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Statutory Trust

A Statutory Trust is a legal entity that allows investors to pool their resources to invest in a portfolio of properties or other real estate-related assets. Statutory Trusts, also known as Delaware Statutory Trusts (DSTs), are particularly popular in the United States and are governed by the laws of the state in which they are established, often Delaware due to its investor-friendly laws.

Here are some features and aspects of a Statutory Trust within the real estate investment industry:

  • Legal Structure: The trust is a separate legal entity that holds title to the real estate assets. The investors own beneficial interests in the trust.
  • Trustee Roles: A trustee is appointed to manage the trust, making decisions related to property management, sales, and leases.
  • Investment Opportunities: Investors can purchase beneficial interests in the trust, akin to shares, which provides them with a fractional ownership in the underlying real estate assets.
  • 1031 Exchange: DSTs are popular in 1031 exchanges, allowing investors to defer capital gains taxes by reinvesting proceeds from the sale of investment property into beneficial interests in the DST.
  • Pass-through Taxation: The trust itself is not subject to federal income tax. Instead, tax obligations “pass-through” to the individual investors based on their ownership interests.
  • Liquidity and Flexibility: While DSTs offer fractional ownership and can provide some level of liquidity, they are typically long-term investments and not as liquid as publicly traded real estate investments.
  • Regulation: DSTs are subject to specific regulations and compliance requirements, including securities laws due to their investment nature.
  • Risk Diversification: Since a DST can hold multiple properties, investors may benefit from risk diversification as their investment is not tied to a single asset.
  • Distribution of Profits: Profits and losses are typically distributed to investors on a pro-rata basis, in accordance with their ownership interests in the trust.

A Statutory Trust can be a useful vehicle for investors looking for diversified real estate exposure and tax advantages, such as those offered through 1031 exchanges. However, investors should also consider the risks, legal complexities, and regulatory requirements involved in DST investments.