What is a Delaware Statutory Trust?
Download a summary Delaware Statutory Trust FREE
Real estate investors focus so much time and effort on getting into the deal. Once they have a deal, it’s all about creating cash flow, net operating income, and profit at a future sale.
For the investor who has held a property for twenty years and depreciated it to near zero, a conversation with your accountant can be shocking when you realize the potential tax consequence of selling.
If this is you, the depreciation recapture and capital gains tax can leave you feeling trapped and asking yourself, “How can I keep my profits?”
Most real estate investors have heard of the 1031 Exchange. In its simplest terms, the 1031 Exchange allows you to defer paying taxes from the sale of an investment property if you abide by the 1031 Exchange requirements including:
- Same taxpayer provision: the entity purchasing the new property must be the same entity that sold the property creating the tax event
- Balance your trade: the purchase price of the new property must be of greater value, with equal or greater debt than the property that was sold.
- Qualified intermediary: profits from sale cannot be received by you, and must be transferred from the old property to the new property through a neutral third party.
- Timeline: In 45 days the replacement property must be identified and the transaction must close within 180 days.
Tenant in Common or Delaware Statutory Trust.
In order to invest with other investors, you must choose one of two structure options to preserve the 1031 exchange.
The Tenant in Common notable limitations include:
- Participating investor count can not exceed 35.
- The requirement of unanimous consent.
The Delaware Statutory Trust characteristics / requirements for Investors:
- The Investor cannot be active in the decision making and must remain passive.
- The DST cannot invest in new development and must invest in a stable investment with financing already in place.
- An investor holds a “beneficial interest” in the Delaware Statutory Trust, which provides all of the traditional benefits of a 1031 Exchange, including the allowance for subsequent 1031 Exchange.
Typical Delaware Statutory Trust Risk Profile
DST eligible properties will controlled by the sponsor/ operator, stabilized and provide consistent income. Financing will be in place. The property will be a Class A asset that is newer, larger, and located in a major metro area.
The investors considering a DST looks more at risk avoidance and principal preservation, than appreciation.
If your goal is to preserve your principal, gain consistent income, and get into a larger, newer, stabilized asset, a Delaware Statutory Trust might be the answer.
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*Realized 1031 is not an Investment Adviser or CPA and does not provide investment or tax advice. Any information presented in the podcast or other materials is for illustrative purposes only. Securities offered through the Realized Marketplace are exclusively through WealthForge Securities, LLC, a registered broker/dealer and member of FINRA/SIPC (“WealthForge”). Certain members of Realized are registered representatives of WealthForge.