Real estate investors may be looking for ways to keep more money in their pockets at the end of the tax year. Obviously, there are some cases where taxes cannot be avoided, but there can be a legal way to write off some of your earnings or defer some of the taxes you owe until a later date. Obviously, it’s vital that any tax breaks you find are applied within the framework of the law, as failure to comply with state and federal tax laws can result in hefty fines and more serious penalties. However, knowing how to use tools, such as a Delaware Statutory Trust, can help you legally keep your money in your pocket.
What is a Delaware Statutory Trust?
A Delaware Statutory Trust, also referred to as a DST, is a separate legal entity that allows real estate investors to hold the title to one or more properties. Under DST regulations, any type of commercial property can be classified as a DST, including apartment complexes, office spaces, shopping centers, fulfillment centers, manufacturing plants, and more. These trusts allow multiple investors to pool their money together in order to purchase interests in a single property or a group of properties, depending on the structure of the trust being invested in.
DSTs allow the trust to hold the title to more than one property simultaneously. It is important to note that if a DST holds multiple titles at the same time, the trust may be required to file tax returns in every state that the trust owns property in.
How Does a DST Work?
The Sponsor, who can be a person or an entity, heads up the trust itself. It’s important to note that this Sponsor has a fiduciary responsibility to the shareholders who invest in the trust. The DST collects funds from investors with the goal of providing them a portion of any profits based on the amount of money that they invest into the trust.
The trust is solely responsible for securing the financing for the property or properties being invested in. In addition to obtaining the financing, they are also ultimately responsible for the advertising, management, and eventual liquidation of the properties that they have selected.
Any profits generated by the trust are then distributed among the investors at scheduled intervals. Investors collect a percentage of the profits that is proportionate to the amount of money that they have invested into the trust.
Benefits of DSTs
There are several reasons to consider a DST. One benefit is that they allow investors to purchase fractional interest in commercial real estate that can qualify as like-kind property, and thus opens the door for 1031 exchanges. This tax deferral method has long been a tool used by real estate investors. Additionally, it’s important to note that having a Sponsor in charge of managing the property means that investors can enjoy property management, allowing them to pursue a passive income.
Delaware Statutory Trusts provide a tool for investors who are seeking a passive income while setting themselves up to take advantage of the tax deferral tools that they provide. When searching for a DST to invest in, be sure to consider one's that suits your investment strategy and personal financial goals.
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. 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. All real estate investments have the potential to lose value during the life of the investment. There is no guarantee that the investment objectives of any particular program will be achieved. The actual amount and timing of distributions paid by programs is not guaranteed and may vary. There is no guarantee that investors will receive distributions or a return of their capital. These programs can give no assurance that it will be able to pay or maintain distributions, or that distributions will increase over time. Costs associated with a 1031 transaction may impact investor’s returns and may outweigh the tax benefits.
