Delaware Statutory Trust (DST)
DST 1031 Exchange Investment Properties
DST 1031 Exchange Property Information
Delaware Statutory Trust (DST) Overview
A DST is an acronym for a Delaware Statutory Trust which is fractional ownership of real estate. Delaware Statutory Trusts (DSTs) began in 2004 with the IRS Revenue Ruling 2004-86 which detailed the best structure. Each DST 1031 is a separate legal entity and each investor receives “beneficial interests” in the DST or trust for IRS 1031 purposes. Delaware Statutory Trusts are undivided fractional interest ownership in property.
Learn More About Delaware Statutory Trust (DST) / DST 1031 Exchange Properties
A DST is an acronym for a Delaware Statutory Trust which is fractional ownership of real estate. In 2004 the IRS issued a Revenue Ruling clarifying the terms on structuring a DST investment for 1031 purposes. Please review the IRS Revenue Ruling 2004-86.
Delaware Statutory Trusts (1031 DST) began in 2004 with the IRS Revenue Ruling 2004-86 which detailed the best structure. Each DST is a separate legal entity and each investor receives “beneficial interests” in the DST or trust for IRS 1031 purposes. DSTs are undivided fractional interest ownership in property. DSTs have low minimum investment amounts and therefore create an ability to diversify your current rental property into multiple investments in different cities, states, and asset classes such as apartments and net lease retail. A DST is a separate legal entity created as a trust under Delaware statutory law. Delaware law permits a very flexible approach to the design and operation of the entity. However, to use a DST in a Section 1031 tax-deferred ex- change private placement program, it is necessary to comply with the requirements of IRS Revenue Ruling 2004-865 so that a beneficial interest in the trust is treated as a direct interest in real estate for income tax purposes. It is also necessary to meet lender requirements, especially if the loan is to be securitized. An efficient and popular vehicle for protecting assets and structuring capital market transactions, a Delaware Statutory Trust is often the special purpose entity of choice for securitizations, liquidations, premium finance programs, life settlements, investment funds, real estate acquisitions, tenant-in-common structures, and much more. CSC Trust Company of Delaware (CSC Trust) can assist you in forming a Delaware Statutory Trust in a cost efficient and expeditious manner. Whether you need active trust administration or a passive resident trustee solely for the purpose of meeting statutory requirements, we will partner with you at every stage to ensure the success of your transaction.
Delaware Statutory Trusts (DST) FAQs
What are the deadline dates to complete a successful 1031 Exchange?
To accomplish a full tax deferral on the sale of rental property you must follow the IRS Section 1031 Guidelines. Corcapa 1031 Advisors recommends the following:
- Be in communication with your Corcapa 1031 Advisor representative well ahead of your proposed relinquished property closing so we can begin to research and identify potential replacement property.
- Be sure to select and assign a Qualified Intermediary “QI” or Accommodator to receive the sale proceeds from escrow. Corcapa can recommend QIs for you. Be sure to research the financial backing of QIs before selecting them. Be especially careful to NOT take personal receipt of the funds or your exchange will be invalidated.
- From the day you close your relinquished property, you will have 45 days to identify your replacement property(ies) and can use one of three rules: The three property ID rule, the 200% rule, or the 95% rule.
- You have an additional 135 days from the end of the 45 day period in which to close on your replacement property(ies).
- Additionally, for full tax deferral you must purchase equal or greater purchase price, equal or greater debt and reinvest all cash.
Are you an Accommodator?
While Corcapa is happy to refer you to accommodators, we cannot provide accommodator/QI services. We specialize in the replacement properties for our client’s 1031 exchanges.
Will a DST or TIC Qualify for a 1031 Exchange?
The Revenue Ruling 2004-86 issued by the IRS governs how the DST should be structured so that the purchase of a DST will fit within the guidelines of a 1031 exchange. Corcapa works with sponsors of DST offering who structure the offerings with a legal opinion for 1031 exchange purchases. We recommend that you discuss this with your tax and legal advisors and we will provide all documentation to these advisors to use in analyzing your replacement property options. Further, we are not aware of any of our clients to have ever had an IRS tax issue with the purchase of a DST investment.
What is the time frame for purchasing and closing on a DST? Choosing, Closing, Deadlines
This depends on the velocity of the real estate market. Currently there is a significant upswing in 1031 exchange activity and also an upswing in the purchase of DST properties. More attractive DST offerings can sell out quickly so its important to alert you Corcapa representative early on and let them know you have a pending 1031 exchange. This way we can be very proactive in finding the replacement properties that fit you needs.Most clients prefer to have a closing on their replacement properties sooner so as to begin earning income. Its possible to have a closing on your DST within ten business days or sooner. Alternative, clients may prefer to wait a few weeks to close escrow on their replacement property and this can easily be arranged.
How is the DST Income paid? Frequency?
Virtually all DSTs pay monthly. For example if you close on your DST purchase on August 15th, you will typically receive a distribution on September 15th for all the months you were invested in August. The October distribution would be a full month distribution for all of September and so forth.Investors can elect to receive the distributions via direct deposit or a mailed check, although almost all investors choose direct deposit.
Do I still receive depreciation on the income?
Yes, DST ownership is similar to traditional real estate ownership and the year-end tax reporting with note your share of the depreciation expenses.
How frequently will I receive reporting on my DST?
The DST sponsor will provide you quarterly reporting delivered either electronically or via mail. There is a comprehensive year-end report provided which also gives you the tax reporting information you would provide to your accountant to complete your taxes.
Potential Benefits of 1031 DST (Delaware Statutory Trust) Investments:
- Diversification: Investors can select multiple DST properties as part of their 1031 exchange allowing diversification of asset classes, cities and level of needed non-recourse debt.
- DSTs have lower minimum investments often as low as $100,000 of equity. If you require a lower investment amount than the stated minimum, let your Corcapa 1031 Exchange representative know and we may be able to negotiate a reduction in certain circumstances.
- Potentially lower fees in DST investments than TIC investments. The DST investment does not require a special purpose LLC entity that needed to be annually maintained and paid for.
- Potentially Greater Cash Flow: Most DSTs have a projected cash flow based on the anticipated rental income less expenses. This could be a higher net cash flow than you are currently receiving on your rental property. As with all real estate the income cannot be guaranteed because the rental income and expenses can increase or decrease unexpectedly.
- Non-Recourse Loans – Virtually all the loans within the DSTs that are approved by Primex are non-recourse which means the investor does not personally guarantee them.
- Easier access to financing for investors needing debt on their replacement property and potentially quicker closings.
- Investors like the pre-arranged DST programs so that some of their 1031 risk is removed.
- Access to Institutional Grade properties which are typically larger commercial properties that previously required significant capital to purchase.
Potential Risks of 1031 DSTs:
- General real estate risks and market also apply to DSTs. There can be no assurance that a property will perform as projected and DSTs are subject to economic volatility, tenants not paying their rent timely, and other traditional risks of owning, selling, and operating real estate.
- DST investors do not hold title to the investor but rather own beneficial interests in the trust and the sponsor controls the selling and managing of the property.The DST owners have limited control over the investment and are reliant on the sponsor.
- Illiquidity: A DST interest is an illiquid investment and there is no current active secondary market for selling your interest.
- Fees and Expenses of each offering should be carefully evaluated. Multiple owner offerings typically have additional expenses to owning real estate on your own and these fees should be weighed against specific capital gains tax liability. All investors are encouraged to have their tax and legal counsel advise them on taxes including any federal and state capital gains taxes, depreciation recapture and the recent 3.8% Medicare tax, which could be applicable.
- DSTs are structured according the Revenue Ruling 2004-86. Corcapa and Primex typically work with sponsors and properties that have “should” level tax opinions regarding 1031 exchange tax compliance but its possible the IRS would rule unfavorably on a DST offering and this could result in back and immediate tax liability.
- The enabling IRS revenue ruling which forms the basis for a DST transaction in a Section 1031 exchange program has prohibitions on the powers of the trustee, which are built into the Trust Agreement and have become known as the “seven deadly sins”. They are:
- Once the offering is closed, there can be no future contributions to the DST by either current or new beneficiaries.
- The Trustee cannot renegotiate the terms of the existing loans nor can it borrow any new funds from any party unless a loan default exists as a result of a tenant bankruptcy or insolvency.
- The Trustee can not reinvest the proceeds from the sale of its real estate.
- The Trustee is limited to making capital expenditures with respect to the property to those for (a) normal repair and maintenance, (b) minor non-structural capital improvements and (c) those required by law.
- Any reserves or cash held between distribution dates can only be invested in short term debt obligations.
- All cash, other than necessary reserves, must be distributed on a current basis, and
- The Trustee cannot enter into new leases or renegotiate the current leases, unless there is a tenant bankruptcy or insolvency.
- Because of the DST restrictions the best types of real estate for a DST are Master Lease transactions where the Master Tenant takes on all the operating responsibilities or a Triple Net/Net Long Term Lease with a financially stable tenant. Additionally, it is prudent with DSTs to have sufficient upfront and ongoing reserves, as well as a plan for a sale prior to the maturity of a loan.
- Additionally, there is a “Springing LLC” provision option which could convert the trust to a limited liability company to solve property issues. However, this could prevent future 1031 ability and adversely affect the value of their investment.
- One additional approach to give the Lender comfort is to place an operative provision in the Trust Agreement that if the trustee determines that the DST is in danger of losing the Mortgaged Property due to tax related restrictions on the trustee’s ability to act, (the seven deadly sins), it can convert the DST into a limited liability company (the “Springing LLC”) with a Lender-approved operating agreement. Delaware law permits the conversion by what is basically a simple election and which does not constitute a transfer under Delaware law. The “Springing LLC” will contain the same SPE and bankruptcy remoteness provisions as the DST (for the Lender’s benefit), but it will not contain the prohibitions against the raising of additional funds, the raising of new financing or renegotiation or the terms of the existing financing or entering into new leases. In addition, it will provide that the trustee (or Sponsor) will become the manager of the LLC.
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