sponsor executes the proper strategies, which can free investors from responsibilities. It also means they have no control over property decisions. As such, before considering a DST investment, obtaining advice and direction from a qualified financial professional or accountant is vital.

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.

Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.

No public market currently exists, and one may never exist. DST programs are speculative and suitable only for Accredited Investors who do not anticipate a need for liquidity or can afford to lose their entire investment.

Costs associated with a 1031 transaction may impact investor's returns and may outweigh the tax benefits. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities.

Hypothetical examples shown are for illustrative purposes only.

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