Delaware Statutory Trust Tax Advantages: Reviewing Potential Tax Benefits and Advantages of DSTs

Frac­tion­al own­er­ship of real estate may come in a few dif­fer­ent forms. One of the legal enti­ties used in real estate own­er­ship and invest­ment is a Delaware Statu­to­ry Trust (DST). Investors seek tax advan­tages with many invest­ments and DST may offer advan­tages to cer­tain investors. 

March 1, 2024

By Al DiNi­co­la, AIF®, CEPA™
DST 1031 Spe­cial­ist
NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC
Secu­ri­ties offered through MSC-BD, LLC Mem­ber of FINRA/SIPC

As always, we rec­om­mend that investors con­sult with their tax pro­fes­sion­als. We are not CPAs and do not pro­vide tax advice. The tax laws may not be carved in stone and are sub­ject to change depend­ing on changes to the tax codes. There are require­ments and restric­tions on how DST may be used for tax advan­tages.  Here is an overview.

Sec­tion 1031 Tax-Deferred Exchange:
§1031 exchanges have been in use for over 100 years (albeit a few changes in struc­ture over the years). Since 2004 DST have been accept­ed as replace­ment prop­er­ties for investors to use to qual­i­fy for a §1031 exchange. Sim­ply put appre­ci­at­ed prop­er­ty held by investors may be sold and the cap­i­tal gains are deferred by rein­vest­ing the pro­ceeds in a DST.  Investors need to fol­low all IRC §1031 require­ments of the exchange.

One of the ben­e­fits investors may take advan­tage of is the con­ti­nu­ity of invest­ment with­out the imme­di­ate tax impact and con­se­quences. There may be a poten­tial increase in the over­all per­for­mance and returns.

Pass-Through Tax­a­tion:
One big ben­e­fit from tax pur­pos­es id the pass-through struc­ture of the DSTs. All deduc­tions and income from the DST will pass to or through to the investors. The indi­vid­ual investors when fil­ing their per­son­al income tax­es will uti­lize these items to their ben­e­fit.

Income is not taxed at the DST lev­el and when passed through to the indi­vid­ual investor avaoids dou­ble tax­a­tion.

Depre­ci­a­tion Ben­e­fits:
Real estate pro­vides a tax ben­e­fit called depre­ci­a­tion. Basi­cal­ly, the investor may deduct a per­cent­age of the build­ing over a pre­scribed peri­od of time. DST pro­vides the same advan­tage.  Investors uti­lize depre­ci­a­tion that may off­set income from the invest­ments. The off­set may poten­tial­ly off­set tax­able income.  Each investor may have dif­fer­ent write off based on their indi­vid­ual basis car­ried for­ward to the DST.

Ben­e­fits in Estate Plan­ning:
Investors may not look for­ward per­son­al­ly to a step up in basis. When investors pass away the val­ue of their invest­ment (Regard­less of the orig­i­nal price or amount of depre­ci­a­tion takes) will “step up” to the cur­rent mar­ket val­ue. The heirs will ben­e­fit from an increase in val­ue if they decide to sell.

Over­all estate plan­ning should involve many aspects. Uti­liz­ing DSTs as part of the over­all strat­e­gy may pro­vide an easy method to poten­tial­ly build gen­er­a­tional wealth and min­i­mize tax impli­ca­tion.

Man­age­ment by Pro­fes­sion­als:
Pas­sive investors are seek­ing a hands-off investor sta­tus. DSTs are struc­tured to pro­vide pro­fes­sion­al man­age­ment that may lead to a more effi­cient oper­a­tion of the prop­er­ty. All real estate investors are seek­ing max­i­miz­ing income with min­i­miz­ing tax lia­bil­i­ties. The struc­ture of the DST with a pro­fes­sion­al­ly man­age­ment prop­er­ty can be very advan­ta­geous for the investors.

Diver­si­fi­ca­tion and Risk Mit­i­ga­tion:
Diver­si­fi­ca­tion may not guar­an­tee to elim­i­nate risk. How­ev­er, many strate­gies design port­fo­lios that include a strat­e­gy of diver­si­fi­ca­tion. The frac­tion­al own­er­ship struc­ture of the DST enables investors to invest in insti­tu­tion­al grade prop­er­ties. Many investors would not be in a finan­cial posi­tion to invest in insti­tu­tion­al grade prop­er­ties alone.  The low bar­ri­er to entry ($100,000 in most cas­es) pro­vides an oppor­tu­ni­ty to invest in sev­er­al prop­er­ties. All the poten­tial tax ben­e­fits will remain in place with the diver­si­fi­ca­tion strat­e­gy.

We sug­gest investors con­duct their own research on all of the advan­tages to a DST. Under­stand­ing the risk of all real estate invest­ments includ­ing DSTs should be a foun­da­tion of investor edu­ca­tion.  We always sug­gest investors con­sult with their tax advi­so­ry team (CPA, accoun­tant, legal advi­sor. Indi­vid­ual investors will have dif­fer­ent imme­di­ate and long-term invest­ment goals.

DST’s (Delaware Statu­to­ry Trusts) are for accred­it­ed investors only.  Con­tact your invest­ment advis­er for addi­tion­al details on how a DST may be a solu­tion to your 1031 Exchange and com­pli­ment your finan­cial objec­tives. For more infor­ma­tion on how to prop­er­ly set up an IRC 1031Tax Deferred Exchange or if you are an accred­it­ed investor and would like addi­tion­al infor­ma­tion on a DST con­tact Al DiNi­co­la at 239–691-8098 or email adinicola@namcoa.com.

This is not an offer to pur­chase or solic­i­ta­tion to pur­chase any secu­ri­ty, as such be made only through an offer­ing mem­o­ran­dum or prospec­tus.  Invest­ing in secu­ri­ties, real estate, or any invest­ment, in any form, involves risk, includ­ing but not lim­it­ed to the poten­tial of los­ing some or all of your invest­ment dol­lars when you invest in secu­ri­ties. You should review any planned finan­cial trans­ac­tions that may have tax or legal impli­ca­tions with your per­son­al tax or legal advi­sor.   NAMCOA, LLC is a Reg­is­tered Invest­ment Advi­sor, reg­u­lat­ed by SEC (Secu­ri­ties and Exchange Com­mis­sion). Our cor­po­rate office is locat­ed at 999 Van­der­bilt Beach Road, Suite 200, Naples Flori­da 34108. Secu­ri­ties Offered through MSC-BD, LLC, Mem­ber of FINRA/SIPC. 8215 SW Tualatin ‑Sher­wood Rd, Suite 200 Tualatin, OR 97062. MSC-BD, LLC and NAMCOA are inde­pen­dent­ly owned and are not affil­i­at­ed.