They do say that real estate is always a great investment, but the traditional way of investing in real estate comes with a heavy burden of work. If you’re a landlord managing your own rental property, you’re fielding calls from tenants, sometimes in the middle of the night; dealing with non-payment of rent; investing in maintenance and renovations and repairs; perhaps performing evictions and dragging tenants into court. It’s a lot to deal with.
What if there was a way you could enjoy the financial benefits of investing in rental property without the hassles that come with being a landlord? What if you could roll over your capital gains on the sale of a rental property into a low-maintenance asset that offers passive income but still meets like-kind requirements? You can, when you invest in a Delaware statutory trust (DST).
Delaware statutory trusts have become more popular since tax laws were changed to allow these assets to be purchased as part of a 1031 exchange. Under a Delaware statutory trust, a sponsor firm acting as master tenant buys a commercial or institutional property under the umbrella of a DST, and then opens up that DST to investors who want to purchase a beneficial interest in the trust. Investors can either purchase shares in the DST directly, or invest the proceeds from a 1031 exchange in the DST. Let’s take a closer look at this investment vehicle.
DSTs Allow You to Defer Capital Gains Taxes
Investing in a DST can have significant tax advantages if you do it as part of a 1031 exchange. Because a Delaware statutory trust holds commercial or institutional rental real estate, it counts as a real estate asset under like-kind exchange rules for 1031 exchanges.
Let’s say you have some rental real estate that you’re tired of managing – you’re ready to make some more truly passive income. You can sell that piece of real estate and swap it for shares in a DST, and defer paying capital gains taxes until you ultimately cash out of the DST. If you die without cashing out, your heirs can avoid paying capital gains taxes on the proceeds of your sale.
Any Accredited Investor Can Invest in DSTs
DSTs can bring institutional and commercial real estate investment within the reach of individual accredited investors. In order to be an accredited investor, you need to have an individual net worth, or joint net worth with your spouse, of $1 million dollars; or, you must have had an individual income of $200,000 a year for the past two years, or $300,000 between you and your spouse combined if you are married. You must reasonably expect to earn the same amount in the current year.
A Delaware Statutory Trust Is Not a Tenancy in Common
The ownership structure of a DST is similar to that of a tenancy in common (TIC), but it’s not quite the same thing. In a TIC, the tenants each directly own a share of the property – the shares don’t have to be the same size, the tenants can each sell their shares if they want, and the shares go to the tenants’ estates if they die.
In a TIC arrangement, a different lender can fund each tenant’s loan, and there can be up to 35 tenants owning a property in common. In a DST arrangement, there is only one loan and ultimately only one master tenant: the fund sponsor. Because investors don’t directly own shares in the property, but instead only own shares in the trust that supports the property, there’s an additional layer of financial security in volatile times – the investor isn’t responsible for any portion of the mortgage on the property, because it’s held by the fund sponsor and the investors do not hold loans.
Delaware statutory trusts can also typically accommodate a much larger number of investors than a tenancy in common. A DST can accommodate 99 to 499 investors, each one owning an interest in the trust that owns the asset. With so many other investors, individual shares can be bought for as little as $100,000.
If you’re ready to earn passive income and give up on the landlord game, you should invest in a Delaware statutory trust. Use a 1031 exchange to defer paying capital gains taxes on any gains you realize from the sale of your rental property, and enjoy collecting returns from a higher caliber of real estate investment.