Some real estate investors have long understood the importance of taking advantage of legal tax breaks and tax deferral options. Capital gains taxes, which are owed any time an investor makes a profit from the sale of a property, can lead to a major tax liability that can greatly reduce the profits generated. That’s why we believe it's important that investors consider alternate investment opportunities that are still legal according to the Federal Tax Code. One such example of these legal tax deferral options is a Delaware Statutory Trust. Understanding what these trusts are and how they can provide tax relief is a tool for real estate investors.
How Are DSTs Established?
The trust is established when a real estate company, who is considered the “Sponsor” identifies and purchases investment properties. Once the properties are identified and the purchase is complete, the trust then opens up the investment pool. Individual investors then purchase interests of ownership within the trust. As these investors begin putting money into the trust, they obtain a percentage of ownership based on their investment. As the amount of invested funds increases, the trust’s ownership decreases, and the properties are wholly owned by the investors. This ensures that no single owner can claim complete ownership of the properties, and all of the investors are entitled to a portion of any profits generated by the properties held by the trust.
Who Operates Delaware Statutory Trusts?
One aspect of investing in a Delaware Investment Trust is the potential opportunity to earn truly passive income. Even though investors eventually obtain a majority or total ownership of the properties, the Sponsor is still obligated to handle all of the management necessary for the properties that are held within the trust. The Sponsor, who works under the authority of the trust itself, is responsible not only for identifying and purchasing property, but the management responsibilities also fall on the Sponsor’s shoulders. Any rehab or improvements that need to be performed on the property, the process of advertising the property to attract tenants, repairs, maintenance, rent collection, and other aspects of property management are all the responsibility of the trust. This passive income opportunity for investors makes DSTs an option for those no longer interested in being directly involved.
How Can Investors Purchase Fractional Interests in a DST?
Delaware Statutory Trusts can be a versatile real estate investment opportunity that investors have available to them. In addition to their potential tax deferral benefits and passive income potential, they also allow investors who don’t have a large amount of excess cash to invest. Understanding how these trusts fit into your portfolio can play a part in further diversifying your portfolio while also setting up your long-term investment plan.
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. 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. Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk. Costs associated with a real estate transaction may impact investor’s returns and may outweigh the tax benefits.
