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).
The foundational purpose of the DST is to simplify the arrangement of a structured finance transaction for real estate (or other assets). The reasons why they continue to hold their position as the preferred vehicle for such transactions include the following:
DSTs are simple to create and maintain. DSTs offer a high degree of privacy and flexibility for the trustee and the beneficiaries, as well as low cost.
DSTs protect the trustees, management, and beneficiaries. Owners have the same protection that stockholders of a Delaware corporation enjoy, and managers and trustees are exempt from liability due to the acts or omissions of the DST.
DST contracts are flexible. The parties to the agreement determine protocol on management, indemnification, mergers, and economic rights of owners.
DSTs enjoy tax advantages. DSTs can be corporations, partnerships, or trusts. From the taxpayer/investor's perspective, the ability to invest in a DST and defer the realization of taxable capital gains is a tremendous advantage. Suppose you are seeking a replacement property for a 1031 exchange. In that case, a DST investment is an IRS approved way to defer the capital gains tax while moving to a fractional unified ownership structure.
DSTs give you access to more asset options. Buying a share of a DST allows you to enjoy passive real estate investing, accessing high-quality properties without the labor-intensive encumbrance of property management. Buying a percentage of a DST provides you with a selection of professionally managed, institutional quality real estate that you would be unlikely to pursue as an individual investor.
DST investing maintains your tax flexibility going forward. If you are invested in a property as a limited partner or LLC, you lose the ability to direct the proceeds of that asset's sale into a 1031 exchange. That means you can't defer the capital gain, and you will have to pay the tax due (please consult your tax advisor.) That limits the capital you have for your next investment, and that disadvantage continues to compound each time you lose the opportunity to maximize the gain and defer the tax. If you start the journey with a tax-advantaged structure like a DST, you can compound the tax savings benefit each time you exchange into a new investment.
DSTs have flexible holding periods and lower entry levels. The holding times for DSTs average seven to ten years. Managers are usually on the lookout for favorable market conditions in which to transact sales. Financing for the DST is typically handled by the sponsor and is non-recourse to each investor. Unlike some TIC arrangements, DST portions are available to smaller investors.
