In our last article, we discussed the 1031 “like-kind” exchange, how it works, and what its benefits and limitations are. We briefly introduced Delaware Statutory Trusts, also known as DSTs, as an option to utilize as a qualified like-kind exchange for a recently sold property. So, let’s get into what a DST is, how they work, and what their benefits and risks are.
DSTs may be a favorable choice for real estate investors based on their scenario and investment goals. These legal entities are designed to hold, manage, administer, and invest in various types of assets, one of the most common being real estate.[1] DSTs offer an investment opportunity, combining the potential for favorable returns with the convenience of fractional ownership, and allowing investors to diversify their portfolios.[2]
For investors considering DSTs, one benefit is the potential to defer capital gains taxes through a 1031 exchange.[1] This is a tax provision that allows investors to swap one property for another “like-kind” property and defer capital gain taxes. DSTs qualify for this provision, which could result in tax deferral upon exit.[3]
Another potential advantage is the ability to access high-quality institutional real estate that may be out of reach for individual investors.[1] DSTs also eliminate the hassle and stress of active real estate management. With DSTs, investors may benefit from long-term properties without the need to worry about the details of maintaining them or managing tenants.[1]
Despite these considerable advantages, DSTs are not without their drawbacks. One of the primary drawbacks is the cost associated with DST transactions. These can include a variety of fees such as selling commissions, broker-dealer allowances, managing broker-dealer fees, wholesaling fees, offering and organization expenses, and acquisition fees.[1] While these fees may be over and above the usual expenses linked to real estate acquisitions, investors may keep in mind that these costs may be below the capital gains tax that the seller would be deferring as a result of the 1031 exchange.
Investing in a DST also involves additional risk compared to outright property ownership. For instance, the performance of a DST investment may depend on the abilities and strategies of the trust’s management team. If the team is not competent or their strategies fail, the investment could suffer.[2]
Just like any investment, it is crucial for potential investors to thoroughly understand the risks and benefits before deciding to invest in a DST.[1][2] Taking the time to understand these factors can help ensure a more informed and smarter investment decision.
Stay tuned for our next article which will outline, using hypothetical examples, how a 1031 exchange and DST investment can work in sequence with each other to create a potential real estate investment option.
[1] Delaware Statutory Trust Pros and Cons
[2] Pros and Cons of Investing in a Delaware Statutory Trust
[3] Delaware Statutory Trust (DST) 1031 Investment Pros & Cons
Because investor situations and objectives vary this information is not intended to indicate suitability for any individual investor.
This is for informational purposes only, does not represent legal or tax advice does not indicate suitability for any particular investor, and does not constitute an offer to purchase or sell investments.
There are material risks associated with investing in private placements, DST properties and real estate securities including illiquidity, general market conditions, interest rate risks, financing risks, potentially adverse tax consequences, general economic risks, development risks, and potential loss of the entire investment principal.
Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk. Potential returns are not guaranteed and could be lower than anticipated.
There are retirement account risks that could diminish investor returns, such as, but not limited to: low interest rates, market volatility, withdrawal timing and sequence of returns risk, government policy uncertainty and increased longevity. Prospective investors should perform their own due diligence carefully and review the “Risk Factors” section of any prospectus, private placement memorandum or offering circular before considering any investment.
Advisory Services are offered through Asset Strategy Advisors, LLC (ASA), a SEC Registered Investment Advisor. Securities offered through registered representatives of Concorde Investment Services, LLC. (CIS), member of FINRA/SIPC. Insurance Services offered through Asset Strategy Financial Group, Inc. (ASFG). ASA, CIS, and ASFG are independent of each other.
