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Delaware Statutory Trusts (DSTs) as alternative investments provide possible advantages for real estate investors but there are a couple of things to consider as you invest your thousands of dollars into this complex investment vehicle. Some of these include, the eligibility of investors, tax treatments, investment objectives, and risks amongst others. 

Investors looking to invest or already Investing in DSTs require adequate information so in order to make the right decisions. Let’s get into the details of important aspects of investing in DSTs that every investor should know and consider.

Accredited Investor

The United States federal securities laws allows only individuals considered as accredited investors to participate in certain Investments. A Delaware Statutory Trust is of such investment platforms that are exclusive for investors that meet the requirements set by the Security Exchange Commissions (SEC). One of the reasons these requirements were put in place was to provide indirect protection to average investors against losses from alternative investments not listed in the public market. 

The most recent amendments to the accredited investor criteria was in 2020. This amendment included individuals with defined measures of sufficient experience and professional knowledge or possess certain recognized qualifications and certifications. Prior to this amendment, accredited investors were identified based on their annual income, net worth and asset value. The SEC considers it important that alternative investments — which are complex in nature and deemed more risky than traditional investments — are only accessible to sophisticated investors who possess the required knowledge and financial acumen of such investments.

What are the financial requirements for accredited investors? This depends on if you are an individual, couple or an entity.

Individuals: Persons with income exceeding $200,000 for two most recent years and expected to at least remain in this income band for the current year; also, individuals with single or joint net worth (for couples) exceeding $1,000,000 (excluding primary residence) can be classified as accredited investors.

Couples: To be classified as accredited investors, couples with joint income are required to have income exceeding $300,000 for two most recent years and expected to at least remain in this income band for the current year.

Entities: Specific organizations or entities owned by accredited investors can be allowed to invest in sophisticated financial assets and instruments. Such entities need to have total assets in excess of $5,000,000. Such organizations may include but are not limited to banks or any savings and loan association, a registered broker or dealer, an insurance or investment company or a business development company. 

If you are considering investing in a DST, you have to meet the criteria set by the SEC and also maintain this classification. Qualification as an accredited investor allows you to purchase ownership interest in a Delaware Statutory Trust directly or by depositing your 1031 exchange proceeds into this investment vehicle.

Risk Appetite

Delaware Statutory trusts are commonly known for the advantage of qualifying as 1031 exchanges. DSTs provide an opportunity for investors to explore potential passive real estate investment benefits and possible tax deferral advantages. However, they do not come without risks. Some of the risks associated with DST investments include illiquidity of property investments, minimal or no control on property investment decisions amongst others. Furthermore, like any other type of investment, Delaware Statutory Trusts do not provide guaranteed returns. 

Due to inherent risks associated with investment vehicles like DSTs that are not publicly listed and not required to provide disclosures, you need to consider your risk appetite. These types of investments are thought to be risky even though they do not directly fluctuate with movements in the financial markets. Such alternative investments may not be suitable for risk averse investors or investors who have much to lose. This is why they are made accessible to investors that are considered to be well aware of associated risks, have surplus funds and a robust net worth. 

Portfolio composition

For accredited investors looking to diversify their investment portfolio and add a different asset in their portfolio mix, the DST can be considered as an option. While portfolio diversification does not provide a hundred percent protection from investment losses, it is considered  an effective strategy for risk management. 

Through investments in Delaware Statutory Trusts, you can have access to a wide range of property investments such as commercial real estate, retail and residential buildings and also industrial buildings. 

It is important to note that DSTs are complex alternative investments and including them into your investment portfolio may require not only the professional services of your financial advisor, but also experts such as accountants and tax advisers.

Investment objective

Given the nature of DSTs, if you want to include them in your portfolio, you would want to ensure that they fit into your overall investment goals. Investing in real estate through a Delaware Statutory Trust is generally more suitable for long term investing strategies. An ownership interest in a DST can not be quickly sold off as you would a publicly listed stock in the financial market. There is no publicly traded market for Delaware Statutory Trusts and therefore it may take a long time to find avenues to dispose of investments. 

Most investments in DSTs are held for an average period of five to ten years. They usually provide a means for investors to keep deferring taxes on investments for a relatively long period of time. If your investment objective is to hold long term assets with the potential benefit of tax deferral, then DSTs are considered a plausible option.

Regulations and Tax laws for DSTs

Delaware statutory trusts are normally set up as pass-through entities, as regards tax treatment, this indicates that the return on investments are taxed in the hands of the investors. For federal tax purposes, the classification of a DST as a business or a trust is dependent on the power awarded to trustees to carry out activities such as acquiring and disposing of property, making structural modifications to the property, renegotiating leases or debt, investing cash for profit or collecting and distributing income.

The notable tax regulation governing investments in DSTs is that which makes this investment platform eligible for 1031 exchanges. This compelling feature enables accredited investors to defer taxes on capital gains from real estate property sales. The 1031 exchange through DSTs provides an avenue for investors to reinvest their capital gains from sale of existing property into like kind properties that qualify for tax deferral. Real estate investors are able to purchase ownership interests in institutional quality properties for a fraction of the cost as investors funds are pooled in the DST. 

In terms of legal structure, DSTs operate as limited liability structures offering protection to associated beneficial owners, trustees, managers. The liability protections for beneficial owners  are similar to stockholders of a private corporation, investors or trustees cannot be held liable to third parties for operations of the DST. As such, creditors are not able to seek remedies on investments in DST properties.

Final Thoughts on Investing in DSTs

Ensure that you understand the sophisticated aspects of Delaware Statutory Trust investments. They are definitely not risk proof, neither do they guarantee returns on investments. If DSTs fit into your overall investment strategy as an accredited investor, then you can utilize them as part of your investment portfolio. However, it is recommended to always evaluate your portfolio mix and rebalance your assets if needed, real estate investments inclusive.

Got questions on investing in DSTs, you can contact the Stax Capital team for robust information on investment options and strategies.

Alternative investments are often used as a means for portfolio diversification. Individual investors can invest directly in alternative investments or through mutual funds that include alternative assets in their portfolio mix.

While there are different types of alternative investments, there are some investments that are specific to the real estate industry. You will need to understand how an alternative investment fits into your overall financial plan and investment goals before you decide on which option is best for you.

What Are Alternative investments?

Alternative investments are typically investments in assets that are not considered to be conventional. Conventional investment assets include, stocks, bonds, government bills, money market assets, amongst others. On the other hand, most non-traditional investments such as investments in commodities, real estate, venture capital, hedge funds, etc. involve complex procedures and processes that need high levels of professional knowledge and competence. These types of investments are called alternative investments.

Generally, most alternative investments are only accessible to accredited investors with high net worth. According to the Security Exchange Commissions (SEC), individuals can be classified as accredited investors based on their annual income, net worth and professional experience or knowledge. This would generally include individual Investors with income more than $200,000 for two most recent years and expected to at least remain in this income band for the current year. For organizations, they would need to own assets with total value greater than $5,000,000. This is alongside other requirements that need to be met to qualify as accredited investors than can invest in alternative assets.

Also, due to the complexity of alternative investments and lesser regulations, alternative investments are often held by investors who are knowledgeable about the market dynamics peculiar to their non-conventional nature. For individuals who do not have adequate knowledge on alternative investments, they employ the services of professionals such as financial advisors, investments specialists, accountants and tax experts.

Majority of alternative investments are not registered with the Securities Exchange Commission (SEC) and as such, are not publicly traded on the financial market. This provides a good explanation for why most alternative investments are highly illiquid in nature.

Alternative investment options

Alternative investments provide different options for investors who want to explore possible returns from non-conventional assets. Some of these options include:

Commodity:

Commodity investments involve buying commodities such as metals –gold, copper, agricultural products or natural gas and oils etc. Most investors invest in commodities directly and/or through commodity Exchange Traded Funds (ETFs) or mutual funds.

Private Equity:

Investors through private equity funds can invest in privately held companies for equity in these companies. This is usually with the aim to sell their shares in the company for profit at a later time. Most private equity investments transactions are carried out by investment firms.

Hedge Funds:

These are complex investment vehicles that usually function by pooling cash resources from accredited investors. Hedge funds are managed by registered financial and investment advisors. Hedge fund managers employ calculated investment strategies with the aim to make high returns from the market.

Real estate investment: 

Alternative investments in the real estate market are of different forms and types. The most commonly explored options include real estate investment trusts (REITs), tenancy in common (TICs), Delaware Statutory Trusts (DSTs). Direct purchase investments such as buying properties to flip and sell also qualify as real estate alternative investments.

Other forms of alternative investments include cryptocurrency, foreign exchange (FOREX), private debt funds and financial derivates —such as futures, options and forwards, amongst others.

Alternative Investments for Real Estate Investors

Real Estate Investment Trusts:

Commonly known as REITs, Real estate investment trusts can either be publicly traded through the stock exchange market or privately. Publicly listed REITs are usually registered with the Security Exchange Commission.

When you invest in REITs, you generally would purchase shares in a real estate company that owns several properties. These properties can either be retail, commercial or residential. Investments in REITs are done through equity REITs, Mortgage REITs or a combination of equity and mortgage REITs, also known as, hybrid REITs.

Using the REITs vehicle, investors can earn rental income through dividends from their interests in the REIT companies.

Qualified Opportunity Funds:

Qualified Opportunity Funds (QOFs) are investment vehicles set up for the purpose of investing in Qualified Opportunity Zones. Investments in Qualified Opportunity Funds provides possibilities for real estate investors to become eligible for tax benefits. These potential benefits generally come in three forms:

Capital gain deferral: Eligible capital gains such as gains from property sale can be deferred if reinvested in a Qualified Opportunity Fund.

Capital gain reduction: The step-up basis for investment in Qualified Opportunity Fund allows investors to reduce capital gain recognized on your interest in the QOF when sold or exchanged after at least five years of holding it.

Capital gain elimination: Capital gains from qualified investments in a Qualified Opportunity Fund may be eligible for total tax elimination when held for at least 10 years.

Delaware Statutory Trusts:

Accredited investors can buy fractional units in institutional quality properties through Delaware Statutory Trusts. A great advantage this potentially provides for investors is that they can defer tax gains on property sale when they make eligible investments in DSTs. This is possible because DST investments qualify as 1031 exchange subject to other requirements being met.

Delaware Statutory Trusts work through the management of the sponsors and trustees or managers who oversee the property investment activities under the trust. You can become a beneficial owner in the trust by purchasing investment interest. These ownership interests in the DST would provide you with distributed income from the trust based on the fraction of your investment in the trust.

There are other forms of real estate alternative investments such as crowdfunding investments. This involves pooling money from many investors to invest in highly valued properties. There is also the tenancy in common (TIC) form of real estate investment that involves the ownership of real estate property by two or more people. 

Pros of Alternative Investments

Portfolio diversification: One of the most attractive attributes of alternative investments is the outlet it provides for investors to put their money into assets that are not directly correlated with the common financial markets.

Stock markets and bond markets are inversely related. When the stock prices go up, bond yields decline and vice versa, when the bond market performs outstandingly, the stock market tends to dip. Due to this, investors look for other investment vehicles that do not go through the frequent booms and dooms of conventional financial assets. This is where alternative investments may provide value.

It is important to note that while investment diversification may reduce the impact of potential losses in some assets, even the best diversification strategy does not guarantee a hundred percent protection against total investment losses.

Possible returns: When you invest in alternative investments, you do so to take advantage of potential returns. Like every other form of investment, alternative investments can provide possible returns for investors. However, returns are not guaranteed.

Lack of volatility: Alternative investment options may not be as volatile as traditional investments. The prices and values of alternative assets typically do not fluctuate easily as other conventional asset prices.

Tax Benefits: Some alternative forms of investing provide investors with the possibility of deferring tax and other tax benefits. One of such alternative investment vehicles in the Delaware Statutory Trust which allows investors to defer capital gains for transactions that qualify as 1031 like-kind exchange.

Cons of Alternative Investments

Alternative investments are not all rosy, they have associated downsides to them. The cons of investing through alternative investments should be considered carefully before delving into the complex world of this non-traditional space of seeking possible returns.

Accessibility: Most people are not aware of the fact that a significant aspect of alternative investments is that they are not easily accessible to the large public. There are often restrictions on eligibility for alternative investments. This is partly due to the complexity of these investments and the widely unregulated market for these assets.

Also, most alternative investments require significantly higher financial commitments, usually in the minimums of $25,000 to $100,000. This automatically limits access to only investors who possess such amounts of money to invest.

Illiquidity: When investors want to buy conventional assets such as stocks or bonds, they can easily purchase them from the public financial markets through brokers or other investment platforms. This is not the case for alternative investments. Investing in alternative assets generally involve private dealings and contracts. Most alternative investments are not publicly listed, making them highly illiquid investments. When purchased, these assets may not be easily sold or disposed of as quickly as conventional assets.

High Risk: Alternative investments are relatively riskier forms of investments. This is due to many reasons. One of such reasons is as a result of the unregulated nature of alternative investments. The SEC does not regulate most alternative investments and as such, this can lead to inadequate disclosure practises and asymmetric Information about many aspects of these investments.

Also, although there may be less frequent swings in alternative markets, occasional swings may be larger. Returns on alternative assets may be relatively higher, but also, any losses may have significantly more financial impact.

Stax Capital offers different real estate alternative investment options. Contact the team to discuss which available investment options are best suitable for your needs.

This article does not constitute any tax advice. Individuals are encouraged to seek professional advice from independent tax advisors regarding tax consequences of investments. Also note that in assessing investment returns, past performances are not indicative of future performance.

Searching for the right investment property isn’t the only challenging task for a real estate investor. Every property investor needs to identify the right opportunities in order to take advantage of any possible advantages. Accredited property investors looking for ways to reinvest their sale proceeds can  explore programs like the Delaware Statutory Trust. For these types of investments that qualify as 1031 exchanges, the services of a qualified intermediary is required. There are a couple of factors to consider when choosing a qualified intermediary for your 1031 like kind exchange investment transactions.

Before going further into what a qualified intermediary is and how to choose one to facilitate your property sale or purchase, here’s a little background on what the 1031 exchange is.

The 1031 Exchange

Suppose you own an investment or business property, and you decide to sell it. If this sale results in a capital gain, the gain would be subject to tax. However, with the provision of the IRC Section 1031, there is an exception to this capital gain tax that allows you to defer the tax on any capital gains. This deferral is effective if you reinvest the proceeds from the sale in a like-kind property. This is generally referred to as a like-kind exchange. There are specific rules that guide the 1031 property exchange transactions.

The 1031 Like Kind Exchange Rules

To qualify as a like-kind exchange, a sale and purchase transaction needs to meet certain requirements. These include:

Timing Rules: The investor needs to identify the replacement property, also known as the reinvestment property within 45 days of the sale of the relinquished property.

Additionally, the investor needs to receive the replacement property by the earlier of 180 days after the original property has been sold and transferred or the due date of the investor’s tax return for the taxable year in which the relinquished property is transferred.

Like-Kind Property Rules: The like-kind exchange gets its name from the rule that requires the exchange of the properties to be of like-kind in terms of nature and character. This also translates to the values of properties being exchanged as any perceived gain from the difference in values of exchanged properties may lead to taxes.

Qualified Intermediary Rules: A facilitator is required to make the exchange of property and sale proceeds as this cannot be done directly by the investor who intends to sell off a business or investment property. This requirement is an important aspect of the like-kind exchange and here’s what you need to know about using a qualified intermediary.

Who Is A Qualified Intermediary for 1031 Exchanges?

Real estate investors looking to diversify or expand their portfolio have the opportunity to invest through 1031 like-kind exchanges. This type of property investment provides tax advantages for investors who re-invest sale proceeds from a property sale into another property that qualifies as like-kind in nature.

A qualified intermediary is an independent party to a 1031 exchange transaction, they usually have no formal relationship with the seller of the investment property or the owner of the new property to be invested in. Qualified intermediaries are sometimes called facilitators or accommodators. They are independent parties in a 1031 exchange transaction —possessing no affiliations or personal relationship with the parties involved in a 1031 exchange.

A qualified intermediary is generally not the taxpayer or termed a disqualified person. The capacity of a qualified intermediary requires a written agreement with the investor, called the exchange agreement. This agreement specifies certain guidelines and restrictions on the investor’s rights to receive, pledge, borrow or obtain the benefits of the money or property held by the intermediary before the exchange of properties is completed.

The exchange agreement between the tax paying investor and the qualified intermediary also specifies the rights assigned to the qualified intermediary.  All parties involved in the exchange agreement would be notified of the assignment in writing on or before the date of the transfer of the relinquished property.

An agent of the tax paying investor is not allowed to act in the capacity of a qualified intermediary for a like-kind property sale transaction. The capacity of an agent includes responsibilities and services on behalf of the taxpayer. This translates to roles such as an investment banker, employee, attorney, accountant, broker, or real estate agent within a 2-year period to the date of the transfer of the first of the relinquished property or properties.

This limitation excludes agent related services as regards exchanges of property intended to qualify for non-recognition of gain or loss under section 1031 and routine financial, title insurance, escrow, or trust services for the taxpayer by a financial institution, title insurance company, or escrow company.

What are the Responsibilities of a Qualified Intermediary?

Without the use of a qualified intermediary, property sale and purchase may not qualify as a 1031 like kind exchange. This is so because, if the investor actually or constructively receives sale proceeds in the form of cash or other property before receiving the replacement property, any gains realized may become subject to tax. The proceeds from the sale of the relinquished property are secured in a qualified escrow or qualified trust to ensure that the investor does not receive any payments that may disqualify the transaction.

The qualified intermediary acts in a capacity to prevent this from occurring. The qualified intermediary facilitates the sale by receiving the proceeds from the 1031 exchange and transferring it to the seller of the replacement property.

Here are a few services a qualified intermediary may perform:

Purchases the replacement property from the seller and transfers the replacement property to the investor.

Partners with other professionals such as accountants and lawyers to make sure that the exchange agreement meets all requirements and that the rights for all parties are clearly stated.

Ensures that the 1031 exchange is executed in the time frame that makes it qualify for deferred tax gains. Effectively communicates on important deadlines and expectations.

Prepares documentations such as trust or escrow agreements, reports, notice of assignments and other exchange agreements.

In addition to the above, the qualified intermediary will facilitate the exchange and receive the relinquished property from the investor before transferring the relinquished property to the buyer.

The qualified intermediary also secures the proceeds from the sale on behalf of the taxpayer until it is required to use as payment for the replacement property.

Factors to Consider When Choosing a Qualified Intermediary

There are important factors to consider when choosing to engage a qualified intermediary. Careful selection in this process would prevent any errors or complications in the 1031 property exchange transaction. Some of these factors are as follows:

Expertise and Professionalism: 1031 exchanges are complex transactions with equally complex tax and accounting implications. You need a qualified intermediary with adequate level of experience to facilitate all kinds of like kind exchanges within the specific requirements that enable a transaction to qualify for tax deferment advantages. A good, qualified intermediary should keep all parties abreast of any important timelines or changes that may affect the property exchange.

Compliance: There are no widely known licenses or regulations for someone or an entity to act in the capacity of a qualified intermediary. As an investor, you need to carry out due diligence to ensure all legal requirements and procedures are met appropriately. You have the responsibility to ensure the qualified intermediary you engage for your property exchange agreement acts within the confines of any compliance and legal requirements.

Trust and transparency: You should be informed about the details involved in your 1031 exchange process. Use a qualified intermediary that is transparent and trust worthy. Also, due to the highly complex nature of 1031 like-kind exchange transactions, it is recommended to employ the services of a financial advisor and an accountant to provide advice on tax implications or any part of the transaction that may disqualify your capital gains from being deferred.

Funds Security: As an investor, you need to make sure that the proceeds from the property sale as well as the replacement property deed and title are safe. Sometimes it may be necessary to obtain insurance to cover for any losses due to fraud or theft. The proceeds involved in 1031 exchanges are usually of high value thus security should be an important aspect of the transaction.

Stax Capital provides property investment opportunities such as Delaware State Trusts (DSTs) that qualify for capital gain tax deferral under the 1031 like-kind exchange. We engage professional and independent third parties who provide guidance on legal and tax implications for 1031 exchange transactions.  With extensive years or experience and expertise, the team partners with you to make sure your financial and investment goals are achieved.

As an investor looking to diversify into real estate or expand your investments in properties, you may be wondering what the benefits of Delaware Statutory Trusts might be.

Investing in real estate involves active responsibilities to ensure properties are well maintained and managed. It also requires direct involvement to ensure that expected rental returns are monitored and realized.

Delaware Statutory Trusts as an investment vehicle may provide ways to gain possible benefits of alternative real estate investments while being less involved in time consuming management. Here’s what you need to know about DSTs and how beneficial it may be to you as a property investor.

What is a Delaware Statutory Trust (DST)?

A Delaware Statutory Trust (DST) is a legal entity usually formed for business investment purposes and is used as an instrument through which property is purchased and managed for the beneficial interest of owners.

It is considered a separate legal entity from its beneficial owners, under the Delaware law. This offers a limited liability status to the investors who own beneficial interest in the trust, one of the notable benefits of Delaware Statutory Trusts.

How Do DSTs Work?

The operations of a DST would generally involve individual duties in the capacity of a sponsor, lender, trustee(s), managers, interest owners etc. A DST is usually bound by a governing instrument such as a trust agreement which would categorically specify any rights, obligations, liabilities or management responsibilities for all parties involved, as well as the general business conduct and underlying governance of affairs of the trust.

As an investor and beneficial owner in a DST, you would have undivided beneficial interest in the property or properties of the statutory trust. Except otherwise stated by a trust agreement, you become entitled to receive income and distribution from the DST. The profits and losses you would share from the statutory trust would be proportionate to your total undivided beneficial interest in the DST.

DSTs are often managed by a trustee or trustees on behalf of the beneficial owners who have interest in the trust property or properties. Usually, the trustee is responsible for distributing cash less any reserves to you as an investor based on your interest in the DST.

For federal tax purposes, the classification of a DST as a business or a trust is dependent on the power awarded to trustees to carry out activities such as acquiring and disposing of property, making structural modifications to the property, renegotiating leases or debt, investing cash for profit or collecting and distributing income.

One of the most popular benefits of Delaware Statutory Trusts is that investments through interests in the trust may qualify for a tax-deferred like-kind exchange (subject to all other conditions and requirements being met).

Who Qualifies as an Accredited Investor for DSTs?

In order to access possible benefits of Delaware Statutory Trusts, you have to be an accredited investor. As an accredited investor, you can purchase interest in the DST directly or by depositing your 1031 exchange proceeds into this investment vehicle.

An accredited investor may be an individual or entity identified to be financially sophisticated and authorized to invest in unregistered securities or private capital markets that are usually deemed to carry more risks than traditional investments. Classification of an accredited investor is based on annual income, net worth, asset value and/or professional investment knowledge.

The Security Exchange Commissions (SEC) considers accredited investors as individuals with income exceeding $200,000 for two most recent years and expected to at least remain in this income band for the current year; for couples with joint income, this amount is $300,000.

Also, individuals with single or joint net worth (for couples) exceeding $1,000,000 can be classified as accredited investors. Your net worth is considered as the fair market value of all assets excluding primary residence minus total liabilities excluding primary residence mortgage up to its estimated fair market value.

For entities, an accredited investor status may be awarded to certain organizations with total assets in excess of $5,000,000. Such organizations may include but are not limited to banks or any savings and loan association, a registered broker or dealer, an insurance or investment company or a business development company. It could also be an entity owned completely by accredited investors.

In 2020, the SEC modified its classification of accredited investors to include individuals who have defined measures of sufficient experience and professional knowledge or possess certain recognized qualifications and certifications. This increases the pool of investors who may qualify to invest in unregistered assets and have access to the benefits of Delaware Statutory Trusts.

Benefits of Investing Through Delaware Statutory Trusts

There are potential benefits of Delaware Statutory Trusts. If you are an accredited investor, here’s how investing through DSTs may be beneficial for you.

The 1031 exchange: One of the major benefits of Delaware Statutory Trusts is that they qualify as 1031 like kind exchanges for property investment. The 1031 exchange allows investors to defer capital gains if they invest in like kind properties.

With DSTs, there is the potential to locate properties that are like kind within the given 45 days rule, also, it may be easier to exchange and transfer ownership of a DST property investment within 180 days from the sale of your replaced property.

Freedom from property management: Properties purchased for real estate investments usually require periodic maintenance and management. Taping into the benefits of Delaware Statutory Trusts can take away the pressures and hassles of dealing with property management issues directly.

A trust agreement would normally delegate the property management responsibility to trustees or an assigned manager who oversees that the trust’s properties are professionally managed and maintained.

Institutional quality investments:  Investors are allowed to purchase fractional units of a much larger scale investment property through DST investments. This offers access to institutional quality property investments that would ordinarily not have been accessible due to cost and other complexities. When considering the benefits of Delaware Statutory Trusts, being able to invest in institutional properties at low minimums – usually $25,000, is a huge plus.

Potential passive income: DSTs can be effective for wealth management when utilized correctly. With this investment vehicle, you may have the opportunity to build wealth through real estate properties. DSTs could potentially provide passive income for investors who need to take a step down from active involvement in real estate investments. Also, the possibilities for wealth generation make up one of the important benefits of Delaware Statutory Trusts.

Portfolio diversification:  One of the benefits of Delaware Statutory Trusts is, it offers an opportunity for portfolio diversification. When you meet the accredited investor requirements, DSTs could be your introduction into real estate investing, giving you a wider range of investment possibilities in a different asset class.

As an experienced property investor who also meets the requirements of an accredited investor, through DSTs you could have access to multiple property types and ranges.

Flexibility: Except if the governing instrument of a statutory trust specifies otherwise, the beneficial interest you purchase in a DST can be easily transferable. You can freely transfer your ownership to a different party after all requirements have been met and fulfilled.

Lenders who provide financing for the properties under the trust deal directly with the trust and not with investors, therefore, you do not need to qualify for a loan under a DST. This makes it relatively easier to access funding and financing.

Also, when you become entitled to receive income distribution from a DST, you would be entitled to all remedies that a creditor of the DST has in terms of the distribution.

Limited Liability: Given its separate legal identity status, owners and trustees have limited liability as regards properties invested. What this means for investors is that they do not have interest in any specific property and creditors are not able to seek remedies on DST properties.

As an investor, the potential benefits of Delaware Statutory Trusts may include being protected under a limited personal liability similar to that of private corporations’ stockholders.

Are There Any Risks Involved in DST Investments?

The potential benefits of Delaware Statutory Trusts are usually accompanied with possible risks. Similar to any other investment platform or asset, there may be risks involved in DST investments. The major downsides to DST investments include having minimal or no control in investment or management decisions, fewer opportunities to sell off investment ownership interest due to an illiquid market, and no guarantee of investment principal or returns.

It is recommended that investors who want to explore the potential benefits of Delaware Statutory Trusts utilize the expertise of professionals such as financial advisors and tax experts.

Key Takeaway on Delaware Statutory Trusts

DSTs can be leveraged as alternative investments that diversify investment portfolio. While this investment platform may provide a huge potential for benefits, you need to also consider the risks and complexities that come with DST investments. The benefits of Delaware Statutory Trusts include the opportunity to invest in like kind exchange properties, flexibility of property investment and limited liabilities associated with the trust.

Stax Capital specializes in alternative investments through Delaware Statutory Trusts, providing you opportunities to manage your wealth and explore capital gains tax deferral options available via the 1031 like kind exchange vehicle. The team at Stax Capital partners with you to explore potential benefits of Delaware Statutory Trusts.

The 1031 exchange is a term that comes up often in the real estate world of investing. For property investors, the 1031 exchange can be used as an important tool to manage capital gains taxes on property sale.

The process of a 1031 exchange requires professional expertise to execute properly. While it may be considered an advantageous route in property investment, the 1031 exchange does not make capital gains from property sale tax free but rather, tax deferred.

Here’s what you should know about investing in properties using the 1031 exchange.

What is the 1031 Exchange and how does it work?

The 1031 Exchange originated from the Internal Revenue Code (IRC), section 1031, which refers to the exchange of property held for productive use or investment.

Whenever you make a gain from the sale of an investment or business property and reinvest the sale proceeds in a like-kind property, the 1031 exchange allows you to defer taxes on the capital gain.

However, when you eventually sell the reinvestment property, the deferred capital gain from the disposed property plus any additional gain from the replacement property would be subject to tax.These property investment transactions are of a complex nature and thus require the collaboration of various parties such as the investor, who is usually a taxpayer, a facilitator, a tax expert, an investment company, amongst others.

For an investment property sale and purchase transaction to qualify as a 1031 exchange, it has to meet various requirements and follow some laid out rules.

The 1031 Exchange rules

If the possibility of not paying taxes on capital gained from a property sale sounds too good to be true, it is because it comes with a number of rules that have to be adhered to.

Timing rules

One major rule is this, the replacement property, also known as the reinvestment property, has to be identified within 45 days of the sale or transfer of the relinquished property (the property to be sold).

Also, importantly, the replacement property has to be received by the earlier of 180 days after the relinquished property has been sold and transferred or the due date of the investor’s tax return for the taxable year in which the relinquished property is transferred.

Qualified intermediary rules

To qualify as a 1031 exchange, the sale proceeds of the relinquished (disposed) property investment cannot go directly to the owner of the property. The sale proceeds for a 1031 exchange has to go through a qualified intermediary or an exchange facilitator.

Qualified intermediaries are third parties to a 1031 exchange transaction, they usually have no formal relationship with the seller of the investment property or the owner of the new property to be invested in.

The qualified intermediary facilitates the sale by receiving the proceeds from the 1031 exchange and transferring it to the seller of the replacement property (reinvestment property).

Like-kind property rules

As an investor, you have to sell and reinvest in like-kind properties for the 1031 exchange advantages to come into effect. The disposed property and the new property to be acquired have to be like-kind, meaning, the properties have to be alike in terms of nature and character and not necessarily by quality or grade.

Also, the value of the replacement property should be of greater or equal value to that of the relinquished property for the transaction to qualify for tax deferral.

If the value of the replacement property is higher than the value of the disposed property, this may result in a boot. When this occurs, the boot becomes taxable. Proceeds that are not considered to be like-kind property exchange would be subject to tax.

Properties involved in a 1031 exchange have to be located within the United States.

Different types of 1031 like-kind exchanges

 1031 exchanges can be carried out using a simultaneous swap, delayed or deferred exchange, a reversed exchange or an improvement property exchange.

Using a simultaneous 1031 exchange, real properties are exchanged simultaneously, no delays or deferrals.

With the deferred 1031 exchange, the relinquished property which the investor wants to sell is transferred first and the reinvestment property to be acquired is then identified within 45 days after the transfer. The exchange should be completed within the 180-days time limit.

In order to qualify as a 1031 exchange, this type of like-kind exchange needs to be differentiated from a transaction that’s basically just using the sale proceeds of a property sold to buy another property.

The reversed 1031 exchange involves an investor acquiring the replacement property first before selling the relinquished property. This type of exchange would be possible if the investor has cash or a facility to acquire the new investment property.

The replacement property is usually acquired through an exchange accommodation titleholder. This exchange also needs to meet the 180-days rule to qualify as a 1031 exchange.

An improvement property exchange involves using the proceeds from a relinquished property to improve the replacement property of choice. However, the 180-days rule from the sale of the disposed property still applies. Properties exchange also still need to be of the same fair market value.

For a 1031 exchange, you may need to prove that the transaction is indeed an exchange of property. You have to show that the sale of the relinquished property and the purchase of the replacement property are integrated and mutually dependent on each other.

What are the advantages of real estate investments through a 1031 Exchange?

The major advantage of real estate investments using the 1031 exchange tool is the ability to defer capital gain taxes on proceeds from real estate property sale.

As an investor, you may be able to carry over any gain from sale proceeds that have been reinvested in a like-kind property for years with no tax implication until you finally decide to sell the newly acquired property.

When you invest in new properties using the 1031 exchange, you may have more purchasing power and more retained cash because there is no immediate cash outflow that would have occurred as a result of taxes on capital gains.

What kind of properties are qualified for a 1031 Exchange?

 Only real properties qualify for tax benefits through a 1031 exchange. The property purpose rule is one that has to be met. The exchanged properties in the 1031 exchange should be for trade, investment or business purposes and not for personal uses such as a vacation home or property used as a primary residence or second home.

Properties held primarily for resale do not qualify for 1031 exchanges, this may include properties sold immediately after they are acquired, or properties improved for the sole purpose of resale such as a fixer upper.

Examples of properties that can be leveraged for the 1031 exchange include: retail properties, commercial properties or buildings, rental properties, industrial properties, apartment buildings, etc.

The real properties that qualify as like-kind can either be improved or unimproved.

Delaware Statutory Trusts (DSTs) - A qualified vehicle for 1031 exchange

Corporations and partnerships, trusts, limited liability companies (LLCs) and other entities that pay tax may be able to set up a 1031 like-kind property exchange.

The Delaware Statutory Trusts (DSTs) is a vehicle that can be used to take advantage of any tax deferral that may result due to reinvestment in like-kind property. In other words, DSTs qualify as 1031 like-kind property exchanges.

To identify DSTs to reinvest in through the 1031 exchange within 45 days after the sale of the relinquished property, you can use the three-property rule, the 200 percent rule and the 95 percent rule.

Using the three-property rule, you can identify up to three prospective replacement properties irrespective of their fair market value.

With the 200 percent rule, you can identify any number of prospective replacement properties given that the total market value of these properties does not exceed 200 percent of the fair market value of the disposed property by the transfer date.

A 1031 exchange may still be in effect if the accredited investor identifies unlimited prospective replacement properties as long as 95 percent of the total value of all identified properties is purchased.

While DSTs may possess liquidity risk, they may provide a faster route for you to identify and close on property investments that qualify as 1031 exchange under the 45-days and 180-days like-kind property exchange requirements.

Invest in DSTs that qualify as 1031 Exchanges with Stax Capital

For over 12 years, Stax Capital has offered real estate investments that qualify as 1031 like-kind exchanges.  With investment properties under Stax Capital DSTs, you gain access to top notch management that relieves you of the complexities and time-consuming nature of managing investment properties.

If you need to diversify your investment portfolio through the real estate market, the highly experienced team at Stax would work with you to provide solutions and opportunities that may potentially expand your portfolio and help towards your wealth generation goals and objectives.

For when you need to invest in a property that qualifies as a 1031 like-kind exchange but want to stay away from the hassles of property management with the potential to earn passive income, Stax capital is just a reach away.

Delaware Statutory Trust vehicles are only available to accredited investors. Property investments using the Delaware Statutory Trust vehicle as a 1031 exchange can be a complex process, therefore, it is advisable to get professional advice from tax and investment advisors.

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