We recently attended an apartment owners tradeshow and were surprised to hear many experienced investment property owners ask us the same questions throughout the afternoon. That’s why we thought it might be a good idea to write about what exactly were the three most commonly asked questions we heard during that conference that relate to DST 1031 exchanges, including:
- What is a Delaware Statutory Trust and what are the associated risks?
- What can a Delaware Statutory Trust do for me?
- Do I have to have a Delaware address to invest in a Delaware Statutory Trust?
First, of course, you don’t have to live in Delaware to invest in a “Delaware Statutory Trust”. Delaware was the state where the law defining a DST and its structure was created, and what’s so special about this real estate investment vehicle is that it’s blessed by the IRS to qualify as “like-kind” investment property for the purposes of a 1031 exchange.
Internal Revenue Code (IRC) Section 1031 allows investors to postpone paying tax on the gain of a relinquished property by reinvesting the proceeds in similar property as part of a qualifying like-kind exchange.
What is a Delaware Statutory Trust?
A Delaware Statutory Trust is a real estate ownership structure that allows multiple investors to each hold an undivided beneficial interest in the holdings of the trust. The term “beneficial interest” means that investors hold a percentage of the ownership, and no single owner can claim exclusive ownership over any specific aspect of the real estate. The laws of DSTs allow the trust to hold title to one or more investment properties that can include commercial, multifamily, net lease, retail, office, industrial, self-storage, etc.
Potential Benefits of a Delaware Statutory Trust
- Eliminating the Day-to-Day Headaches of Property Management
Many participant investors in DST 1031 properties are at or near retirement and are tired of the hassles that real estate ownership and management often bring. They are tired of the proverbial “3 T’s” of multifamily residential real estate: tenants, toilets, and trash, and just want to move away from actively managing properties. The DST 1031 property provides a 100 percent passive ownership structure, allowing investors to enjoy retirement, grandkids, travel, and leisure, as well as to focus on other things they are more passionate about instead of property management headaches.
Obviously, as with all forms of real estate investments, there is an underlying level of risk that investors should be aware of including things like economic downturns, vacancies, tenant repairs, etc.
- Tax Deferral Using the 1031 Exchange
Many of our clients have wanted to sell their apartments, rentals, and commercial properties for years but haven’t been able to find a property to exchange into and just can’t stomach the tax bill after adding up federal capital gains tax, state capital gains tax, depreciation recapture tax and the Medicare surtax. The DST 1031 property solution can potentially provide investors an ability to move from an active to a passive role of real estate ownership on a tax-deferred basis while still potentially receiving passive income. Also, because a 1031 exchange has very tight timelines (45 days to identify exchange property and 180 days to complete the exchange), DST investors can close quickly and complete their exchanges within 3 to five days as opposed to having to wait 30, 60, 90 days to purchase another outside property.
Investors are strongly encouraged to consult their CPA and tax attorney regarding the potential tax advantages as well as risks associated with any DST 1031 exchange properties. Furthermore, investors are encouraged to read the entire Private Placement Memorandum (PPM) for a full discussion of the risks and business plan of each offering.
- Increased Cash Flow Potential
Many investors of real estate may be unhappy with the amount of cash flow they are receiving due to recent eviction moratoriums, under-market rent structure, multiple vacancies and/or that the raw or vacant land is sitting idle and unproductive. DST 1031 exchange properties provide an opportunity for investors to potentially increase their cash flow on their real estate holdings via a tax-deferred 1031 exchange. This potential passive cash flow can come about from regular monthly payments from their DST 1031 investments. All real estate investments provide no guarantees for cash flow, distributions or appreciation as well as could result in a full loss of invested principal.
- Portfolio diversification by geography and property types
Often, 1031 investors are selling a property that comprises a substantial amount of their net worth. They want to reduce their potential risk and instead of buying one property (such as another apartment building) or a single NNN building (such as a Walgreens or Taco Bell) they decide that investing into a diversified portfolio of DST 1031 properties with multiple locations, asset classes (property types) and tenants is a better fit for their goals and objectives. Still, investors should also understand that diversification does not guarantee profits or protect against losses.
Matthew McFarland is vice president and DST 1031 specialist with Kay Properties & Investments, where he works out of the Kay Properties’ headquarters in Los Angeles, helping clients with their 1031 exchanges and direct investments. For more information on DST 1031 exchanges, please visit www.kpi1031.com or call 1-855-899-4597.
Kay Properties & Investments is a national Delaware Statutory Trust (DST) investment firm. The www.kpi1031.com platform provides access to the marketplace of DSTs from over 25 different sponsor companies, custom DSTs only available to Kay clients, independent advice on DST sponsor companies, full due diligence and vetting on each DST (typically 20-40 DSTs) and a DST secondary market. Kay Properties team members collectively have over 115 years of real estate experience, are licensed in all 50 states, and have participated in over $21 Billion of DST 1031 investments.
There are material risks associated with investing in real estate, Delaware Statutory Trust (DST) properties and real estate securities including illiquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multifamily properties, financing risks, potential adverse tax consequences, general economic risks, development risks and long hold periods. All offerings discussed are Regulation D, Rule 506c offerings. There is a risk of loss of the entire investment principal. Past performance is not a guarantee of future results. Potential distributions, potential returns and potential appreciation are not guaranteed. For an investor to qualify for any type of investment, there are both financial requirements and suitability requirements that must match specific objectives, goals, and risk tolerances. Securities offered through Growth Capital Services, member FINRA, SIPC Office of Supervisory Jurisdiction located at 2093 Philadelphia Pike Suite 4196 Claymont, DE 19703.
Read more articles from the January 2022 edition of the AOA Magazine