DSTs for Passive Income

Investors seek­ing pas­sive income streams for a vari­ety of rea­sons have dis­cov­ered Delaware Statu­to­ry Trusts (DSTs).  DSTs as an invest­ment in real estate assets or prop­er­ties have gained in pop­u­lar­i­ty.

May 8, 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

Can DSTs pro­vide a source of pas­sive income for investors.

This gain in pop­u­lar­i­ty has been with cash investors as well as investors uti­liz­ing a 1031 tax deferred exchange.  Over the years we have exam­ined how DSTs can pro­vide tax advan­tages as a source of pas­sive income. We do not offer tax advice and always sug­gest investors seek their own tax con­sul­tants for their indi­vid­ual sit­u­a­tion. DST by design and reg­u­la­tions are only for accred­it­ed investors. There are many facets to the DST struc­ture and func­tion of pro­vid­ing pas­sive income. We will attempt to pro­vide the top rea­sons.

Invest­ment in Real Estate:
DSTs are an inter­est in real estate. The inter­est in real estate may be many of the same com­mer­cial and res­i­den­tial real estate asset class­es. These may be large indus­tri­al prop­er­ties, mul­ti­fam­i­ly, stu­dent hous­ing, senior hous­ing, self-stor­age, life sci­ence facil­i­ties, nec­es­sary retail and even land.

Ben­e­fi­cial or Frac­tion­al Own­er­ship:
There are dif­fer­ent styles of frac­tion­al own­er­ship investors may become involved. The DST is a frac­tion­al own­er­ship struc­ture that many times is ref­er­enced as a ben­e­fi­cial inter­est. Basi­cal­ly, investors in frac­tion­al own­er­ship con­tribute funds or pool funds with oth­er investors. By com­bin­ing funds, it enables investors to acquire an inter­est in a larg­er, more expen­sive (poten­tial­ly bet­ter qual­i­ty) prop­er­ty than the indi­vid­ual investors may be able to acquire by them­selves. This strat­e­gy also enables indi­vid­ual investors to poten­tial­ly diver­si­fy their real estate hold­ings. This diver­si­fi­ca­tion may be across dif­fer­ent asset class­es or dif­fer­ent geo­graph­ic loca­tions.

Pas­sive Man­age­ment:
In addi­tion to pas­sive invest­ment there is also pas­sive man­age­ment. The DSTs prop­er­ties are pro­fes­sion­al­ly man­aged by asset man­agers or spon­sors. These man­agers han­dle the day-to-day oper­a­tions. This includes prop­er­ty man­age­ment, leas­ing, and main­te­nance. Elim­i­nat­ing the man­age­ment enables the investors to enjoy the pas­sive income with­out any of the respon­si­bil­i­ties that typ­i­cal­ly come with the own­er­ship of real estate.

Cash Flow:
The advan­tage DST pro­vides is typ­i­cal­ly sta­ble cash flow over the term of own­er­ship. The under­ly­ing real state prop­er­ty typ­i­cal­ly gen­er­ates income through rents and oth­er poten­tial income sources. Income is typ­i­cal­ly dis­trib­uted on a month­ly (or quar­ter­ly) basis. Investors seek a steady source of income maybe attract­ed to this struc­ture. There are a few excep­tions by design where a DST may be struc­tured as a “zero coupon” invest­ment where all dis­tri­b­u­tion pays down a high­ly lever­aged loan on the prop­er­ty. 

Tax Advan­tages:
Investors may become inter­est­ed in obtained tax favored invest­ment struc­tured. There are poten­tial tax ben­e­fits DSTs offer. These tax ben­e­fits may be depre­ci­a­tion deduc­tions. If the DST has any debt (struc­tured as non-recourse loans to the investors) there may be addi­tion­al ben­e­fits. These tax ben­e­fits may help to off­set income gen­er­at­ed by the income received.  When the DST is pre­pared to be sold the investors may enter into a 1031 exchange. The exchange may enable the investors to defer cap­i­tal gains by mov­ing into anoth­er DST or into anoth­er qual­i­fy­ing real estate offer­ing.  Investors uti­liz­ing a 1031 exchange to invest in a DST will typ­i­cal­ly have a dif­fer­ent depre­ci­a­tion sched­ule based on any car­ry for­ward basis from a relin­quished.  Indi­vid­ual investors should seek their own analy­sis on depre­ci­a­tion sched­ules.

Lim­it­ed lia­bil­i­ty:
Investors may have an under­ly­ing com­mon inter­est in lim­it­ed lia­bil­i­ty. In part­ner­ships, ten­ants in com­mon, and oth­er frac­tion­al own­er­ship forms lia­bil­i­ty may be shared among own­ers. In the DST struc­ture there is lim­it­ed lia­bil­i­ty. This means the per­son­al assets of the indi­vid­ual investors are pro­tect­ed from any lia­bil­i­ties of the DST. This pro­vides anoth­er lay­er of pro­tec­tion.

Acces­si­bil­i­ty:
If investors are accred­it­ed investors there are a wide range of prop­er­ties that are avail­able to investors. Finan­cial advi­sors or DST spe­cial­ists who work on a day-to-day basis with spon­sors should be well versed in the acqui­si­tion as well as the due dili­gence need­ed. This enables the investor to acquire inter­est in large scale real estate prop­er­ties.

Sum­ma­ry
One of the most impor­tant items for investors to com­plete is the review of the mate­ri­als and con­duct due dili­gence on options. All real estate has risk asso­ci­a­tion with own­er­ship and DSTs are not dif­fer­ent. Con­sult­ing with a DST advi­sor is typ­i­cal­ly a great start­ing point.

DSTs are not for all investors. The acqui­si­tion of a DST is for accred­it­ed investors only. Con­tact your invest­ment advis­er for addi­tion­al details on how a DST may be a solu­tion to your 1031 Exchange and suit­ed for your invest­ment future. 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, whether pub­lic or pri­vate, 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.

Thank you.

NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC