--- title: Is a Delaware Statutory Trust (DST) a Pass-Through Entity? description: For owners of commercial real estate, reasons for investing may include the pursuit of profits, stable income, and tax advantages. However, the owner pursuing those goals with real property may have the accompanying burdens of accountability for leases, tenants, and other management responsibilities. In contrast, investing through a DST can offer access to fractional ownership of commercial property as a passive investment. image: https://www.realized1031.com/hubfs/house-1323993183.jpg --- [![Realized 1031 Exchange Marketplace](https://www.realized1031.com/hs-fs/hubfs/Images/Brand/Logo/Realized/Realized-Logo-Black.png?width=240&height=80&name=Realized-Logo-Black.png "Realized 1031 Logo") ](https://www.realized1031.com/) - [Wealth Management Gap](https://www.realized1031.com/the-wealth-management-gap) - [Our Process](https://www.realized1031.com/how-realized-works) - [Financial Advisors](https://www.realized1031.com/advisor) - [Resources](https://www.realized1031.com/resources) - [The Company](https://www.realized1031.com/about-us) - [Articles](https://www.realized1031.com/blog) [Register](https://www.realized1031.com/marketplace) [Log In](https://www.realized1031.com/login) - Better Business Bureau Rating: **A+** - [FINRA BrokerCheck](https://brokercheck.finra.org/firm/summary/22333) - [Call](tel:1-877-797-1031) **(877) 797-1031** # Is a Delaware Statutory Trust (DST) a Pass-Through Entity? Posted Oct 27, 2023 ![Is a Delaware Statutory Trust (DST) a Pass-Through Entity?](https://www.realized1031.com/hubfs/house-1323993183.jpg) Investors often have questions about tax considerations related to DSTs (Delaware Statutory Trusts), including whether these trusts are pass-through entities.  Yes, Delaware Statutory Trusts are pass-through entities for federal tax purposes. This means that the income and losses of the DST are passed through to the investors, who report them on their individual tax returns.   The advantage of a pass-through entity is that the company doesn't pay taxes on the income before distributing it to the owners (beneficiaries). This structure generates a tax benefit for the shareholders since the income is only taxed once. In contrast, with a traditional corporate system, taxes are first paid at the corporate level and then again by the shareholders, who pay taxes on the dividends they receive.  ### Are there other advantages of DSTs? As with any investment, DSTs have pros and cons. DSTs are attractive to many investors for several reasons. First, a DST allows an investor to purchase fractional ownership of institutional-quality assets that they might not otherwise be able to own. A sponsor creates the DST, choosing and acquiring the targeted assets. Often, a DST focuses on a specific sector, such as multifamily housing, office property, industrial, retail, or niche markets like self-storage and student or senior housing.  The sponsor finances the purchases and then seeks investors, using their capital investments to replace the original financing. DSTs often have minimum investment requirements of $100,000, although some are higher and a few are lower. Second, DSTs are convenient tools to facilitate the execution of a 1031 exchange. For many investors attempting to use a 1031 exchange to defer capital gains taxes, one challenge is identifying and purchasing replacement properties within the tight timeline the IRS allows.  Since a successful 1031 exchange requires that the total proceeds from the original asset sale be reinvested into new acquisitions, investors may have trouble finding the properties they want that fulfill the requirements and can be transacted within 180 days. DST offerings are pre-packaged, so an investor can often complete the purchase of whatever amount they need (above the minimum) in just a few days.  In addition, while the investor has fractional ownership that allows using a 1031 exchange, the trust holds the debt, and creditors cannot seek recourse from the beneficiaries.  ### What are the drawbacks of DSTs? While not necessarily a drawback, investors should be aware that DST investments require accreditation. That means that the investor must demonstrate sufficient assets to withstand potential losses. The SEC requires accreditation for risky or complex investments when the offering company is not required to disclose the same level of detail that a publicly traded stock does.  A potential disadvantage is that DST investments are illiquid. The holding period is typically five to ten years, and investors should not rely on being able to sell sooner.  Also, DSTs may have high fees that reduce the potential income. The sponsor charges fees for their management, and the trust may also pay various commissions and other expenses. The investor should assess the impact of these costs on the overall profit potential.  Finally, some investors may not be comfortable with the hands-off nature of their investment since decisions are made by the trustees, not by the owner/beneficiaries. Relinquishing direct management involvement can be either a positive or negative attribute, depending on your preferences.  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. All real estate investments have the potential to lose value during the life of the investment. All financed real estate investments have the potential for foreclosure. The income stream and depreciation schedule for any investment property may affect the property owner's income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities. 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. 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. 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This means that the income and losses of the DST are passed through to the investors, who report them on their individual tax returns. The advantage of a pass-through entity is that the company doesn't pay taxes on the income before distributing it to the owners (beneficiaries). This structure generates a tax benefit for the shareholders since the income is only taxed once. In contrast, with a traditional corporate system, taxes are first paid at the corporate level and then again by the shareholders, who pay taxes on the dividends they receive. Are there other advantages of DSTs? As with any investment, DSTs have pros and cons. DSTs are attractive to many investors for several reasons. First, a DST allows an investor to purchase fractional ownership of institutional-quality assets that they might not otherwise be able to own. A sponsor creates the DST, choosing and acquiring the targeted assets. Often, a DST focuses on a specific sector, such as multifamily housing, office property, industrial, retail, or niche markets like self-storage and student or senior housing. The sponsor finances the purchases and then seeks investors, using their capital investments to replace the original financing. DSTs often have minimum investment requirements of $100,000, although some are higher and a few are lower. Second, DSTs are convenient tools to facilitate the execution of a 1031 exchange. For many investors attempting to use a 1031 exchange to defer capital gains taxes, one challenge is identifying and purchasing replacement properties within the tight timeline the IRS allows. Since a successful 1031 exchange requires that the total proceeds from the original asset sale be reinvested into new acquisitions, investors may have trouble finding the properties they want that fulfill the requirements and can be transacted within 180 days. DST offerings are pre-packaged, so an investor can often complete the purchase of whatever amount they need (above the minimum) in just a few days. In addition, while the investor has fractional ownership that allows using a 1031 exchange, the trust holds the debt, and creditors cannot seek recourse from the beneficiaries. What are the drawbacks of DSTs? While not necessarily a drawback, investors should be aware that DST investments require accreditation. That means that the investor must demonstrate sufficient assets to withstand potential losses. The SEC requires accreditation for risky or complex investments when the offering company is not required to disclose the same level of detail that a publicly traded stock does. A potential disadvantage is that DST investments are illiquid. The holding period is typically five to ten years, and investors should not rely on being able to sell sooner. Also, DSTs may have high fees that reduce the potential income. 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