DST Properties For 1031 Exchanges
What Makes DSTs Such A Popular 1031 Solution?
The demand for fractional property investments through DSTs has been extremely high over the last decade, making them an attractive option for many 1031 exchange investors. Delaware Statutory Trust (DST) co-ownership offers the tax deferral benefits of 1031 exchanges without the burdens of day-to-day management. A fractional ownership interest in large, institutional quality, professionally managed commercial property is available to smaller investors through the DST structure. In contrast to NNN options, increased diversification benefits both small and large investors.
This property is suitable for 1031 exchanges. In DST 1031 properties, each investor owns a share of the Trust, which then owns the property. Securities held by DST investors qualify for 1031 exchanges because they are treated as direct property ownership by the IRS. Revenue Ruling 2004-the IRS issued 86 in 2004, which allows the use of a DST to acquire real estate, where each owner is treated as a direct owner for IRC Section 1031 purposes.
Institutional Grade. Taking advantage of the co-ownership structure, DSTs have a lower minimum investment threshold, providing smaller investors with the opportunity to own investment real estate of institutional quality, such as multifamily apartment communities, medical offices, office buildings, senior living facilities, student housing, self-storage facilities, industrial properties, and national franchises. The only institutional investors who could invest in these properties used to be life insurance companies, pension funds, REITs, and foundations. By investing in a DST, individual investors can access a diversified selection of high-quality properties otherwise unavailable.
Professional Management. Investors who want the returns associated with property ownership but don’t want the management responsibilities associated with individual real estate ownership can take advantage of DSTs. Sponsors set up professional real estate asset managers and property managers to manage DSTs. The sponsor packages the DST through independent broker-dealers and makes it available to accredited investors as non-traded security.
There are limitations to DSTs, and they are generally more suitable for investors looking for a longer-term, passive investment. DSTs have the following structural advantages and disadvantages
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Benefits Of A DST
- Low Minimums. Private investors can access institutional-quality properties and tenants with investments as low as $50,000.
- The Flow Of Cash. In most cases, owners receive their percentage share of cash flow income monthly.
- Professional Management. Due to professional property and asset management, DST investors do not need to worry about day-to-day management duties.
- Real Estate Ownership. Depreciation and interest deductions are similar to those of sole ownership.
- Diversification. Additionally, DSTs offer geographical diversification and additional assets.
- Limited Liability. Investors are protected by the DST structure beyond the number of their investments.
- Pre-packaged Investments. Using 1031 exchange funds to purchase fractional DST investments is relatively simple since financing and all due diligence has already been completed.
- Single Borrower. This property is owned by the DST and financed by the DST alone, resulting in more efficient and cost-effectively obtaining financing.
- Control. A DST is governed by a single Trustee, eliminating concerns or disagreements among investors.
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