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Delaware Statutory Trusts (DST) in Relation to 1031 Exchanges

For real estate investors or retirees looking to diversify their portfolios and defer capital gains taxes, Delaware Statutory Trusts (DSTs) can be a game-changing investment strategy. However, not many people are familiar with the concept of DSTs and their role in 1031 exchanges. In this blog post, we will provide a comprehensive guide to DSTs, from their fundamentals to their tax advantages, and the unique benefits they offer to investors. We understand that this may seem daunting to those who are new to 1031 exchanges, but this guide aims to demystify DSTs and provide expert advice to help make an informed decision.

What are DSTs?

A Delaware Statutory Trust (DST) is a legal entity that allows multiple investors to own a share or interest in a single property. The property is typically a large, institutional-grade property like an apartment complex, office building, or shopping center. In a DST, investors hold an undivided fractional interest in the property, which entitles them to share in the rental income, any appreciation in the property’s value, and tax benefits.
DSTs are commonly used in 1031 exchanges because they allow investors to defer capital gains taxes on the sale of their investment property. Instead of selling their property and paying taxes on the gains, investors can exchange their property for a fractional interest in a DST. This way, they can defer capital gains taxes, diversify their portfolios, and potentially generate passive income.

Tax Advantages of DSTs

DSTs offer a range of tax advantages that make them an attractive investment strategy for 1031 exchanges. In addition to deferring capital gains taxes, investors can also benefit from depreciation deductions, which can offset any rental income generated by the property. Furthermore, DSTs are not subject to the same limitations on passive losses that rental properties face, which means that investors can claim passive losses on their tax returns.

Connecting DSTs and 1031 Exchanges

As mentioned earlier, DSTs are commonly used in 1031 exchanges because they allow investors to defer capital gains taxes and diversify their portfolios. However, it’s important to note that DSTs are not the only options available for 1031 exchanges. Investors can also exchange their property for another like-kind property, a Tenant-in-Common (TIC) interest, or a Real Estate Investment Trust (REIT). The choice ultimately depends on the investor’s investment goals, risk tolerance, and personal preferences.

Unique Benefits of DSTs

While DSTs share some similarities with other 1031 exchange options, they also offer unique benefits that make them a worthwhile investment strategy. One of the biggest benefits is the passive nature of the investment. DSTs provide investors with a way to access institutional-grade properties without having to worry about property management or day-to-day operations. Property management is typically handled by a professional management firm hired by the DST sponsor. Furthermore, DSTs offer a way for investors to diversify their portfolios across different asset classes and geographic locations. This diversification can help mitigate risk and potentially increase returns.

In conclusion, Delaware Statutory Trusts (DSTs) can be a game-changing investment strategy for real estate investors looking to defer capital gains taxes, diversify their portfolios, and potentially generate passive income. In this guide, we provided a comprehensive overview of DSTs, from the fundamentals to their tax advantages, connection to 1031 exchanges, and unique benefits. Whether you’re an experienced real estate investor or new to 1031 exchanges, DSTs may be a viable option to consider. However, it’s important to consult with a qualified intermediary or tax advisor before making any investment decisions.

Nate-Leavitt-web

1031 Investment Advisor

Nate oversees the daily operations, business development, and strategy for 1031 Exchange Place. He became interested in real estate from a young age due to his father's influence. After earning his real estate license at 18, Nate worked in the 1031 industry, focusing on business development through a unique white-labeling model. Following a religious mission in Taiwan, he continued in the industry until the 2008/2009 real estate crash. During the downturn, Nate pursued entrepreneurship and marketing, working with startups and outdoor companies. As the 1031 market recovered, he returned to work with his father, aiming to provide a more personalized experience for clients. Nate is passionate about outdoor activities and spends his free time with his wife and four sons, enjoying fly fishing, skiing, backpacking, rock climbing, and riding dirt bikes.