Delaware Statutory Trusts (DSTs) can offer several advantages to California investors. These can include:
- Possible deferral of capital gains and depreciation recapture taxes on real estate sales
- The potential for passive monthly income
- Possible depreciation benefits
California real estate investors can obtain added benefits when purchasing DST fractional shares. This article examines some pros and cons of investing in Delaware Statutory Trusts in California.
Potential Benefits and Drawbacks of DST California Investments
Delaware Statutory Trusts are passive investment vehicles formed as separate legal entities in Delaware. They are considered securities under federal law. For tax purposes, the IRS treats DST holdings like direct property ownership.
The trusts take responsibility for buying, selling, and managing professionally managed commercial real estate assets. These can include self-storage, multifamily, industrial, retail, and office. Investors then buy “pieces” or “shares” of the trust. Through this method, DSTs can help investors acquire quality real estate that otherwise might be too costly.
DSTs are eligible as replacement properties when used in conjunction with 1031 exchanges. DST-held assets can be located in different geographical regions, providing additional portfolio diversification advantages. Additionally, investors aren’t limited to a specific number of DST investments. This allows investors to build varied portfolios with holdings spread across various asset classes. This variety can be crucial in helping manage potential risk.
There are some DST drawbacks, which include:
- Illiquidity
- Lack of investor control
Furthermore, the trust can't raise any more capital once the DST is fully funded during the initial offering period.
DSTs in California
Delaware Statutory Trusts are often used in estate planning. This can be useful for investors based in, or conducting business in, California.
DSTs can provide many of the same investor benefits as limited liability companies (LLCs). These can include individual liability protection from any debt or financial obligations incurred by assets held within the trust, pass-through income, and distributions to trust beneficiaries.
And because the Golden State views DSTs as estate planning tools, these entities aren’t subject to the annual LLC franchise tax of $800.
The Bottom Line
DSTs for California investors can provide potential benefits, including monthly income, asset appreciation, and 1031 exchange eligibility. Investors in California and DST investors whose trusts have commercial properties located in the state should discuss the potential benefits and financial implications of this type of investment vehicle with experienced financial and legal professionals.
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.
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.
