Howard and Lee Anne acquired a 10-unit apartment building for $850,000 in a Seattle neighborhood on January 1, 1992. For example, one DST/private equity investor may live in Florida where there is no state income tax while another may live in California, which has a substantial state income tax. Because every tax situation is unique, DST investors should work with a qualified CPA to ensure that all tax requirements are met with regard to their DST investment. Alternative investments have higher fees than traditional investments and they may also be highly leveraged and engage in speculative investment techniques, which can magnify the potential for investment loss or gain and should not be deemed a complete investment program. A 64% increase over their previous income. Deferred Sales Trust 101: A Complete Guide | 1031Gateway A Delaware Statutory Trust (DST) is a trust formed under the Delaware statutory trust law that allows passive, fractional ownership in real estate while qualifying as a like kind real estate replacement property under Section 1031. Private REITS may be attractive to investors seeking income and appreciation potential and risk diversification. Enter the Delaware Statutory Trust (DST). Individual results will vary. DST investors own a beneficial interest in a trust, which owns a piece of commercial real estate. A Delaware Statutory Trust is a specialized type of legal entity that is formed for the specific purpose of owning, managing, or investing in real estate. One of the IRS rules states that the value of, and equity in, the replacement property must be of equal or greater value than the relinquished property. Understanding Delaware Statutory Trusts (DSTs) - SmartAsset This means DSTs cannot own speculative development property. Delaware Statutory Trusts: A Comprehensive Guide with Pros and Cons DST sponsors are reimbursed for these costs at the time of the offering. Whats more, the new depreciation attributed to an increased value of their portfolio. Triple net lease (NNN) properties and tenancy-in-common (TIC) agreements may offer similar benefits to a DST, but have some notable differences as well. What Real Estate Investors Need To Know About DSTs - Forbes The objectives for the 1031 Exchange were as follows: Ninety percent (90%) of the value of the $850,000 purchase price was allocated to the physical structure ($765,000) and 10% was allocated to the value of the land ($85,000), which is not depreciable. DST sponsors use their own balance sheet to identify and acquire the property(s) to be structured within the trust. To learn more about our current investment opportunities. DST investments are tremendously popular. Practically, this means that individual investors can defer capital gains tax liability by reinvesting the proceeds from a profitable sale into a DST. Once the properties are identified and the purchase is complete, the trust then opens up the investment pool. Purchasing full ownership of an NNN asset requires substantial funds, often tying up a significant amount of capital in a single property. As an investment vehicle, they are popular with individual investors because they qualify as a replacement property in a 1031 Exchange. The Delaware Statutory Trust (DST) Guide - 1031Gateway real estate An Easier Path to Real Estate Investing: 1031 Delaware Statutory Trusts Being a landlord isn't for everyone, but getting out of the biz could trigger capital gains taxes. The portfolio included an allocation of: The portfolio had a total loan-to-value of 55%. All Rights Reserved. This means the trustees of the DST cannot ask the investors for more money. Nationally, Passco Companies has achieved the status of Preferred Borrower with Fannie Mae, ranked #2 Best Places to Work in Multifamily in 2019 byMultifamily Leadership and was listed as one of the Top Owners by Multihousing Newsin 2019, for the 3rd consecutive year. DST investors own a beneficial interest in a trust, which owns a piece of commercial real estate. DST sponsors may or may not be a private equity firm. Although all DSTs adhere to these regulatory requirements, not all of them are created equal. How Do DSTs Work? If you are an Accredited Real Estate Investor and would like to learn more about our investment opportunities, contact us at (800) 605-4966 or info@fnrpusa.com for more information. DST sponsors work directly with securities broker-dealers and 1031 Exchange Advisors to make offerings available to accredited investors. The company has acquired over $6.37 billion in multifamily and commercial real estate in the United States. Client portfolio example is hypothetical and for illustration purposes only. Trustees cannot renegotiate existing loan terms unless a default exists as a result of tenant bankruptcy or insolvency. They decided to sell the property and retire in 2018. Once the relinquished property is under contract, the investor can engage a Qualified Intermediary to facilitate the exchange. The pros include: While these benefits can be significant, they must be weighed against the potential cons of the DST structure. Perhaps most importantly, Delaware Statutory Trust properties are popular with individual investors because IRS Revenue Ruling 2004-86 states that a DST investment qualifies as a like kindreplacement property in a 1031 Exchange. is one of the countrys leading private equity commercial real estate investment firms. What is a Deferred Sales Trust? Delaware Statutory Trust Fees: An Investor's Guide by FNRP Due to the large purchase price of typically $30 million to $100 million, these assets would otherwise be unattainable for a typical individual investor, but are accessible through the fractional ownership offered by a DST. Benefits of this DST structure include passive income, fractional interest in high quality properties, and tax deferral. The co-owners can have an equal or unequal ownership in the real estate asset. This is a particularly attractive benefit for independent investors with major life changes aheadfor example, those entering retirement, growing a family or planning for an estate transfer. As individuals invest, their investments displace the capital used by the DST sponsor to acquire the property until it is eventually wholly owned by the investors. the investors who exchanged into the . There's. DSTs are a separate legal entity, formed with private trust agreements, under which real property is "held, managed, administered, invested, and/or operated.". Within 180 days after closing on your relinquished property (135 days following the end of the identification period), you must close on the purchase of your replacement property. As an investment vehicle, they are popular with individual investors because they qualify as a replacement property in a 1031 Exchange. The 255 private placement programs include 716 property acquisitions and 120 property dispositions among 44 states servicing over 12,500 investors. The Delaware Statutory Trust (DST), however, is a statutory entity, created by filing a Certificate of Trust with the Delaware Division of Corporations, and governed by Chapter 38, Part V, Title 12 of the annotated Delaware Code (See 12 3801 through 3862). At First National Realty Partners, we leverage years of expertise and hundreds of transaction repetitions to minimize a propertys tax liability for our investors. U.S. Supreme Court buoys religious employees who seek accommodations at As a result, DSTs often own high-quality assets with credit-worthy Fortune 1000 companies as tenants. How a Delaware Statutory Trust Works | DST Investment This presents a few notableDST risksincluding lack of liquidity, interest rate risk, and changing market conditions. A private REIT, or real estate investment trust, is a company that owns and manages income-producing real estate. Statutory Trust. Internal Revenue Bulletin: 2004-33 | Internal Revenue Service At the end of each tax year, DST investors receive a 1099, which details the income earned from the investment. What is a DST? If the sponsor happens to be a private equity firm, they typically bring significant value to the deal in the form of: Real estate industry relationships to find the best properties at the most attractive prices. What's a DST? The Pros and Cons of Delaware Statutory Trusts Another important milestone within the 1031 Exchange timeline is the180-Day Rule. This site is published for residents of the United States who are accredited investors only. With an intentional focus on finding world-class, multi-tenanted assets well below intrinsic value, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in. Join us each month as we present introductory and advanced topics on DSTs and 1031 Exchanges. . The lease structure reducesbut does not eliminateproperty management responsibilities. Bluerock Value Exchange(BVEX) is a national sponsor of syndicated 1031 exchange offerings with a focus on Class A assets that can deliver stable cash flows and have the potential for value creation. With an intentional focus on finding world-class, multi-tenanted assets well below intrinsic value, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in. A Delaware Statutory Trust (DST) owns income-producing real estate and sells percentage shares of ownership to investors who expect to receive income and appreciation. A Delaware Statutory Trust may have up to 100 investors (sometimes more) with each investor owning a beneficial interest in the trust, which, in turn, owns the underlying asset. DSTs differ in terms of property types and quality, portfolio size, the terms of the master lease agreements and the quality of the sponsor. This information is transferred to schedule E of their tax return and it is subject to income tax. The trust is established when a real estate company, who is considered the Sponsor identifies and purchases investment properties. Practically, this means that individual investors can defer capital gains. Non-recourse debt. Investors provide equity capital, but are otherwise passive partners. While the 1031 Exchange tax benefit can be significant, it is common for real estate investors to experience difficulty finding a suitable replacement property in such a short period of time. Williams v. Inhabitants of Milton, 215 Mass. Therefore, as compensation, DST sponsors can earn a percentage of the properties ongoing net operating income in addition to the acquisition and structuring fees. Investing in alternative assets involves higher risks than traditional investments and is suitable only for sophisticated investors. DSTs have a two tier structure. DSTs have a comparatively low minimum investment requirement, usually $100,000, making it easy to diversify across multiple assets to help mitigate risk. The $3,008,000 of exchange proceeds acquired $6,844,444 of replacement property and thus $3,764,444 of new basis for depreciation. How Delaware Statutory Trust Ownership Structures Work Alternative investments are often sold by prospectus that discloses all risks, fees, and expenses. ExchangeRight strategically acquires and manages long-term, net-leased assets backed by investment-grade corporations that operate in the necessity-based retail and healthcare industries. Any differences between these two values may trigger a taxable event. Potential downsides of the DST structure include illiquidity, lack of operational control, and regulatory risk. The45-Day Rulerequires that your replacement property be identified within 45 days of the close of your relinquished property (by calendar day 45, your qualified intermediary must be notified of the identified replacement property). So, this means that the value of the replacement property must be at least $1MM and the investor must invest all $500M equity earned from the sale of the relinquished property. The information herein has been prepared for educational purposes only and does not constitute an offer to purchase or sell securitized real estate investments. In order to successfully complete a 1031 Exchange, there are a number of. Please speak with your own tax and legal advisors for advice/guidance regarding your particular situation. For individual real estate investors, there are a number of strategies that can be used to defer capital gains taxes on the profitable sale of an investment property. Since its inception, Passco Companies has become a recognized provider of investment real estate opportunities. Low minimum investment: DSTs typically have a minimum investment of $100,000 for 1031 exchangers and $25,000 for cash investors. For additional information please contact, Add a header to begin generating the table of contents, For example, one DST may own a portfolio of class A multifamily apartments, while another may own an industrial building like an. The real estate sponsor is responsible for organizing the DST, finding the property, financing it, and managing it. The terms of the ownership structure can vary and are outlined in the operating agreement. Founded in 1945, Cantor Fitzgerald is a premier global financial services firm with over 10,000 employees located in more than 150 offices across the U.S. and around the world. When an individual makes a DST investment, there are two things that must be considered regarding completing their annual return for DST tax reporting. Some real estate investors have long understood the importance of taking advantage of legal tax breaks and tax deferral options. National institutional real estate firms referred to as DST Sponsors are responsible for vetting, acquiring, and managing the properties included within each Delaware Statutory Trust they put forward. DSTs are a separate legal entity, formed with private trust agreements, under which real property is held, managed, administered, invested, and/or operated.. Following the exchange, not only did Howard and Lee Anne achieve their objectives of diversification, full tax deferral, elimination of active management, but they also acquired a portfolio that produced $172,200 of annual income (a 5.59% return on equity). Because investor situations and objectives vary this information is not intended to indicate suitability for any particular investor. that investors must follow. The DST sponsor will market the DST offering to broker dealers to raise the equity required to fully fund the offering. All of these details are important for investors to note when choosing and vetting a potential DST investment. Through a 1031 exchange, investors can exit a management-intensive asset and shed landlord responsibilities without foregoing the benefits of owing investment real estate. In the. When owning property out of state, you typically will need to file state income tax returns in that state. A DST is a legal entity formed under Delaware law that allows investors to take a fractional ownership interest in professionally managed real estate throughout the United States. All the debt was 10-year fixed rate debt that was non-recourse with interest rates ranging from 2.84% 3.85%, depending on the offering. A Delaware Statutory Trust (DST) is an increasingly popular option. By providing your email and phone number, you are opting to receive communications from Realized. Once you select a DST investment and acquire your ownership, your work is done. This complexity again underscores the importance of working with a CPA to ensure all DST tax obligations are met. This means that individual investors can defer capital gains taxes on the profitable sale of a property by reinvesting the proceeds into a DST. All proceeds must be distributed to the investors. Securities and/or Investment Advisory Services may be offered through Registered Representatives or Investment Advisor Representatives of Realized Financial, Inc., a broker/dealer, member FINRA/SIPC, and Registered Investment Adviser ("Realized Financial"). Any rehab or improvements that need to be performed on the property, the process of advertising the property to attract tenants, repairs, maintenance, rent collection, and other aspects of property management are all the responsibility of the trust. Tax deferral allows DST investors to preserve all of the equity from the sale of their relinquished property so it can continue working for them in their new DST replacement property. Understand what a Delaware Statutory Trust, how is it best utilized, and the pros and cons of DSTs. Is a Delaware Statutory Trust (DST) a Grantor Trust? The properties are managed and administered by the Trustee for the financial benefit of the Trust beneficiaries (i.e. Investors like DSTs because they can . The broker dealer will conduct due diligence and analysis on DST sponsors and their offerings to ensure they are appropriate for their registered representatives to offer to their clients. : Real estate investors have no say in the day to day management of the property. By the end, readers will have the information needed to decide if a. When the sale of the property closes, the qualified intermediary holds the proceeds from the transaction and releases the proceeds to acquire the selected replacement property. . Passco Companies is directed by a team of dedicated senior real estate professionals whose experience in the business averages 38 years, and who, collectively, have acquired over $35 billion in investment real estate. document.getElementById( "ak_js_1" ).setAttribute( "value", ( new Date() ).getTime() ); 2023 | Real Estate Transition Solutions. Delaware Statutory Trust (DST) Tax Treatment & Reporting | FNRP They have no say in the day to day management of the real estate. Accredited investors can request access to our catalog of open DST offeringsvetted and updated monthly. Individual results may vary. TheBasics for a 1031 Exchange work the same way for every property type, including DSTs. As such, it deserves mentioning one more time that working with a CPA can help to navigate the complexity of the tax code and its treatment of DST investments. DST properties are considered securities by federal and state regulators. DSTs are a separate legal entity, formed with private trust agreements, under which real property is held, managed, administered, invested, and/or operated., Investors like DSTs because they can provide passive monthly income, portfolio diversification, and generally have low minimum investment requirements when compared with other, Perhaps most importantly, Delaware Statutory Trust properties are popular with individual investors because, states that a DST investment qualifies as a , . The statutory definition of "Statutory Trust" generally incorporates the common law concept and the modern requirements of a written instrument and the filing of a document with the secretary of state. One of the most popular is known as a 1031 Exchange which allows investors to defer taxes on the sale as long as they reinvest the proceeds into a replacement property that is considered to be like kind to the sold property. 1009 (1914). As part of their due diligence process, DST investors must research the firms structure and how it can impact the success of the investment. Passco Companies is also recognized locally on the 2019 lists: Fastest Growing Private Company and Top Private Companies by theOrange County Business Journaland one ofInc. 5000s Fastest-Growing Private Companies in America in 2018. According to National Real Estate Investor, the dividend yields on private REITS have averaged 7% to 8%. Bluerocks senior management team has an average of over 29 years of investing experience, has been involved with acquiring over 50 million square feet of real estate worth approximately $13 billion, and has helped launch leading real estate private and public company platforms. The investor is not underwritten for the debt on the property owned by the DST. This site is published for residents of the United States only. CRE may provide greater income and appreciation potential, competitive risk-adjusted returns and significant tax benefits. Thats why we believe it's important that investors consider alternate investment opportunities that are still legal according to the Federal Tax Code. Institutional-grade properties generally refers to a property of sufficient size and stature to merit attention from large national or international investors, and typically have the characteristic of high quality assets in major markets and at price points beyond the reach of individual investors and smaller partnerships. Due to the rigid criteria established by the IRS for a DST to qualify as an exchange property, lower-quality assets are rarely eligible. A DST is a business trust created under Delaware law. Delaware Statutory Trusts: Rate of Return, Tax Treatment, and More : Remember, 1031 Exchange investors have just 45 days to identify their replacement property and 180 days to purchase it. One aspect of investing in a Delaware Investment Trust is the potential opportunity to earn truly passive income. Delaware's Governor State Agencies Elected Officials General Assembly Delaware Courts State Employees Cities & Towns . DSTs also offerestate planning benefits. The DST ownership structure comes with many advantages, including tax benefits, income potential, the opportunity to buy ownership in an institutional-quality asset andperhaps most notablyDSTs are eligible for 1031 exchanges. The burden of identifying, purchasing, and managing the DST property(s) to be structured within the trust are the responsibility of a DST sponsor. Tax rates may vary per state. Several properties will be carefully analyzed by the DST sponsor before selecting the best property for an offering. How Do Delaware Statutory Trusts Work? types of commercial real estate investment, 1031 Exchange Checklist for Investors to Follow, 3 Questions All Commercial Real Estate Investors Should Ask Their Transaction Sponsor. * Defined by SEC as an individual with a net worth (excluding primary residence) of $1,000,000+ or annual income in excess of $200,000 for last two years for an individual or $300,000 for a couple filing jointly. More often than not, DSTs are owned by multiple investors, all of whom agree to pool their capital and entrust it to the trust's manager. His work focuses on tax analysis, developing tax-deferral strategies, legal entity re-structuring, co-ownership arrangements, 1031 replacement property options, and Delaware Statutory Trust investments. NOTE: DST investments are only available to accredited real estate investors, who meet certain income and net worth requirements. There are four scenarios in which investors should be aware of the tax implications of a DST investment: income and capital gains, depreciation, cost basis, and future 1031 exchanges. As of December 31, 2019, IPCC has sponsored 255 private placement programs. The DST sponsor develops a plan for building a portfolio of assets, which may focus on a specific sector or asset class. Given their unique legal structure, there are several scenarios in which DST investors should consider their potential tax liability: income and capital gains, depreciation, 1031 Exchanges, and the requirement to buy a property of equal or greater value.