DST 1031 Exchange


Delaware Statutory Trust

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.

Click here to contact a Corcapa 1031 Advisor for more information on DST 1031 Exchanges / DST Investments.

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

Are You an Accomodator?

While Corcapa is happy to refer you to accommodators, we cannot provide accommodator/Qualified Intermediary services. We specialize in the replacement properties for our clients’ 1031 exchanges.

What is a DST?

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

What is Corcapa? What is Primex?

Corcapa 1031 Advisors is a Finra www.finra.org registered branch office located in Costa Mesa, CA. Our broker dealer is Primex Prime Electronic Execution www.primexprime.com based in New York state.

How Do I Know If I am Accredited and Eligible to Purchase a DST?

An accredited investor is an individual, or Revocable Living Trust, with a net worth of at least $1,000,000 (excluding the equity in your home) OR net income the last two years of $200,000 or greater ($300,000 if joint income with spouse) with an expectation of equal or greater earnings in the current year.

Entities such as Corporations and LLCs require a $5,000,000 minimum net worth or you can do a “pass-thru” test to qualify if all the individual members of the entity are accredited with a net worth of at least $1,000,000 (excluding the equity in your home) OR net income the last two years of $200,000 or greater ($300,000 if joint income with spouse) with an expectation of equal or greater earnings in the current year.

Irrevocable Living Trusts must have at least $5,000,000 gross net worth.

What is the Minimum Investment?

Generally, most DSTs have a $100,000 minimum equity investment.

What Due Diligence is Being Done on the DST Properties?

Significant due diligence is done on the properties before they come to market and are approved. Six levels of due diligence are: 1. The Sponsor research, underwriting and sourcing all the third party reports such as appraisal, environmental, and property condition reports along with financial underwriting analysis, 2. The Lender providing the loan, 3. The Attorney (who drafts the private placement memorandum PPM and writes the tax opinion), 4. The Broker Dealer who must conduct due diligence, 5. The third party due diligence firm who provides an internal report to the broker dealers and 6. The Registered Representative.

Investors are able to tour the properties before investing.

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 real estate program is likely to fit within the guidelines of a 1031 exchange. TICs have a Revenue Procedure 2002-22 that discusses the 15 structure points TIC programs should have in order to receive a “should level” tax opinion. Corcapa works with sponsors of DST and TIC offerings who structure the offerings with a legal opinion from experienced industry attorneys 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.

How Quickly Can I Close Escrow on My DST?

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 three to ten business days. Alternatively, clients may prefer to wait a few weeks to close escrow on their replacement property and this can easily be arranged.

One advantage of closing escrow sooner on your DST purchase is that the cash flow begins to accumulate immediately after closing and is paid with the first distribution the following month.

Must all My DSTs be Purchased and Close at the Same Time?

No. Historically most exchanges were simultaneous but now the most common form is now a delayed or deferred exchange. A delayed or deferred exchange means you sell your property and the net proceeds go to the accomodator, and then you have 45 days in which to identify replacement property(ies) and then another 135 days to close (for a total of 180 days).


What is Cash on Cash Return?

Cash on cash return is the projected cash flow of the property. For example, if you invest $500,000 of equity in a DST property that has a 5% projected cash on cash return, then you can anticipate receiving a projected annual cash flow of $25,000 or $2,083 per month direct deposited right into the bank account of your choice.

How Long is the Typical Hold Period for a DST Investment?

Most DSTs have ten years fixed rate financing associated with them. The sponsor will be mindful of this and generally does all they can to watch the market for the best time to sell and sell the property before year ten. However, no guarantee can be made as to when the property will sell.

Historically, the sponsors of DSTs that we work with have an approximately six-year holding period.

And some of the DSTs have sold within two to four years if they were in strong, growing markets.

However, given the current elevated pricing for quality properties around the country, I anticipate that many DSTs will go a full eight to ten-year hold period.

Potential Benefits of 1031 DST (Delaware Statutory Trust) Investments:

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
Easier access to financing for investors needing debt on their replacement property and potentially quicker closings.

Lower Risk
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:

  1. Once the offering is closed, there can be no future contributions to the DST by either current or new beneficiaries.
  2. 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.
  3. The Trustee cannot reinvest the proceeds from the sale of its real estate.
  4. 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.
  5. Any reserves or cash held between distribution dates can only be invested in short term debt obligations.
  6. All cash, other than necessary reserves, must be distributed on a current basis, and
  7. 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.

Request DST 1031 Exchange Listings

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Please Confirm You Are An Accredited Investor

An accredited investor is an individual with a net worth of at least $1,000,000 (excluding the equity in your home) OR net income the last two years of $200,000 or greater ($300,000 if joint income with spouse) with an expectation of equal or greater earnings in the current year.

Learn More About 1031 Exchange Replacement Property Investments

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