What is a DST? Get the facts right
Delaware Statutory Trusts (DSTs) are becoming more and more popular among real estate investors. Could this happen because this investing option is eligible not only for 1031 but also for 721 and 1033 exchange? The connoisseurs are very aware of the fact that 1031 exchange allows investors to defer taxes, which definitely represents a big advantage taking into account that bearing taxes equals carrying the weight of the world on your shoulders. For some business owners, the tax season is the most unpleasant period of the year. Thus, since DSTs and 1031 exchange or like-kind exchange go hand in hand, they have become a common choice for real estate owners who use net-leased properties for reinvesting sale proceeds. People might wonder: what is the role of 1031 or tax-deferred exchange here? Well, the DST allows investors to resort to 1031 exchange when giving up on their interest in the trust or when the trust simply ends. However, the main question remains: What is a DST?
Understanding how a DST works: the basics for novice investors
Those who never used DSTs for 1031 exchange or never had to deal with DSTs whatsoever probably do not know the basics of this investing method that practically gives real estate investors a fractional ownership of property. DSTs represent the favorite option of investors who want to obtain passive income. According to the law, Delaware Statutory Trusts are a separate legal entity, which qualifies as a like-kind or tax-deferred exchange. Keeping all these in mind, how do you Think that DSTs work? Well, a sponsor firm also representing the master tenant, buys a real estate property and creates a trust for those who want to invest and gain a beneficial interest. The investors have two options available, which refer to directly acquiring an interest in the DST or depositing 1031 earnings into the DST. The explanation is actually quite easy to understand.
The benefits and risks associated with 1031 DSTs
Undoubtedly, DSTs have become popular due to the benefits offered, in combination with 1031 of course. These benefits refer to lower fees in comparison with TIC investments, greater cash flow, diversification, investors can get financing easier and access to larger commercial properties. When it comes to selecting DST properties, real estate investors have more options at their disposal, which means that they have the possibility to own different asset classes in multiple cities. Nevertheless, apart from the advantages, people should also be familiar with the risk associated with 1031 DSTs. Since the real state market is ever-changing, DSTs offer no guarantee that everything will go according to the plan. Consequently, economic volatility represents a potential risk that investors opting for DSTs face, but this is not all. Other possible risks involve illiquidity, certain strict requirements that trustees have to meet, according to the IRS, DST investors do not enjoy maximum control on the property, which is managed by the sponsor. This means that real estate investors choosing DST have to rely almost fully on sponsors.