<img height="1" width="1" style="display:none" src="https://www.facebook.com/tr?id=986471439785289&amp;ev=PageView&amp;noscript=1">
logo-white
  • Products
    • Delaware Statutory Trust
    • 721 DST
    • Private Funds
    • Private Credit
    • Qualified Opportunity Funds
  • Marketplace
  • About
  • Resources
    • Blog
    • Case Stories
    • Videos
    • Guides
  • Products
    • Delaware Statutory Trust
    • 721 DST
    • Private Funds
    • Private Credit
    • Qualified Opportunity Funds
  • Marketplace
  • About
  • Resources
    • Blog
    • Case Stories
    • Videos
    • Guides
Login Register
Blogs|DST|

What is a DST and can it qualify as a 1031 replacement property?

Quick Links

What is a DST and can it qualify as a 1031 replacement property?

author image
Editor at Stax Capital

DST

Share:
URL copied!

Andrew Carnaby's statement that 90% of millionaires build their wealth from real estate has become famous over time. Said at the turn of the century, this insight still holds true today.

However, back in the late 1800s, things were a little different. There was no capital gains tax for one, as this was only instituted in 1913.

Of course, capital gains tax or not, real estate is still a promising investment type. What's more, capital gains tax can be minimized through informed tax planning strategies. The use of DSTs is one example of this.

But what is a DST 1031 exchange? Delaware Statutory Trusts (DSTs) provide real estate investors with a passive investment structure that can qualify as 1031 exchange replacement properties.

If you are looking to defer capital gains taxes and reinvest into DST investment opportunities, continue reading to find out how DST 1031 real estate can work as part of your strategy.

What Is a DST?

A Delaware Statutory Trust offering or DST is a legal real estate entity designed for conducting business activities. Contrary to its name, Delaware Statutory Trust properties are not registered exclusively in Delaware. DSTs are also known in some instances as unincorporated business trusts or UBOs.

Similar to LLCs,  DSTs allow investors to own fractional shares in professionally managed commercial real estate. This enables passive real estate investment while providing potential tax benefits through a DST 1031 exchange. DSTs also provide trust investors with limited liability while offering exposure to commercial real estate assets.

Unlike traditional real estate investments, DST investors do not directly manage the property. Instead, a sponsor oversees DST investment management, handling asset performance, lease agreements, and property maintenance.

Do DSTs Quality as 1031 Exchange Property?

Yes, DST investment opportunities qualify under section 1031 as a like-kind property for 1031 exchange investors. The IRS officially recognized DST 1031 exchange structures under Revenue Ruling 2004-86, making them eligible for 1031 exchanges.

However, 1031 exchange requirements specify that Delaware Statutory Trust properties are only available to accredited investors. To qualify as a like-kind property, a DST investment must be structured correctly, meeting the requirements for conducting a 1031 exchange.

DST allows real estate investors to reinvest in 1031 exchange properties while benefiting from the passive nature of a DST. Unlike traditional real estate investment firm models, a DST can also provide access to commercial real estate that might otherwise be out of reach.

1031 Exchanges Explained

If you are unfamiliar with 1031 exchanges and DSTs, let’s quickly examine how they work and what their requirements are.

A 1031 exchange investor can sell the property and defer capital gains tax by reinvesting in eligible 1031 exchange assets. This enables real estate investors to defer paying taxes, increasing potential tax benefits.

If you are unfamiliar with 1031 exchanges, let's quickly take a look at how they work and what their requirements are.

In a nutshell, 1031 exchanges allow for real estate property to be sold without attracting immediate capital gains tax. Any applicable capital gains tax is deferred, allowing investors to enhance the growth potential of their portfolios. A further benefit is properties purchased through a 1031 exchange can be passed down to heirs tax-free.

However, there are a number of requirements for 1031 exchanges. These include:

  • Proceeds from the sale of the real estate have to be reinvested in "like-kind" replacement property (properties that are considered similar)
  • The replacement property or properties have to be identified within 45 days from the sale of the previously held property
  • The replacement property or properties need to be successfully closed on within 180 days
  • Replacement property has to be utilized for investment purposes or business purposes

The passive nature of a DST makes it an attractive option for many real estate investment firm clients, allowing them to diversify their trust investments. 

Identifying qualifying replacement property, conducting due diligence on the property, and closing on it within the required time frames can be difficult. DST 1031 investments can, however, remove some of the obstacles involved in a 1031 exchange.

Let's take a look at some of the pros and cons associated with DST property investment.

Pros and Cons of 1031 Exchanges via DST Properties

A DST 1031 investment comes with several advantages, making it a preferred option for tax-deferred real estate investing. However, as with any investment, DST investments also come with potential drawbacks. Below are the pros and cons investors should be aware of when considering DST property.

DST Investment Pros

DST property investment poses a number of advantages. DST investors can enjoy the benefits of 1031 exchanges, with fewer hurdles, and minimized risk of exchange failure. DST property investment allows for enhanced diversification and reduced personal management duties.

Streamlined 1031 Exchanges

The overarching benefit of DST investments is that 1031 exchanges can be accomplished in a streamlined manner, providing that the DST investors find a properly structured DST product.

When investing in a well-managed DST, investors can enjoy the tax shelter of a 1031 exchange without the legwork of identifying, investigating, and closing on qualifying properties. Without the pre-established framework of a DST investment, investors run the risk of disqualifying their 1031 return due to factors outside of their control.

Zero Property Management Duties

Properties that are owned by DSTs are typically managed in full. This means that DST investors enjoy monthly income from their investment, without the need for hands-on management.

Property management can be a significant drawback of real estate ownership. Dealing with tenants and property maintenance can be a full-time job in and of itself.

With structured DSTs, investors do not have to worry about this aspect. Instead, all property management tasks are handled by the trust.

Opportunity for Portfolio Diversification

Another benefit of DST properties is the entry point for DST investment can be significantly lower than when buying total ownership of a property.

DST investments often consist of multifamily assets, mixed-used property, office space, and CRE assets. These types of real estate assets are often out of reach for private investors. DST investments, on the other hand, typically start at a minimum value of $100,000.

This means that DST investors can buy into a property with less capital. This also facilitates diversification, where buyers can choose to invest multiple properties types simultaneously.

DST Property Cons

While investing in a DST 1031 property has many advantages, there are also several potential cons. These include a loss of control, illiquidity, and market and financial risks.

Loss of Control

For some investors, having full property management might not be ideal. Thanks to the structure of DSTs, investors are not able to manage the affairs of the real estate investment.

In many cases, this can be a substantial bonus. However, if investors disagree on the way property management is carried out, this can become a point of conflict.

Illiquidity

Another potential drawback to investing in DST property is its illiquid nature. DST property is normally only sold once the DST has completed its cycle, and there is no public market for ownership interests.

In some situations, an investor may be able to sell early. However, this is not guaranteed.

Therefore, DST investments are only suitable if you are looking to invest for long-term gain, typically over 5-10 years.

Market Risk

DST's or Delaware Statutory Trusts are real estate investments and therefore subject to all the risk related to real estate ownership. Some of these include occupancy, local employment base, rent collections, general economic risk, etc.

Financing

DST's usually employ the use of leverage to help investors meet their 1031 loan replacement requirements. Whenever leverage is part of a real estate purchase, it opens up the property to a potential foreclosure if at some point the property cannot generate enough net income to make ongoing loan payments.

Would You Like to Know More About DST Investments?

Now that you know the answer to "What is a DST," are you interested in learning more about potential DST investments?

If so, you have come to the right place. We specialize in DST property and real estate investment and are here to help you with your alternative investment journey. Do your portfolio a favor and find out more about our DST investment offerings.

We pride ourselves in providing open and honest investment information and opportunities that facilitate our clients' financial freedom. If you have any questions about DST investing, please do not hesitate to reach out and we will be happy to assist you.

Frequently Asked Questions

A Delaware Statutory Trust (DST) allows multiple investors to own a share of a large commercial property, like an office building or apartment complex. It is commonly used in 1031 exchanges, which let investors sell a property and reinvest in another without paying immediate taxes on the profit. A DST helps investors pool money together, diversify their holdings, and avoid the hassle of directly managing a property.

A Real Estate Investment Trust (REIT) is like a stock—investors buy shares of a company that owns and manages real estate. A REIT often owns multiple properties, and investors get regular dividends.

A DST, on the other hand, is a trust that owns a single property (or a few properties). Investors own a direct share of the real estate, which makes it a popular option for 1031 exchanges. Unlike REITs, DSTs don’t pay dividends, but investors get a portion of the rental income and potential appreciation when the property is sold.

To start a DST, follow these steps:

  1. Set up a legal trust – Work with attorneys and financial experts to create a Delaware Statutory Trust following legal guidelines.
  2. Choose the property – Identify a commercial real estate property that will generate steady income.
  3. Structure financing – Secure funding from investors and lenders.
  4. Offer shares to investors – Investors buy fractional ownership in the trust, just like buying shares of a property.
  5. Manage the property – A professional company oversees rent collection, maintenance, and finances while investors collect passive income.

An example of a DST could be an investment in a large apartment complex. Let’s say a real estate firm purchases a 200-unit building for $50 million. Instead of one person buying the entire property, the firm sets up a DST and allows multiple investors to buy shares. These investors receive a portion of the rental income and a share of the profits when the property is eventually sold.

DSTs are usually open to accredited investors—people who meet specific financial requirements, such as:

  • Having a net worth of $1 million (excluding their primary home)
  • Earning at least $200,000 per year ($300,000 for couples)

Because DSTs involve commercial properties and long-term investments, they are best suited for experienced investors looking for passive income and tax benefits through 1031 exchanges.

Similar Blogs

DST

6 min. Read
Real Estate Investment Trusts vs Delaware Statutory Trust

There are various ways to invest and take advantage of possible benefits in the ...

Read More

Exchange Tips

8 min. Read
How to Become a Passive Real Estate Owner Through DSTs

Are you interested in real estate but don’t want the hassle of managing properti...

Read More

DST

10 min. Read
DST Exchange vs. 1031 Exchange: Key Differences and How They Work Together

Confused about whether to choose a Traditional or a DST 1031 exchange vs. a DST ...

Read More
logo-white

Copyright 2024 © Stax Capital

Quick Links
  • Marketplace
  • About STAX
  • News
  • Contact us
Documentation
  • Finra Brokercheck
  • Form CRS
  • Reg BI Disclosure
  • Business Continuity Plan
  • Privacy Policy
Socials

Disclosure

This website is for informational purposes only. This website does not provide investment advice or recommendations, nor is it an offer or solicitation of any kind to buy or sell any investment products. Securities offered through Stax Capital, Member FINRA & SIPC. Stax Capital is located at 10525 Vista Sorrento Pkwy, Suite 220, San Diego, CA 92121. Contact us toll free at 844-427-1031. Private Placements and Direct Participation Programs are speculative investments and involve a high degree of risk. An investor could lose all or a substantial portion of his/her investment. Investors must have the financial ability, sophistication/experience and willingness to bear the risks of an investment in Private Placements and Direct Participation Programs. Private Placements and Direct Participation Program offering materials are not reviewed or approved by federal or state regulators. Investors should not place undue reliance on hypothetical or pro forma performance summaries. Investors must conduct their own due diligence and should rely on the advice of their own financial, tax and legal advisors prior to making any investment decisions.

The contents of this website are neither an offer to sell nor a solicitation of an offer to buy any security which can only be made by prospectus. Investing in real estate and 1031 exchange replacement properties may not be suitable for all investors and may involve significant risks. These risks include, but are not limited to, lack of liquidity, limited transferability, conflicts of interest and real estate fluctuations based upon a number of factors, which may include changes in interest rates, laws, operating expenses, insurance costs and tenant turnover. Investors should also understand all fees associated with a particular investment and how those fees could affect the overall performance of the investment. Neither Stax Capital nor any of its representatives provide tax or legal advice, as such advice can only be provided by a qualified tax or legal professional, who all investors should consult prior to making any investment decision. Pursuant to SEC rule 501 of Regulation D, prior to engaging in substantive discussions regarding DST specific investments, investors must first be qualified as an accredited investor, by way of meeting certain income or net worth requirements.

Past performance is not an indication of future returns. We do not guarantee any investment performance, outcome, or return of capital for any investment opportunity posted on the site. Investing in real estate entails risk. You should not invest unless you can sustain the risk of loss of capital, including the risk of total loss of capital. This communication is not intended to be relied upon as advice to investors or potential investors and does not take into account the investment objectives, financial situation or needs of any investor. All investors should consider such factors in consultation with a professional advisor of their choosing when deciding if an investment is appropriate.

This site may contain forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of Stax Capital or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.

There are substantial risks in the DST Investment program. This type of investment is speculative, is illiquid, and carries a high degree of risk – including the potential loss of the entire investment. See the “risk factors” in the Private Placement Memorandum for a complete discussion of the risks relevant to DST offerings. Investors have no control over management of the Trust or the property. There is no guarantee that investors will receive any return. Distributions may be derived from sources other than earnings. The property will be subject to a Master Lease with an Affiliate of the Sponsor. The property will be subject to the risks generally associated with the acquisition, ownership and operation of real estate including, without limitation, environmental concerns, competition, occupancy, easements and restrictions and other real estate related risks. The properties may be leveraged. The Manager, the Master Tenant and their Affiliates will receive substantial compensation in connection with the Offering and in connection with the ongoing management and operation of the property. The Manager, the Trust, the Master Tenant and their Affiliates will be subject to certain conflicts of interest. An investment in the Interests involves certain tax risks.

Our website’s content adheres to the ‘Truth in Securities’ law, which prioritizes investor protection through comprehensive disclosures. Our commitment is to furnish accurate financial information, ensuring transparency and fair practices in the marketplace. For inquiries, please contact Jason Finley, Chief Compliance Officer, at jason@staxai.com or (858) 229-2881.

1 We update financial information and statistics at least quarterly.

Read more

Copyright 2024 © Stax Capital