Delaware Statutory Trusts Explained For 1031 Exchange Investors

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What is a Delaware Statutory Trust?

A Delaware Statutory Trust lets you exchange into a fractional interest in institutional grade real estate instead of buying a whole replacement property. The IRS treats that interest as like kind property, so a 1031 exchange into a DST keeps your gain deferred. You hold a beneficial interest and take no part in managing the property.

A quick note, because two different questions share a name. Some people looking up Delaware statutory trusts want to form one as a legal entity for a business or a fund, which is a matter for a Delaware attorney. This page is about DSTs used as replacement property in a 1031 exchange, which is what we do.

A Delaware Statutory Trust (DST) is a legally well-defined and secure entity created by the Delaware Statutory Trust Act in 2002. These trusts are designed to hold income producing properties and deliver pro-rata benefits to investors.

The income producing property is held as securitized real estate and Individuals can purchase incremental shares of a DST. These investors are beneficiaries, and what they own is a beneficial interest in the trust. The trustee is a separate role, held by the sponsor or a professional trustee, and it is the trustee that holds legal title to the property and makes the operating decisions. Beneficiaries receive distributions according to their pro rata share and take no part in managing the property. Since the trust beneficiaries are separated from the trust, as a real estate investor in the trust, the beneficiary can only lose their original investment. They have no legal obligations to repay loans or be a party in a lawsuit against the property. Beneficiaries’ benefits include income, depreciation, and appreciation. What a DST distributes depends on the properties it holds, the debt on them and the leases in place, so any single figure describes one offering at one moment rather than DSTs in general. On anything we put in front of you, the projected distribution is in the offering documents and we will walk you through it before you commit to anything. DST depreciation can offset DST income taxes. It can offset up to 100% of the DST income tax in some cases.

Check the details for your specific investment to learn the depreciation percentage.

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What does a Delaware Statutory Trust cost?

There are two ways to buy into a DST and they are priced very differently. A broker dealer is paid by commission, typically 6 percent or more of what you invest. A registered investment advisor is paid a fee, typically $1,000 to $25,000. We are an RIA, and under our agreements with DST providers we refund the broker dealer commission back to you.

Broker – Dealer (BD): A BD is paid by commissions, typically 6%+ of your investment

Registered Investment Advisor (RIA): An RIA is paid by fees, typically $1,000 to $25,000.

We are an RIA. We don’t chase commissions. In fact, based on the agreements we have with our DST providers, we refund the BD commissions back to you.

So your minimum investment of $100,000 in a DST becomes $106,000 immediately. You then have the choice of paying us a one-time fee or a percentage of the income generated. Both are far less than $6,000.

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What's a Delaware Statutory Trust?

If you get overwhelmed or would rather have experts handle it, we will be right here, ready to tailor a tax deferral strategy for you.

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When should you use Delaware Statutory Trust?

The Delaware Statutory Trust is typically used in a 1031 Exchange. With 100s of investments to choose from, many investors that no longer wish to manage property but still want the appreciation aspect of real estate investing choose the DST as their next investment. DSTs also have several benefits when used in a 1031 Exchange. A 1031 Exchange requires that both the mortgage and equity be invested into a replacement property of equal or greater value to the relinquished property. A DST can fill the gap on the equity side and the mortgage side.

a simple example:

A simple example, James sold his land for $1,000,000 but he had a loan for $500,000. After paying the loan in escrow, James now has $500,000 with a 1031 Exchange accommodator. James can either:

Buy new investment property for $1,000,000 or more by using his $500,000 from the 1031 Exchange as a down payment and getting a new loan for the rest, or
Buy $500,000 in one or more DSTs with a 50% loan to value (LTV).

The DST option does not require James to get a new loan because, when he made the investment into DSTs, he made an equity investment of $500,000 and also bought $500,000 in debt based on James’ pro-rata ownership in the 50% LTV DST. Now James has investment income and depreciation from a professionally managed real estate investment without the hassles of managing real estate and no mortgage payments.

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Top 10 Reasons to use a Delaware Statutory Trust

Is a Delaware Statutory Trust a good investment? The Delaware Statutory Trust can be a good investment, but it is not a great investment. There are other real estate investments that pay more with about the same risk. Also, owning your own real estate can have significantly higher appreciation than buying into a DST. But…
DSTs allow real estate ownership benefits without the hassles.
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We only work with specific providers that provide institutional grade contracts with experienced property managers. The companies we work with survived the Dot Com Bust, 911, and the Financial Crisis. DSTs tend to be 5, 7, or 10 year investments. We feel it is important that the company you work with is still around in 10 years.

The key benefits of a DST over other real estate investments include: ‍

Avoid Financing Obstacles

You do not need to qualify for a loan in order to use a DST.

Great Back-Up Property

If you are in a 1031 Exchange and your replacement property deal falls through, the DST can fill in as a back-up replacement property.

Avoid Taxable Gains on Boot

If you have money left over in a 1031 Exchange, you can use a DST to close the gap.

No Property Management Headaches

If you are tired of tenants, toilets, trash, termites, teenagers, and turmoil; Let professionals manage the property for you.

Diversification Benefits

You can buy multiple DSTs in different states and different asset classes to mitigate location risks.

Remove a Reason Not to Sell

DSTs remove a reason not to sell, so you can make a return on your investment quicker and easier.

You Can Swap Til You Drop

With DSTs, you can swap and interchange properties until you drop.

Estate Planning (100% Step-Up in Basis)

DSTs are real estate investments which allows a step up in basis when the owner passes. The DST is still part of your estate.

Quality Properties and Leverage Options (LTV)

There are literally 100s of DSTs looking for investors at any given time across the US. There is also a wide variety of asset classes to choose from.

Low Minimum Investment Amounts

The requirements for minimum investment amounts for DSTs are relatively low, typically $100,000 or more.

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How do I purchase a Delaware Statutory Trust?

Since a DST is securitized real estate, it can only be sold through a Registered Investment Advisor or a Broker-Dealer. Our company will discuss your investment goals, determine if a DST is right for you, then set up meetings with DST providers that will show you DSTs currently available that meet your needs. Our goal is not to sell products with the highest commission. Instead, we will find high quality products that meet your needs, educate you on the details, and let you decide if anything is right for you.

Who should you buy a Delaware Statutory Trust through?

A DST is a security, so you cannot buy one the way you buy a house. You will hear several names for the people involved. Here is who does what.

The DST sponsor

The sponsor builds the trust. It buys the property, arranges the loan and runs the property for the whole hold period. The trustee role sits with the sponsor or a professional trustee.

A broker dealer

A broker dealer sells DSTs and is paid a commission out of what you invest. A DST broker works this way.

A registered investment advisor

A registered investment advisor, or RIA, is paid a fee instead of a commission. You may also see the titles DST specialist or DST consultant. Those are not licenses, so ask how the person is paid.

A qualified intermediary

A qualified intermediary, also called an exchange accommodator, holds your sale proceeds during the 1031 exchange. They do not choose your DST.

What we do, and what we do not do

We are a registered investment advisor. We talk through your goals and tell you if a DST is a poor fit. We set up meetings with DST providers and explain each offering before you decide. We do not keep broker dealer commissions. We are not the sponsor or the trustee, and we do not manage the properties.

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How is a Delaware Statutory Trust taxed?

For federal income tax, a properly structured DST is treated as a grantor trust. The IRS looks through the trust and treats you as owning your share of the real estate.

How the income reaches you

Your share of the rent, the expenses and the loan interest passes through to you each year. The sponsor sends a year end tax statement. Most investors report it on Schedule E, the same form used for a rental you own yourself. If the property is in another state, you may need to file there too.

How depreciation passes through

Your share of the depreciation passes through as well. It can offset some or all of the income the DST pays you. The amount depends on the basis you carry over from the property you sold.

What happens to the deferred gain when the DST sells

The gain you deferred does not go away. When the trust sells the property, that gain becomes taxable, along with depreciation recapture. You can defer it again by moving the proceeds into another 1031 exchange.

Why a DST interest counts as real property

A DST interest is sold as a security. For exchange purposes the test is different. In Revenue Ruling 2004-86, the IRS said an interest in a properly structured DST is treated as a direct interest in real estate. That is why it can be replacement property in a 1031 exchange.

This is general information, not tax advice. Have your CPA review your own numbers.

Hold period, liquidity and exit: how a Delaware Statutory Trust ends

The hold period

Most DSTs are built to last 5, 7 or 10 years. The sponsor decides when to sell, and the date is not guaranteed. Investors do not vote on it.

What happens at the end

When the property sells, the loan is paid off and the trust closes. You receive your share of what is left. You can move those proceeds into another 1031 exchange, including another DST, and keep deferring. Or you can take the cash and pay the tax.

A DST interest is not liquid

There is no public market for a DST interest. A small secondary market exists, but it is thin. A sale there needs a willing buyer and the sponsor’s consent. It can take time, and the price may be less than you paid. Plan to stay in for the full hold period.

Transfers and inheritance

An interest can usually be transferred, subject to the trust agreement and the sponsor’s approval. If you pass away, your interest goes to your heirs as part of your estate. Under current law they receive a step up in basis.

Delaware Statutory Trust questions and answers

What is the downside to a Delaware Statutory Trust?

The main downsides are control and liquidity. You make no decisions about the property, and you cannot easily sell before the sponsor does. Once the trust closes, it cannot raise new money or take a new loan. Distributions are not guaranteed, and the property can lose value.

What is the purpose of a Delaware Statutory Trust?

A DST lets many investors own a share of one large property without managing it. For 1031 exchange investors, its purpose is to serve as replacement property, so the gain from a sale stays deferred.

How do I get out of a Delaware Statutory Trust?

The normal way out is to wait for the sponsor to sell the property at the end of the hold period. You then take your share of the proceeds, or exchange into a new property or another DST. Leaving early is hard. It means finding a buyer for your interest, with the sponsor’s consent.

What is the average return on a Delaware Statutory Trust?

There is no single average that means much. What a DST distributes depends on the properties it holds, the debt on them and the leases in place. The projected distribution for any offering is in its offering documents, and we walk you through it before you commit.

We are Tax Deferral Consultants. We have 17 legal tax reduction, tax deferral, and tax elimination options we can combine into hundreds of strategies.

This was a quick overview of the Delaware Statutory Trust; what it is, when to use it, how good of an investment it is, and how to purchase one. The real value of this investment depends on your investment goals and your specific situation. If you are interested in learning more, we have complimentary 25 minute appointments designed to discover what works best for your situation.

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