What Is A DST Property?
Delaware Statutory Trusts are a preferred option for 1031 Exchanges. It has a unique structure and allows high-quality properties of excellent grades to be co-owned by multiple investors. There has been a huge increase in the demand for DSTs in 2018 and 2019. Today we will discuss the advantages and drawbacks of a DST property in detail so that investors can make an informed decision while choosing options for replacement property for a 1031 exchange.
DST is the only such setup that the IRS approves for replacement property identification. With DSTs, a real property co-owned is regarded as a real property interest for 1031 exchange purposes.
Let’s understand more about DST’s in detail –
DSTs Serve As An Excellent Alternative To TICs
In the past, TIC was extremely popular among investors of all domains.
What Are Tenants In Common?
Tenants in common, also known as the tenancy in common, is a kind of real estate ownership in which two or more than two people own a partial stake concurrently. All tenants of a property need to agree upon Tenants in Common, and it can be created by a deed, a will, or by operation of law. As is the case with joint tenancy, every tenant in common investor holds the property jointly; however, the proportions of interest might vary.
Detailed Definition
Similar to DSTs, Tenants in common are also a form of simultaneous property ownership. Whether the real estate is an apartment, a house, or a commercial building – Co-tenants hold an equal share of the property. When the value of the property rises, each co-tenant profits as well. Each co-tenant enjoys an equal, “undivided” right to own or use the entire property, and co-tenants bear the property’s rent or maintenance costs according to their interests. However, every tenant may own varying-sized shares of the property, unlike a joint tenancy or tenancy by the entirety, in which shares must be identical for all tenants.
TIC properties have worked well in the past for many like-kind exchanges. However, the advantages of DSTs surpass the benefits of TICs, which is why DSTs are gaining more traction than TICs.
DSTs Mandate A Minimum Investment
One of the essential criteria to get eligible for investment in a DST property is a minimum investment amount. Ideally, the minimum investment tends to be above or around $100,000; however, DST sponsors are permitted to change the minimum investment per their strategy.
Most of the successful 1031 exchanges involve proceeds that are above $100,000, so this minimum never acts as a barrier. But, investors should keep this in mind if they are planning to use DSTs as their secondary replacement property rather than primary.
Removing Your Investment Can Be Challenging
Another restriction around DST investments is that investors are not permitted to withdraw their investments. DSTs are stable investment vehicles, and therefore once interest is sold, sponsors prefer to maintain the ownership structure intact for a defined period.
Most DSTs involve a contract that locks the investor into the structure for a specific period of time. Therefore we always advise our investors to choose their DSTs with extreme care and only after completing due diligence.
Things to keep in mind before selecting a DST –
- DST Sponsor’s Infrastructure
- DST Sponsor’s Track Record
- Projected Income
- Risk Factors Involved
DSTs Provide Management for Investors
Management responsibilities that come along with a property is always a hassle for investors. Well, with DSTs, say goodbye to the arduous task of property management. DSTs are professionally managed, and all the responsibilities are handled by experts, leaving you with the only task of cashing in checks and enjoying the benefits. No Property Management is another reason behind the increase in demand for DSTs.
DSTs Provide Steady Returns
Every investor has its own set of priorities. Some look for a steady return, while others prefer a high-risk – high-return scenario. DSTs are mostly for investors who prefer no management responsibilities and a steady revenue stream. At times DSTs also generate huge profits, and investors end up making twice their initial investment amount. However, if an investors’ sole purpose of investing in a DST is generating unparalleled profit, a DST should not be their first choice.
Bottomline
If you are an investor searching for a replacement property for your 1031 Exchange, DSTs are an excellent option. They are prepackaged and risk-free in terms of identification period challenges. The future is bright for the DST industry due to robust sponsors, structuring high-quality 1031 exchange offerings that provide the potential for stable cash flow, preservation of capital, and diversification in a passive structure.
1031 Exchange allows tax deferral and maximizes your profits. However, the exchange guidelines need to be followed thoroughly to ensure that the IRS does not disqualify your transaction. We have more than 15 years of experience in handling highly profitable exchanges for our varied client base.
If you are planning to invest in DSTs, feel free to get in touch with us, and we would assist you in identifying a high-performing DST.
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