If you're delving into commercial real estate or seeking a hands-off investment approach, you might have encountered the term "DST." This acronym represents a Delaware Statutory Trust, a legal framework established under the laws of Delaware.
DSTs are often favored for their versatility in various investment portfolios, especially by those looking to identify replacement property for a 1031 like-kind exchange. While DSTs are not exceedingly complicated, understanding how they work is crucial before investing. This guide offers an introduction to the key features of DSTs.
DSTs Defined
A DST is an investment structure that enables a group of investors to collectively hold a beneficial interest in one or more professionally managed real estate properties within a trust. This specialized entity allows investors to access high-quality commercial real estate, typically between $25 million and $125 million, making such investments feasible for many who might otherwise find them out of reach.
How Does a DST Operate?
The establishment of a DST is overseen by a "sponsor," who is tasked with forming the trust, selecting potential properties, conducting thorough evaluations, and procuring the necessary funds for acquisition.
After acquiring all designated properties, the sponsor offers them in an "offering" to qualified investors. Although the trust retains asset ownership, investors acquire "beneficial interests," representing a share of the underlying assets.
The DST trustee is responsible for all decision-making relate to property transactions and also handles financing, investor contributions, and appointing a property management firm to oversee the assets.
Income and Liquidation in a DST
Income generated by a DST is distributed to investors, typically on a monthly basis, providing a source of passive income. Similar to an LLC, all dividends and income are passed through to investors for individual taxation, rather than at the collective level.
DST properties are usually held for a period of three to 10 years. Upon selling a DST property, investors receive all proceeds, including any appreciation gains. For properties involved in a 1031 exchange, the proceeds can be used to acquire a new replacement property, allowing for continued deferral of capital gains tax.
Who is Eligible to Invest in a DST?
While DSTs may attract a broad range of investors, they are exclusively open to accredited investors. As defined by the SEC, an accredited investor must possess:
- A net worth exceeding $1 million (excluding the primary residence), individually or jointly with a spouse, or
- An average annual income exceeding $200,000 for the past two years ($300,000 for joint filers), with the expectation of maintaining or surpassing this income level in the current year.
- Prospective investors must also meet the minimum investment threshold set by the DST, which often starts at $100,000.
Exploring DST 1031 Exchanges
Delaware Statutory Trusts (DSTs) offer a unique and flexible investment opportunity for those interested in commercial real estate. By allowing multiple investors to hold a beneficial interest in high-quality properties, DSTs provide a pathway to investment in assets that might otherwise be out of reach. Whether you're seeking passive income, diversification, or a replacement property for a 1031 exchange, understanding the mechanics of DSTs is essential to making informed investment decisions.
If you're intrigued by the potential of DSTs and want to learn more about how they can fit into your investment strategy, especially in the context of 1031 exchanges, we encourage you to take the next step.
Download our free e-book on 1031 Exchanges to gain a deeper understanding of this 1031 exchange process and the investment options at hand.
