Delaware Statutory Trusts (DSTs) can offer several advantages to California investors. These can include:
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.
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:
Furthermore, the trust can't raise any more capital once the DST is fully funded during the initial offering period.
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.
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.