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What Happens To Depreciation Recapture In A Delaware Statutory Trust?
Putting money into a Delaware Statutory Trust (DST) means investors reap the benefits of a passive investment. While the DST sponsor handles the ins-and-outs of direct property ownership, investors can receive regular income streams, confident in the idea that, once the DST matures and properties are sold, they’ll also likely benefit from asset appreciation.
Using DSTs To Fill In The Gaps Of A 1031 Exchange
In order to defer paying capital gains taxes when selling an investment property by reinvesting the proceeds into another property, the taxpayer must comply with the parameters established by the IRS for a like-kind exchange under Section 1031. The crucial rules include the following:
How DSTs Help With Your Life Stage Transition
In a familiar scenario, the family business is grown and nurtured by several generations, thriving under the dedication of constant attention. If the circumstances change and that level of direct management is no longer possible, the business could falter and may fail quickly. If property assets are part of the business, one solution may be to consider changing from direct management properties to investments that do not require active involvement. For example, if the primary investor is retiring or otherwise becomes unable to continue overseeing the rental or retail property, it may be time to transition to a passive investment, such as a DST.
Using A DST As A Back-up Plan For Your 1031 Exchange
If you are selling an investment property and seeking a replacement to meet the 1031 exchange parameters for tax purposes, you know that you have some tight deadlines and stringent requirements to meet. Once you sell the property, you have 45 days to identify the replacement property (or properties) and then 135 more to complete the deal. This strict time limit adds pressure to your search for appropriate and desirable properties.
Fill The Debt Financing Gap With A Delaware Statutory Trust
Matching the debt from the relinquished property is a vital requirement of the IRS during a 1031 exchange. Failure to do so will result in paying taxes — the worst-case scenario for a 1031 exchanger. But when the markets become unstable or a recession sets in, securing a loan for the replacement property in the exchange may become difficult or even impossible. A paper published by the Harvard Journal of Financial Economics notes that during the peak of the Global Financial Crisis (Q4 of 2008), new loans to large borrowers fell by 47% compared to the previous quarter and by 79% relative to the peak of the second quarter of 2007, identified as the peak of the credit boom.
What Is A Private Placement Memorandum, When Do I Need It, And How Much Does It Cost?
When investing in most private funds, you will receive a document called a private placement memorandum or PPM (also called an offering memorandum or offering document). This is a critical document to look over and should be made available to you with other closing documents. It is similar to a prospectus for mutual funds. The PPM discloses information about the investment and is meant to provide enough data for investors to make an informed investment decision. After reviewing the PPM, you should be able to decide if the investment is a good fit.
Should I Consider A DST With Or Without Debt?
We’ve published several articles about Delaware Statutory Trusts (DSTs), including the advantages and disadvantages. DSTs let investors enjoy the potential benefits of real estate - rental income, appreciation, tax benefits - without having to have operational control or management of the property. We’re going to take another look at the pros and cons but in relation to debt-free versus leveraged DSTs.
DST's vs. TIC's - Which Is Better?
Some investors struggle with the differences between DSTs (Delaware Statutory Trusts) and TICs (Tenant-In-Common). Both allow you to invest fractionally in real estate. Both can be used with a 1031 exchange.
The Limitations of Delaware Statutory Trusts in 1031 Exchanges
The Delaware Statutory Trust (DST) is a popular investment option for a 1031 exchange. For many investors, DST Replacement Property Interests offer the opportunity to exchange into properties that would otherwise be beyond their reach—and enjoy a predictable income stream without any landlord obligations. The appeal of DST 1031 investments is that they allow multiple investors to purchase ownership interests in institutional-quality properties like apartment complexes, office towers, and retail centers. However, investors considering a DST investment should be aware of certain limitations.
Delaware Statutory Trusts And Risk Diversification
Not putting all your eggs in one basket is an adage dating back to the 17th century. At the time, it alluded to the issue of putting a hen’s eggs in one basket. The danger was that, if the basket fell and the eggs broke, everything was lost.
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