How Do You Report Interest in a Delaware Statutory Trust (DST)?

How Do You Report Interest in a Delaware Statutory Trust (DST)?

Posted by Mckenna Duncan on Jul 6, 2022

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Real estate investments may be an attractive way to pursue your financial goals. However, every investor is different, and each has individual preferences for how to invest. For some, direct ownership and management of property may be satisfying, while for others, that approach is too labor-intense. Delaware Statutory Trusts (DSTs) are worth considering for investors exploring passive options. Investing in a DST may provide some potential advantages of direct real estate ownership without the direct ownership management responsibilities. The IRS has defined a DST investment as direct fractional ownership of commercial real estate.

DSTs are pass-through entities, which means that the company does not pay taxes at the corporate level. Instead, income is distributed to the shareholders. The Trust can’t reinvest the money that comes in from leases; it must pay income according to the percentage the investor owns.


Shareholders Receive a Form 1099

DST investors each receive a 1099 from the DST sponsor that reports their individual share of income and expenses. DSTs should send one statement for each property the Trust owns. In turn, the investor reports DST income on a Schedule E, along with deductions and depreciation.


What Are Other Tax Implications of DST Investments?

Often, investors consider DSTs as a means of deferring capital gains taxes when selling investment real estate. Since the IRS determined that DST investments were eligible for use in 1031 exchanges , this tool has been used to defer the gain from selling investment property. If an investor sells an asset and wants to invest in a DST through a 1031 exchange, they can do so, following the usual 1031 exchange rules. However, since investors can typically acquire DST shares in custom-sized amounts, the exchange process may be more straightforward than identifying and acquiring real property.

Also, the DST structure protects investors from exposure to the debt and obligations of the Trust. The Trust's sponsors control decision-making, so the shareholders are one step removed from responsibility. That’s one reason that investors in DSTs must be accredited.


Will I need to pay Delaware state income taxes?

Paying income taxes typically depends on the state where the income was earned. So, if the DST owns property in Delaware, the investor will need to report the income earned in Delaware, just as they would for income earned in another state. However, the property and the investor can be in any state.


What Are the Risks of DSTs?

All investments have risks, including DSTs. For example, real estate can gain or lose value, and sponsors can perform well or poorly. Some other risks for DST investments are as follows:

  • Changes in tax laws can reduce the benefit of DSTs and other tax-advantaged investments and may not be predictable.
  • DSTs fees may be higher than other investment types.
  • DSTs are considered illiquid, with holding periods that are typically five to ten years. Because a DST can't raise additional capital or add new investors, major property expenses or higher vacancies can cause cash flow to tighten.

Investors should consult their financial advisor to evaluate the appropriateness of these investment options.

 

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. 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. The actual amount and timing of distributions paid by programs is not guaranteed and may vary. There is no guarantee that investors will receive distributions or a return of their capital. These programs can give no assurance that it will be able to pay or maintain distributions, or that distributions will increase over time.

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The Investor's Guidebook To DSTs

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