Real estate investment has long been a favorite avenue for wealth creation and asset diversification. However, traditional property ownership can come with various challenges, including management headaches, illiquidity and capital gains taxes when sold. To address these issues, some investors have turned to the Delaware Statutory Trust (DST) as an alternative for exchanging real property and enjoying a host of benefits. In this article, we will explore the top ten advantages of exchanging real property into a DST (instead of into another property with a traditional 1031 exchange).
- Tax-Deferred Exchanges:
One of the most significant benefits of exchanging real property into a DST is the ability to defer capital gains taxes. Under section 1031 of the Internal Revenue Code, investors can exchange like kind properties without recognizing capital gains, thereby preserving their investment capital, and allowing for continued growth. The DST structure enables investors to pool their resources within the DST and invest in larger, diversified properties, enhancing the potential for future returns.
- Passive Income Stream:
Investing in a DST offers investors a passive income stream without the day-to-day responsibilities of property management. The DST sponsor oversees property management, freeing investors from the hassles of tenant issues, maintenance, and property oversight. This hands-off approach is particularly appealing to investors looking to enjoy the benefits of real estate without the associated issues of managing it.
- Diversification:
Exchanging real property into a DST also allows investors to diversify their real estate portfolio. Instead of concentrating their investment in a single property, investors can pool their resources with other investors to acquire a portfolio of properties across different geographic locations and asset classes. This diversification helps mitigate risk and provides greater stability to an investment portfolio.
- Professional Management:
DSTs are typically managed by experienced professionals who have a deep understanding of the real estate market. This professional management can lead to more efficient property operations, better tenant relations, and improved property performance. It also reduces the burden on individual investors to make day-to-day management decisions.
- Accessibility:
DST investments are accessible to a wider range of investors, including those who may not have the financial capacity to acquire and manage a whole property themselves. This accessibility allows more individuals to participate in the potential benefits of real estate investments.
- Estate Planning:
DSTs can be valuable tools for estate planning as well. When investors pass away, their DST interest can be passed onto heirs or beneficiaries by properly titling the interest in their trust allowing them to forgo the often lengthy and complex process of probate. This can help preserve family wealth and provide a seamless transition of assets to the next generation.
- Limited Liability:
Investors in a DST have limited liability, meaning that exposure to potential losses is limited to their investment in the DST. This shields personal assets from creditors and lawsuits related to DST’s properties.
- Flexible Investment Options:
DSTs come in various shapes and sizes, allowing investors to choose options that align with their investment goals and risk tolerance. Whether you are seeking income, growth, or a combination of both, there is likely a DST investment strategy to suit your needs.
- Liquidity Options:
While DST investments are typically considered illiquid, there are secondary market platforms and strategies that can provide some degree of liquidity. While not as easily treated as stocks, these options can offer investors more flexibility than traditional property ownership.
- 1031 Exchange Timeframe:
Investors can defer capital gains taxes indefinitely by continuously exchanging their DST interest into new DSTs through a 1031 exchange. This can be a powerful wealth building strategy for those looking to maximize tax advantages over the long term.
In the end, exchanging real property into a Delaware Statutory Trust can offer a wide variety of benefits to investors from tax deferral and passive income to diversification and professional management. DSTs can provide a compelling alternative to traditional property ownership. As with any investment, it’s essential to conduct thorough due diligence and consult with financial and legal advisors to determine if a DST is the right fit for your investment goals and financial situation. Two major players in the DST provider space are Passco and Inland. For the Qualified Intermediaries, two popular ones are Asset Exchange and Exeter 1031 Exchange.
If you, a friend or family member needs help restating or establishing an estate plan, please reach out to our Intake Department at 760-448-2220 or at https://www.geigerlawoffice.com/contact.cfm. We have offices in San Diego and Orange Counties but can assist families throughout California.
