Yes, a Delaware Statutory Trust (DST) is a separate legal entity from its investors. This means that the trust's assets are not subject to the personal creditors of the investors, and the investors are not personally liable for the trust's debts. DSTs are also considered to be pass-through entities for tax purposes, which means that the investors only pay taxes on the income they receive from the trust, not on the income of the trust itself.
What Is a Delaware Statutory Trust (DST)?
The Delaware Statutory Trust is a real estate investment vehicle structured as a separate legal entity. DSTs are considered securities under federal law, and holding a fractional interest in a DST is treated like direct property ownership for tax purposes.
DSTs are set up to passively invest in commercial real estate. Investors may use DSTs to help manage tax liabilities and purchase fractional interests in commercial real estate that otherwise would have been beyond their purchasing power.
The DST holds title to 100% of the property. There are two types of participants in a DST: trustees and beneficial owners. The trustee is either the Sponsor or an affiliate of the Sponsor and holds the legal title to the trust assets but must follow the terms of the trust agreement regarding management. The beneficial owner holds equitable ownership, and the terms of the trust agreement dictate their ability to manage, control, or use the assets.
How DSTs Work
The master tenant acquires the property under the DST umbrella and opens the trust for investors to purchase a fractional interest in the property. Investors can either use the DST as a replacement property in a 1031 exchange or purchase a direct interest in the DST.
The master tenant leases the property from the DST Sponsor and manages the property while making payments to the DST and collecting lease payments from occupants. Based on their ownership, each investor receives net operating income from the DST.
A DST Provides Legal Separation from Your Assets
A DST has similar liability protection to that of an LLC or partnership. Because of the DST structure, investors are shielded from property-related liabilities.
Under the Delaware Statutory Trust Act, the trust is a separate legal entity, and no creditor of a beneficial owner has the right to possess any of the property belonging to the trust. In other words, creditors cannot go after individual beneficiaries by placing liens against the property. Additionally, DSTs are financed with non-recourse debt, and the beneficiaries do not carry any personal liabilities under the loan.
Reasons to Consider a DST
The DST structure offers a range of benefits. Here are a few potential advantages:
- 1031 exchange eligibility
- Say goodbye to the three t's: trash, tenants, and toilets
- True passive investing
- Non-recourse debt
- Institutional-sized assets
- Diversification
- Personal liability protection
The DST's legal structure and potential tax benefits provide an alternative choice for investors. If you're interested in purchasing a fractional interest in commercial real estate, speak with your financial or legal advisor to discuss the DST investment structure's potential benefits and financial implications. While it may be a viable option, only a professional can help determine if it's suitable for you.
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.
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 1031 transaction may impact investor’s returns and may outweigh the tax benefits.
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. All real estate investments have the potential to lose value during the life of the 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.
