Some DSTs (Delaware Statutory Trusts) have distributions of income. This income has tax implications. For most investors, DST income will be taxed at the investor’s ordinary income tax rate. But there is more to DST income taxation. Let’s dig in to see what it’s all about.
Benefits of a Pass-Through Entity
DSTs are pass-through entities. Unlike some corporate structures, pass-through entities are not double-taxed. Double taxation means the entity is taxed at the corporate and individual (i.e., shareholder or investor) levels. A DST is only taxed at the investor level.
Another benefit of pass-through is that more income goes to each DST beneficiary. If the DST were not a pass-through entity, revenue would be taxed before reaching beneficiaries. In that case, less revenue would find its way to DST beneficiaries.
Income Sheltering Through Expenses
Another benefit of being a pass-through entity is that expenses are also passed to DST owners. Each owner receives a statement showing their pro rata ownership in the DST. The statement includes the owner’s share of expenses, which can be claimed on their personal income tax.
Just as businesses reduce taxable revenue through expenses, individuals can reduce taxable DST revenue through DST expenses, sheltering part of their income.
In some cases, the DST may show a loss for the year. Beneficiaries can use this loss to offset other passive income.
Tax Deferment
DSTs are 1031 exchange eligible. Investors can defer taxes on gains from the sale of an investment property by 1031 exchanging into a DST. Taxes on the sale proceeds will be deferred until the investor’s interest in the DST is sold. Although at that point, the investor can do another 1031 exchange and continue to defer taxes.
During the time that taxes from the original sale are deferred, any gains from appreciation of the DST will also be deferred.
Tax treatment is a complicated topic and unique to each tax filer. It’s best to work with a tax specialist when discussing the tax implications of DSTs.
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.
The income stream and depreciation schedule for any investment property may affect the property owner's income bracket and/or tax status. 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.
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.
