Real estate investors are now at an advantage, unlike in the past when they did not have many options available. Since the Delaware Trust Act’s passing in 1988, DSTs started qualifying as “replacement property” for the tax code’s 1031 exchange. You can create wealth on real estate by acquiring assets, building equity, selling the assets, and expanding to larger properties. Since DSTs are quite sophisticated investments, you need to be an accredited investor to invest in one.
According to the SEC, an accredited investor should have a net worth of $1 million without including their primary residence. They may also need to have an average annual income of over $200,000 in the last two years for one person and, as a couple filing, have $300000. Here are five ways that DSTs can help your real estate investments.
A DST holds a high-grade institutional property even though it can also own nearly every quality estate asset. These kinds of properties refer to a property of adequate sizing and stature to attract the attention of investors in large corporations both locally and internationally. DSTs also have high-grade assets in the major markets and at price points past an individual investor’s reach and small businesses.
Low-grade assets hardly qualify because of the IRS’s stringent standards for a DST to meet the requirements of being an exchange property. Therefore, DSTs commonly own high-grade assets with Fortune 1000 tenants who are worthy of credit. These assets would not be attainable for an individual investor to acquire through a 1031 exchange were it not for the structure of DSTs.
Allows for a Portion of a Real Estate Interest to be Eligible as an Exchange Purposes Property
Allowing a fraction of the real estate interest to be eligible as an exchange purposes property opens up several investment possibilities which may have been unavailable to investors. Not only does the DST start opening previously unavailable segments, but the structure allows the investor to be a minority shareholder, not having to think about the daily issues of real estate development.
While you can consistently recruit somebody to supervise your assets as an individual investor, investing in a DST, the management this same trust will probably use will be of organizational caliber. It also pertains to the work or even analysis performed by experts affiliated with the trust in making financial and investment choices.
No Recourse Debt
Delaware Statutory Trust companies obtain corporate financing on these properties, and the debt is no recourse to the individual Delaware Statutory Trust investors. However, it satisfies the requirements for replacing the indebtedness of the 1031 exchange and provides write-offs of the accruing payments.
Tax Savings for Estate Recipients
One other benefit that real estate investments get from DSTs is through estate planning benefits. Recipients can withhold investment returns, depreciation reclaims, and total equity income tax if the owner dies by using a step-up basis. A Delaware Statutory Trust investment can also be divided adeptly among recipients by the estate, which is not always possible with traditional real estate assets directly owned. A CPA can discount a DST investment when computing the entire estate’s value because it is an investment that cannot be easily converted into cash with fractional ownership. It is quite common to witness discounts varying from 20% up to 30%, which could help lower possible future estate taxes.
The Delaware statutory trust owns the assets and takes on the liability responsibilities as the stockholders hold a positive interest such as passthrough revenue and tax benefits. DSTs have a relatively low investment obligation, typically $100,000, which makes it simple to expand across various properties to help maximize profit and reduce risk. Shareholders can reallocate the earnings of a real estate sale into various DSTs beneath the IRS’s real estate identifying rules for 1031 exchanges, generating instant asset diversification between multiple types of DST property as well as locations.
Investing in DST is ideal for real estate investors who plan on selling any investment property as they withhold the capital gains and move into a passive investment administration role. Additionally, the 1031 exchange also allows the property seller to withhold depreciation recapture taxes.