Joining a Delaware Statutory Trust (DST) helps you defer capital gains taxes and potentially earn income if the property makes a profit. Given the structure of DSTs and rules set by Revenue Ruling 2004-86, sponsors must distribute the income to investors on a current basis. In other words, you receive money on a regular frequency. Knowing this schedule is important for effectively managing your cash flow and financial planning.
In this blog post, Realized 1031 answers the question: How often are Delaware Statutory Trust distributions? You’ll gain an idea of how often payments will happen as you enter this type of investment. Keep reading to learn more.
Typical Distribution Frequency
In most cases, DSTs pay income distributions on a monthly basis. This schedule makes them especially appealing to investors who want a steady cash flow, such as retirees or those reinvesting through a 1031 exchange to replace income from a sold property.
While monthly income distributions are common, there are also DSTs that offer quarterly distributions. This schedule is beneficial for investors who prefer less frequent income payments and perhaps a more consolidated view of their returns.
The frequency ultimately depends on what’s included in the private placement memorandum (PPM), which outlines the terms of the DST. As such, it’s important to examine the PPM while looking at DST offerings to learn which ones distribute income based on your preferences.
Another thing to note is that the income you receive is not based on the income the property itself earned. The final value comes after expenses and other deductions have been accounted for.
What Affects Distribution Frequency and Amount?
Distribution frequency is generally predictable. What’s outlined in the PPM will be what the sponsors will follow. Income cannot be retained by the trust otherwise, they will break a core DST provision, which might disqualify the investors from tax-deferral benefits. What’s more variable is the amount you receive during distribution. Several factors affect the net value you receive, and these include the following.
- Type of Real Estate: Each type of real estate asset will have different characteristics that affect its income. For example, multifamily homes are generally stable, but the income may not be high. On the other hand, hospitality properties might generate higher income but could also be more volatile depending on economic conditions.
- Lease Structures: The structure of leases also affects distributed income. NNN leases, for example, often offer steady yet modest income since the tenant handles three net operating expenses. However, these leases may also offer lower yields than gross leases, depending on the asset.
- Operating Expenses and Debt Service: Higher operating costs or unexpected expenses can reduce the distributable income. Similarly, DSTs with higher leverage (i.e., loans) may experience greater sensitivity to cash flow fluctuations due to required loan payments.
- Market Conditions: Like most other investments, DSTs are not immune to market volatility. Increasing interest rates or decreased real estate demand can affect property performance and, by extension, the income distributed.
Wrapping Up: How Often Are DST Distributions
DSTs are required to distribute net income to investors on a current basis, and the frequency is typically monthly or quarterly. The former is more common, but some investors may choose quarterly distributions to get a more consolidated view of their profits. Whatever the case, you’ll find the frequency on the PPM, so make sure that you’re reviewing this document closely to determine if the offering fits your frequency preferences.
A DST may offer passive income, especially when used in a 1031 exchange. Just be sure you know how and when the cash will flow, as well as associated risks.
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.
Cited Sources:
https://www.nolo.com/legal-encyclopedia/what-is-private-placement-memorandum.html
