Exchanging Into Delaware Statutory Trust Properties: What are the Benefits?

Exchanging Into Delaware Statutory Trust Properties: What are the Benefits?

Are you looking for a way to diversify your investment portfolio? If so, then you may want to consider exchanging into Delaware statutory trust properties.

A Delaware Statutory Trust: What Is It?

An ownership structure for real estate known as a Delaware Statutory Trust enables numerous investors to each have an undivided beneficial interest in the trust's holdings. By "beneficial interest," it is meant that investors have a portion of the ownership and that no one person may claim sole ownership of any one feature of the real estate. The regulations governing DSTs permit the trust to hold title to one or more investment properties, such as retail, office, industrial, self-storage, net lease, commercial, multifamily, and so forth.

One of the biggest advantages of investing in Delaware statutory trusts is the flexibility that they offer. Investors can choose from a variety of property types and trusts, allowing them to tailor their investments to their specific goals and needs.

A 1031 exchange into a property held by a Delaware Statutory Trust (DST) may have a number of advantages.

As with all real estate investments, investors should speak with their tax attorney and/or Certified Public Account before making a DST investment. It's also important to keep in mind that these potential advantages should always be carefully weighed against the potential risks associated with DST investments.

However, DSTs are still becoming more and more popular, particularly among aging baby boomers who are fed up with managing their own homes and are searching for a means to switch to a passive income stream.

As with any type of investment, there are both advantages and disadvantages associated with this strategy. However, the potential benefits may outweigh the risks for some investors. Here are six benefits of investing in Delaware statutory trust properties:

1. Using the 1031 Exchange to Defer Taxes

 In some cases, investors may be able to take advantage of tax breaks when they invest in certain types of Delaware statutory trusts . Consult with a tax advisor to see if this is an option for you . 

Many real estate investors have intended to sell their residential and commercial properties for years, but they haven't been able to find a property to exchange into and simply can't afford the tax bill once federal, state, depreciation recapture, and Medicare surtax are added up. Investors have the option to transition from an active to a passive role in real estate ownership on a tax-deferred basis thanks to the DST 1031 property solution.

2. Getting Rid of Property Management's Pains

When you invest in a Delaware statutory trust , you will have professional managers taking care of the day-to-day operations of the property . This can free up your time and allow you to focus on other aspects of your life .

A lot of DST investors are simply sick of the headaches that real estate ownership and management frequently entails because they are approaching or in retirement. They want to stop actively managing properties because they are sick of the tenants, filth, and toilets. The DST 1031 property offers a passive ownership structure, enabling them to enjoy retirement, grandchildren, travel, and leisure time as well as to concentrate on other areas about which they are more passionate.

3. Increased Potential for Cash Flow

Any Delaware statutory trusts generate income for investors through rental payments or other means. This income can help offset the expenses associated with owning property, making it an attractive option for those who are looking for a passive income stream.

Due to under-market rentals, vacancies, or idle vacant land, many investors aren't getting as much cash flow from their current properties as they could be. Investors have the chance to potentially boost their cash flow through a tax-deferred 1031 exchange by purchasing DST 1031 exchange properties.

4. Portfolio Diversification

Another benefit of investing in Delaware statutory trusts is the ability to diversify your portfolio. By investing in multiple trust funds, you can spread out your risk and potentially increase your overall return on investment.

Frequently, 1031 investors are liquidating real estate that represents a sizable portion of their net wealth. They made the decision to invest in a diversified portfolio of DST 1031 properties with multiple locations, asset classes (property types), and tenants because they want to lower their potential risk rather than purchasing a single property (like another apartment building) or one NNN building. 

Investing in mutual funds and exchange-traded funds (ETFs) rather than investing the entirety of their retirement savings in the stock of a single company is a common practice for investors, and it is comparable to this. It is crucial to remember that there are no guarantees that diversification will result in profits or prevent losses.

5. Non-Recourse Locked-In Financing

Take on "equivalent or higher debt" in the replacement property to what you had in the relinquished property. This is one of the requirements for a 1031 exchange (the property you are selling). Investors frequently struggle to find non-recourse financing with reasonable interest rates and terms in today's lending climate. Sponsors of DST 1031 properties frequently have good contacts with lenders, which enables them to obtain non-recourse financing at some of the best rates on the market. These financing terms, which they would frequently be unable to achieve on their own, are directly provided to the DST 1031 investors.

6. Access to Real Estate of Institutional Quality

DST 1031 assets give investors access to massive, institutional-grade properties that are frequently out of their price range otherwise. Investors can still buy an ownership interest in huge $20 million or more apartment complexes, $5 million or more pharmacies, or $15 million supermarket shops, for instance, with the customary minimum investment of $100,000. Investors now have access to a level of real estate that they would not have previously had the option of exchanging into.

Despite this, many of our clients who had extremely sizable 1031 exchanges chose to invest in DST 1031 properties instead of buying a single, sizable investment property because they didn't want to put "all their eggs in one basket."

Final Thoughts

All in all, DSTs are a powerful investment tool that provide many unique benefits for investors, and because of these benefits, they can be an incredibly lucrative source of income. Not only do DSTs offer tax advantages, flexibility and diversified options, but they are also backed by the full faith and credit of the United States government, ensuring that investors' capital is protected. As such, it is certainly worth considering investing in DSTs if you are looking to supplement your retirement income or diversify your portfolio. Utilizing advanced assets such as DSTs is an excellent way to reduce risk while simultaneously increasing potential gains — a win/win scenario for any serious investor.

JACOBS & CO. REAL ESTATE, LLC.

12923 Fitzwater Dr. Nokesville, VA 20155 

(703) 594-3800 | jacobsandco.com