What Are the Benefits of Investing in a Delaware Statutory Trust in Florida?

Posted by David Funes on Sep 15, 2022

Investing through a Delaware Statutory Trust can be an attractive tool for many investors. Here’s how it works:

A DST is a packaged investment consisting of a portfolio of properties owned by a legal entity that is structured according to the Delaware Trust laws. Each investor owns a share of the DST, and the trust owns a property, but usually more than one. DSTs are packaged by a sponsor who identifies and acquires property, arranges financing and property management, and then offers interests to accredited investors.

DSTs have a couple of primary advantages.

First, investors can own part of properties that they could not buy on their own. Pooling resources with others allows these individuals to own assets they could not otherwise. DSTs may own property in any commercial sector, across a broad geographic region, and in various price categories.

Second, because DSTs are pass-through companies, the trust does not pay taxes at the corporate level. That means income isn't double taxed but passes through to the investors’ tax returns.

Third, DSTs are eligible for entry and exit via a 1031 exchange, allowing investors to defer paying taxes on capital gains if they reinvest the proceeds from a sale into a DST (and following the rules governing an exchange).

Does it matter what state the properties are located in?

While the name of the trust references Delaware, that is a technical issue and doesn't restrict the allowable locations for property, which can be anywhere in the US. However, the investor must pay income taxes in the state(s) that the property is in. If the DST holds properties in several states, the investor must file state income taxes in each one. The DST sponsor must distribute 1099 forms to each investor showing the income and expenses for their tax return.

Since Florida has no state income tax, investors may benefit from having shares in a DST that holds property there. In addition, since Florida is one of the states experiencing an influx of people (four of the ten fastest growing metro areas in the US last year were in Florida, according to US Census data), real estate is booming. Not coincidentally, another fast-growing state is Texas, which also boasts no state income tax.

What are the risks with DSTs?

While unrelated to the state income tax issue, all investments have risks, and DSTs are no exception. DSTs have long holding requirements in many cases and are considered illiquid. As a result, investors may be unable to sell before the planned termination of the trust, and a resale might require sponsor approval. Some investors may dislike the lack of control they have with a DST investment (although, for others, the hands-off experience is one of the benefits of the option). Also, DSTs may have high fees compared to other investments. Therefore, potential participants must research the opportunity to ensure their confidence in the sponsor.

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.

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.

Examples are hypothetical and for illustrative purposes only. Withdrawal strategies should take into account the investment objectives, financial situation and particular needs of the individual.

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.

 

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