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1031 Exchange Into Delaware Statutory Trust: What Terms Should I Know?
A Delaware Statutory Trust (DST) is one of the most common investment methods when considering a 1031 exchange. Although Delaware is in the name, you can complete a DST investment anywhere in the United States. Neither the investor nor the property needs to be in Delaware. A DST is a pre-packaged investment on a property put together by a sponsor. After the sponsor does due diligence, negotiates lease terms, and takes other steps to put the package together, then they offer equity to investors. The trustees pool their 1031 exchange funds for the investment and then receive cash distributions if the property is profitable.
How to Provide Individual Investment Options for Multiple Stakeholders in an LLC
Limited liability companies (LLCs) have been a preferred business entity among multiple stakeholders since the 1980s. Many legacy Limited Liability Corporations were formed by family members to pool funds to invest in commercial real estate. Perhaps the most famous example is Walton Enterprises LLC, the Limited Liability Company founded to serve the beneficiaries of Walmart founders Sam and Helen Walton. Most family trusts and business partnerships won’t reach those same lofty heights, but they still remain a useful tool for members to make larger capital investments than they could as solo investors.
Can A Delaware Statutory Trust Be A Custody For Securities?
When you open a brokerage account to trade stocks, the account must first be funded before any stock trades occur. The broker uses a separate entity called a custodian to hold your cash. As trades are opened and closed, cash moves in and out of the custodian account.
Sponsor Risk and Its Role in Delaware Statutory Trust Entities
When going into a Delaware Statutory Trust (DST) investment, your DST Sponsor is just as important to your success as the property. What seems like a great property in a top location managed by an inadequate Sponsor could mean potential risk in your DST investment.
An Overview of The Delaware Statutory Trust Act
In 1988, Delaware enacted the Delaware Business Trust Act, which was later changed to The Delaware Statutory Trust (DST) Act in 2002. The DST is a statutory entity that is governed by Chapter 38, Part V, Title 12 of the annotated Delaware Code. The DST Act was passed to allow a lawfully recognized and flexible alternative business entity and is periodically amended to allow developments in business practices.
What Is The Purpose Of A Delaware Statutory Trust?
The small state of Delaware is a financial haven for corporations and investors due to many of its friendly ordinances. Delaware offers advantageous conditions to companies that incorporate there, including privacy and lower taxes than many other states. Delaware is also one of the few states in America with statutory trust law, in contrast to states using common law trusts. Delaware adopted the Delaware Business Trust Act in 1988 (and changed the name in 2002 to the Delaware Statutory Trust Act).
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.
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