1031 tax-deferred exchanges offer excellent returns and stability. However, the fate of your 1031 exchange investment depends on the type of replacement you choose. One of the safest and most preferred options is a Delaware Statutory Trust (DST). Current tax laws have skyrocketed DSTs’ popularity among 1031 exchange investors.
Here is a detailed analysis of a DST investment that will help you determine whether it’s a suitable option for you or not.
What is a Delaware Statutory Trust (DST)?
Delaware Statutory Trusts are private entities established under the Delaware Statutory Law. On investing in DSTs, 1031 exchange investors receive a proportional interest in real estate, including the rights to distributions from the property’s rental income or sale.
Build Invaluable Assets For Your Heirs
A DST investment provides you an opportunity to build a portfolio of income-producing assets that you can pass on to your heirs. Once your heirs receive your DST assets after you’re gone, they will be entitled to get an increment in cost basis without inheriting the previously deferred capital gain liabilities.
A Convenient Way To Diversify Your Portfolio
DSTs let you split your investment among several DST properties. As you are free to choose the amount you want to invest in a DST, you can diversify your portfolio by investing in multiple DST properties at once.
Regular Distribution of Income
A DST distributes up to 90% of its income among beneficiaries. Besides cash reserves held for carrying out repairs in the property or covering unexpected expenses, all earnings and proceeds are distributed among investors regularly.
Works As A 1031 Exchange Replacement Option
As a 1031 exchange investor, you need to identify three potential replacement properties during your identification period. You can include a DST property among your three identified properties so that if you fail to acquire the other two properties before the deadline, you can purchase the DST property as they can be closed quickly.
No Operational Control Over Properties
DSTs let investors own real estate without the burden of managing it. While some investors don’t want to indulge in the day-to-day responsibilities of managing real estate, others like to dedicate their time to managing their assets. So, if you belong to the latter group of investors, you may not want to invest in a DST as it doesn’t give you operational control over your asset. Neither are you allowed to make management decisions.
DSTs Require Long-Term Commitments
If you’re looking for a short-term investment option, DSTs are not for you. A 1031 DST investment will lock you for at least a couple of years that may extend up to 10 years. Some investors may not prefer holding onto an investment for such a long time.
No New Contributions After Closing
DSTs are not allowed to accept new investments once the initial offering is closed, which means a significant portion of the profit may go into property maintenance. That’s why it’s essential to have cash reserves for unexpected expenses.
Should You Invest In DSTs?
Now that you’re aware of how Delaware Statutory Trusts function, let’s see whether you should invest in them or not. As mentioned earlier, current tax laws have increased DSTs’ popularity among 1031 exchange investors. Undoubtedly, they are a proven way of building and preserving wealth. If you are looking to own income-generating real estate without the burden of managing the entire property, DSTs can be an ideal choice.
The information provided above has been thoroughly researched and is found true to the best of our knowledge. This isn’t an offer to sell or make profits. Like any other investment, real estate investments are subject to financial risk or loss. We recommend you consult an experienced 1031 exchange broker before investing.